DIRECT AND INDIRECT TAX

PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF

MASTER IN COMMERCE

UNDER THE FACULTY OF COMMERCE

BY
JAYESH DEEPCHAND GUPTA
MCOM -II (SEM-4)
ROLL NO: 306

UNDER THE GUIDANCE OF

ASST PROF MEGHA R YADAV

MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE

SHETH M.K. HIGH SCHOOL COMPLEX, FACTORY LANE, BORIVALI
(WEST) MUMBAI -400092.

MARCH 2024 ACADEMIC

YEAR 2023-2024
2
 DECLARATION BY LEARNER

I the undersigned MR JAYESH DEEPCHAND GUPTA (ROLL NO: 306) here by, declare that the
work embodied in this project work titled (A STUDY ON “HOUSING LOAN FACILITIES PROVIDED
BANKS) ” forms my own contribution to the research work carried out under the guidance of
ASST PROF MEGHA R YADAV is a result of my own research work and has not been
previously submitted to any other University for any other Degree/ Diploma to this or any other
University.

Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in

accordance with academic rules and ethical conduct.

Name and Signature of the learner

JAYESH DEEPCHAND GUPTA

Certified by

ASST PROF. MEGHA R YADAV

3
 MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE
Sheth M.K. High School Complex, Factory Lane,
Borivali (west) Mumbai -400092.

CERTIFICATE

This is to certify that MISS JAYESH DEEPCHAND GUPTA (ROLL NO: 306) as worked
and duly completed her Project Work for the degree of master’s in commerce under
the Faculty of Commerce in the subject of FINANCIAL MANAGEMENT (MCOM -II
SEMESTER-4) and his/her project is entitled “(DIRECT AND INDIRECT TAX)” under
my supervision. I further certify that the entire work has been done by the learner
under my guidance and that no part of it has been submitted previously for any
Degree or Diploma of any University.

It is her own work and facts reported by her/his personal findings and investigations.

ASST PROF. MEGHA R YADAV

Date of submission: MARCH-2024

4
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous, and the depth
is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.
I would like to thank our Principal Prof V. Manikandan for providing the necessary
facilities required for completion of this project.
I take this opportunity to thank our Coordinator Prof V. Manikandan, for moral support
and guidance.
I would also like to express my sincere gratitude towards my project guide ASST PROF.
MEGHA R YADAV whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books
and magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

5
INDEX

6
 CHAPTER 1
INTRODUCTION
The word ‘income’ has special meaning with reference to income-tax. It inter alia includes gains
derived on transfer of a capital asset. Since these are not annual accruals, these are treated on a different
footing for taxation purpose.
Income tax is levied by the Central Government under entry 82 of the Union of Schedule VII to
Constitution of India. This entry deals with ‘Tax on income other than agricultural income’. This task is
achieved by the enactment of the Income Tax Act, 1961[“The Act”].

The Act provides for the scope and machinery for levy and collection of Income Tax in India. It is
supported by Income Tax Rules, 1962 and several other subordinate rules and regulations. Besides,
circulars and notifications are issued by the Central Board of Direct Taxes (CBDT) and sometimes by
the Ministry of Finance, Government of India dealing with various aspects of the levy of Income tax.
Unless otherwise stated, references to the sections will be the reference to the sections of the Income
Tax Act, 1961.

Section 4, which is the charging section, provides that Income tax is a tax on the total income of a
person called the assessee of the previous year relevant to the assessment year at the rates prescribed in
the relevant Finance Act

DEFINITION OF INCOME
IN ORDER TO TAX THE INCOME OF A PERSON THE TERM ITSELF IS DESIGNED UNDER THE INCOME
TAX ACT. AS PER THE ACT THE TERM INCOME INCLUDES:
A. P ROFITS AND GAINS OF BUSINESS OR P ROFESSION : THIS INCLUDES INCOME FROM CARRYING ON
A BUSINESS OR INCOME EARNED BY DOING ANY PROFESSION .
B. DIVIDEND :
C. P ROFIT IN LIEU OF S ALARY, PERQUISITE : THIS INCLUDES ANY AMOUNT RECEIVED BY AN
EMPLOYEE FROM HIS EMPLOYER OTHER THEN THE SALARY AMOUNT .
D. ALLOWANCES GRANTED TO THE ASSESSES TO MEET HIS EXPENSES INCURRED FOR PERFORMANCE
OF HIS DUTIES : THIS INCLUDES ALLOWANCES SUCH AS HRA, M EDICAL ALLOWANCE , ETC GIVEN BY
AN EMPLOYER TO HIS EMPLOYEE .
E. ANY CAPITAL GAINS : THIS MEANS ANY PROFIT DECRIED ON SALE OF ANY CAPITAL ASSET .
F. W INNING FROM LOTTERIES , CROSSWORD PUZZLES , RACES , CARD GAME, T.V. S HOW , ETC
G. ANY SUM RECEIVED FOR FUND CREATED FOR WELFARE OF EMPLOYEES .

7
ONE INTERESTING THING IN THE DEFINITION OF INCOME IS THAT IT CAN BE RECEIVED IN CASH OR
IN KIND . MORE OVER THE INCOME T AX ACT DOES NOT MAKE DISTINCTION BETWEEN LEGAL
SOURCE OF INCOME OR ILLEGAL SOURCE OF INCOME . T HIS MEANS THAT GAMBLING , SMUGGLING
INCOME IS ALSO CHARGEABLE TO TAX UNDER THE INCOME T AX ACT. MORE OVER GIFTS OF
PERSONAL NATURE FOR E.G. BIRTHDAY / MARRIAGE GIFTS ARE NOT TREATED AS INCOME (BUT
THERE ARE SOME EXCEPTIONS IN THIS ).
IN ALL THIS ONE MORE THING IS THAT THE TERM INCOME DOES NOT ONLY MEANS PROFITS BUT
THERE IS A CONCEPT OF NEGATIVE INCOME ALSO .

Computation of Total Income

Income-tax is charged on the Total Income of a Previous Year at the rates prescribed for the
Assessment Year. ‘Assessment Year’ means the period of 12 months commencing on April 1, every
year. ‘Previous Year’ is the financial year immediately preceding the assessment year.

A ‘resident’ tax payer is charged to income-tax on his global income, subject to double taxation
relief in respect of foreign incomes taxed abroad. In the case of a non-resident, income-tax is charged
only on incomes received, accruing or arising in India or which are deemed to be received, accrued or
arisen in India.

For the purpose of computing total income and charging tax thereon, income from various sources is
classified under the following heads:

A. Salaries
B. Income from House Property
C. Profits and Gains of business or profession
D. Capital Gains
E. Income from Other Sources

These five heads of income are mutually exclusive. If any income falls under one head, it cannot
be considered under any other head. Income under each head has to be computed as per the provisions
under that head. Then, subject to provisions of set off of losses between the heads of income, the
income under various heads has to be added to arrive at a gross total income. From this gross total
income, deductions under Chapter VIA are to be allowed to arrive at the total income.

On this total income tax is calculated at the rates specified in the relevant Finance Act or the
rates given in the Income Tax Act itself [as in the case of long term capital gains]. From this tax,
rebates and reliefs, if any, allowable under Chapter VIII are allowed to arrive at the total tax payable by
the assessee. The above procedure is summarized below:

Gross Total Income = A+B+C+D+E

Total Income = Gross Total Income - Deductions under chapter VIA

Total Tax Payable = Tax on Total Income – Rebates and reliefs under Chapter-VIII

It is noteworthy that with effect from 1.4.2006, no rebate is allowable to an assessee.

Following are the salient features of the procedure law relating to preparation of income tax returns.
1. Collection of preliminary details :
8
a. Name of the assessee
b. Birth date and age
c. Gender
d. Residential status
e. Assessment year ( 2021-22)
f. Pervious year (2020-21)
g. Detail of parents and age
h. Detail of children and age
i. List of Relatives and Associate concerns

These detail may have an impact on the applicable tax rate ( e.g. woman, senior citizen, deductions (e. g
insurance premium, handicapped assessee , education loan etc.) , disallowances based on relation as in
40A(2) or exemption based on relation such as in Sec 56 regarding gifts etc.
2. Ascertainment of income under various heads of income as per the applicable provisions of laws
3. Add income of other assessees which are to be included u/s 60-64 – clubbing provisions
4. Aggregate of income from all such sources, ( excluding exempt income ) is called the Gross
total Income.
5. From the Gross Total Income reduce the amount of deductions available in Chapter VI A of the
Act.
6. The Result will be the total income.
7. Ascertain the tax liability at appropriate rate applicable including special rates applicable to
some items of income –horse race , Capital gains on shares.
8. From the tax liability, any tax rebates are to be reduced.
9. The result will be the net tax liability, from which any amounts deducted at source (TDS) or Tax
Collected at Source (TCS) , and taxes paid in advance are reduced.
10. The final balance, if payable is paid by way of self –assessment tax or if excess paid is
shown as the refund due.
11. Other Important Points
a) Clubbing provisions (S-60- 64), whereby income of other persons is included in the hands of the
individual e.g. Income of the minor children
b) Adjustment of agricultural income if in excess of Rs 5,000 is added in total income and then tax
agricultural income is computed separately.
Difference will be the tax liability
c) Interest and remuneration from firm taxable if allowed in the hands of firm. Profit from
the firm exempt as it is taxable in the hands of the firm
d) Income of HUF is to be excluded as tax on such income will be payable by the HUF.
e) Any loan taken from a company is deemed dividend u/s2 (22)) (e), if the individual has 10%
voting power therein.

9
 CHAPTER 2
SALARIES
Introduction
Among the five heads of income listed by S.14, “Salaries” is the first and most important head of
income. The concept of “Salaries” is very wide and includes not only the salary in common parlance
but also various other receipts, gifts, perquisites and benefits.

This divided into various sections dealing with the concept of salary income and its characteristics,
which define as to what constitutes “salaries” followed by the incomes falling under this head the
computation of basic salary, types of allowances and perquisites, valuation of the perquisites, various
income tax provisions for computing taxable value of allowances etc and their detailed descriptions
along with the applicable legal provisions of income tax.

Basis of charge
Section 15 provides the basis and scope of charging salaries to income tax :

 any salary due from an employer or a former employer to an assessee in the previous year
whether actually paid or not,

 any salary paid or allowed to him in the previous year by an employer or former employer to an
assessee in the previous year whether actually paid or not, and

 any arrears of salary paid or allowed to him in the previous year by an employer or a former
employer if not charged to income tax for any earlier previous year.

Section 16 and Section 17 respectively prescribe the deductions tobe made while computing the income
from salary and explain the terms

Scope of Salary Income

Section 15 provided the basis of charging salary income and section 17 explains it. Section 17 gives an
inclusive definition of salary.

Salary includes:
a. Wages;
b. Any Pension or Annuity;
c. Any Gratuity;
d. Any fees, commission, perquisites or profits in lieu of or in addition to salary or wages;
e. Any advance of salary;
f. Any encashment of leave salary;
g. Annual accreditation to provident fund above the prescribed limits; and
h. Any amount of credit to provident fund of employee to the extent it is taxable.

The term “salary" includes not only the basic salary but also Fees, Commission, Bonus, taxable value of
cash allowances and perquisites, Retirement Benefits, encashment of leave salary, advance of salary,
arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent
10
allowance, conveyance allowanceand also includes perquisites by way of free housing, free car, free
schooling for children of employees, etc. Tax treatment of all such receipts is given below.

Tax Treatment Of Certain Receipts

Basic Salary
Basic salary is fixed as per their respective terms of employment. It may be either a fixed amount or at a
graded system of salary. Under the graded system, apart from starting basic, salary annual increments
are pre-fixed. The form of salary is for example 12000-300-15000-500-20,000. In this case the starting
basis salary of the employee will be Rs 12,000 and he will be given an annual increment of Rs. 300 till
he reaches at the salary level of Rs 15,000. After reaching Rs 12,000, the increment will be Rs. 500 per
annum till he reaches the level of Rs 20,000.
No further increment is given thereafter till next date of increment or the date when he is promoted and
placed in other grade.

Fees, Commission and Bonus

Any fees, commission or bonus or incentive paid or payable to an employee by an employer is fully
taxable and is included in salary. Such Commission etc may be payable as a fixed amount or as a
percentage of turnover or partly fixed and partly as a percentage of turnover. When commission is
based on fixed percentage of turnover achieved by employee, it is included in basic salary for the
purpose of grant of retirement benefits and for computing certain exemptions discussed later

Arrears of salary:
Arrears of salary are taxed on receipt basis, if the same has not been taxed earlier. However, relief u/s
89 will be allowed in respect of such arrears.

Advance Salary:
Advance Salary is taxable on receipt basis in the year of receipt; however there will be no tax in the
year of actual accrual of such salary again. Further assessee shall be entitled to relief u/s 89 in respect of
advance salary. Loan to employee isnot treated as advance of salary and the same is not taxable.

Gratuity (Section 10(10):

Gratuity is a lump-sum payment to reward an employee for his past services, on his retirement or
termination. Sec .10 gives tax of treatment of gratuity as under-

1 Amount received as gratuity on termination as per service rules is Fully EXEMPT in case of
employees of Central or State governments or local authorities .

2 Other employees in a concern covered under the Payment of Gratuity Act, 1972 EXEMPTED amount
would be lowest of the following:
a. Amount of gratuity received,
b. Rs 10, 00,000
c. 15 days’ salary for every completed or part thereof in excess of six month year of service computed
on the basis of last salary drawn.

3 Other employees in a concern NOT covered under the Payment of Gratuity Act, 1972 EXEMPTED
amount would be lowest of the following:
a. Amount of gratuity received,
b. Rs 10, 00,000

11
Half month’s salary for every completed year of service in excess of six months (ignoring the fraction)
computed on the basis of average salary of last 10 months preceding the retirement. i.e.

3.6 TAXABLE VALUE OF PERQUISITES

6.1. Definition and Meaning of Perquisites:

Section 17(2), deals with the taxability of perquisites but it does not define the term it. Therefore,
turning to normal commercial meaning, perquisites may be called as any casual emolument or benefits
attached to an office or position in addition to salary or wages normally given in kind and not in cash
but capable of being measurable in money terms.
6.2. Taxability of perquisites:
Perquisites are included in gross taxable salary only if they are:
• allowed by an employer to an employee,
• allowed during the continuation of employment,
• directly dependent on service,
• resulting in the nature of personal advantage to the employee; and
• derived by virtue of employer’s authority.
6.3. Taxable perquisites
Sec. 17 (2) provides the following list of taxable perquisites :
i. Value of rent-free accommodation provided to the employee by the employer.
ii. Value of concession in the matter of rent in respect of accommodation provided to the employee
by his employer.
iii. Value of any benefit or amenity granted free of cost or at a concessional rate in any of the
following cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee who has substantial interest in the company
c) by any employer to an employee who neither is a director, nor has substantial interest in the
company, but his monetary emoluments under the head ‘Salaries’ exceeds Rs.50,000.
iv. Any sum paid by the employer towards any obligation of the employee
v. Any sum payable by employer to effect an assurance on the life of assessee
vi. The value of any other fringe benefit given to the employee as may be prescribed.

6.4. Classification of Perquisites

On an analysis of Section 17(2), the perquisites are of three broad categories :
• Perquisites taxable in all cases
• Perquisites not taxable at all
• Perquisites taxable only in the hands of specified employees only
A. Perquisites taxable in all cases:
U/s 17(2) the following perquisites are taxable in the hands of all type of employees, whether specified
or not:
1. Value of Rent free house provided by employer
2. Value of house provided at concessional rate
3. Any obligation of employee discharged by employer e.g. payment of club or hotel bills of
employee, salary to domestic servants engaged by employee, payment of school fees of employees’
children etc.
4. Any sum paid by employer in respect of insurance premium on the life of employee
B. Perquisites, which are tax-free for all the employees
Section 17 specifically states the some benefits will not be taxed at all in the hand of the employees and
as such, they are exempt from income tax
.these perquisites are given below:
12
a. Medical benefits within India :
Medical benefits within India, which are exempt from tax, include the following:
a) Medical treatment provided to an employee or any member of his family in a hospital
maintained by the employer.
b) Any sum paid by the employer in respect of any expenditure incurred by the employee on
medical treatment of himself and members of his family:
(i) in a hospital maintained by government or local authority or approved by the government for
medical treatment of its employees.
(ii) In respect of the prescribed diseases or ailments in any hospital approved by the Chief
Commissioner.
c) If the ordinary medical treatment of the employee or any member of his family is done at any
private hospital, nursing home or clinic, the exemption is restricted to Rs.15000.

Salaries

Direct Tax b. Medical benefits outside India

Medical Treatment outside India, which is exempt from tax, includes the following:
a) Any expenditure incurred by employer on the medical treatment of the employee or any
member of his family outside India.
b) Any expenditure incurred by employer on travel and stay abroad of the patient (employee or
member of his family) and one attendant who accompanies the patient in connection with such
treatment, shall be exempt to the following extent :
(i) The expenditure on medical treatment and stay abroad shall be exempt to the extent permitted
by the Reserve Bank of India.
(ii) The expenditure on travel shall be exempt in full provided the gross total income of the
employee (including this expenditure) does not exceed Rs.2,00,000.
c. Medical Health Insurance within India
Following are exempted perquisites in respect of medical Health Insurance
• Premium paid by the employer on health insurance of the employee under an approved scheme
u/s 36(1)(ib)
• Premium on insurance of health of an employee or his family members paid by employer on any
scheme approved u/s 80D (Mediclaim).
d. ESOP or Sweat Equity
Any benefit provided by a company free of cost or at a concessional rate to its employees by way of
allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option
Plan or Scheme ESOP/ESOS of the company offered to such employees in accordance with the
guidelines issued in this behalf by the Central Government. However, the difference between the fair
Market Value and the issue price will be treated, when such equity is issued at concessional price, as
the taxable perquisite value of ESOP
e. Transport
Amenity or benefit granted or provided free of cost or at concessional rate for use of any vehicle
provided by a company or an employer for journey by the assessee from his residence to his office or
other place of work, or from such office or place to his residence,
f. Refreshments
Refreshment provided by an employer to the employee during working hours in office environment

g. Others:
a. Value of Leave Travel Concession in India.
b. Amount spent by the employer as its contribution to staff welfare schemes.
c. Laptops and computers provided for personal use.

13
d. Rent free official accommodation provided to a Judge of High Court or Supreme Court or an
official of Parliament including Minister and Leader of Opposition in Parliament.
e. Recreational facilities extended not to a particular employee but to a class of employees.
f. Amount spent on training of employee or fees paid for refresher course.
g. Telephone provided to an employee at his residence.
h. Goods manufactured by the employer sold to employees at concessional rates
i. Allowances to employees of UNO
Since FBT has been discontinued, value of cars and other perquisites will be taxable in the hands of the
employees.
C. Perquisites taxable in case of Specified Employees only
U/s 17(2)(iii) the value of any benefit or amenity granted or provided free of cost or at
concessional rate Specified
Employees only will be taxable and Specified Employees means an employee who is
• a director of or
• who has a substantial interest i.e. more than 20 % voting power in the company; where he is
employed or
• Any other employee (of any employer including a company) whose income [under the head
Salaries exceeds fifty thousand rupees
• Salary for this purpose means salary due from, or paid or allowed by, one or more employers,
exclusive of the value of all benefits or amenities not provided for by way of monetary payment,
The following perquisites are taxable in case of such employees:
1. Free supply of gas, electricity or water supply for household consumption

Salaries

Direct Tax

2. Free or concessional educational facilities to the members of employees household

3. Free or concessional transport facilities
4. Sweeper, watchman, gardener and personal attendant
5. Any other benefit or amenity

3.7 VALUATION OF PERQUISITES:

Perquisites are taxable in the hands of the employee. However since they are paid in kind, notional
monetary the value of the perquisites must be determined in order to get the taxable amount of
perquisites. There are some broad principles for determining the method of calculation of value of
taxable perquisites. Briefly, these principles may be stated as follows:
• If the perquisite is entirely for personal benefits, then whatever the employer has spent for
providing those perquisites will be added to the salary income of the employee.
• If the perquisite is given by employer to employee for official purposes only, then such
perquisites are not be treated as taxable perquisites in the hands of employee.
• Perquisites which are partly used for personal purposes and partly for official purposes - In such
cases a reasonable amount of the value of perquisites which is used for personal purposes only will be
added to the salary income of the employee.
Though the actual valuation rule are beyond the scope of the syllabus, general principles for valuation
of perquisites may be considered
a. Accommodation & Furniture

14
Valuation of furnished and unfurnished accommodation is made according to Valuation Rules. If the
furnishings are owned by the employer then 10 per cent of the cost will be added to the value of
accommodation.
b. Transport
Broadly no perquisite value is taken in the hands of individual employees in three cases:
• Common transport such as bus provided to all the employees,
• If the employer is in the transport business.

• If a car is provided only for official use or for the purpose of travel from residence to office.
In other cases a reasonable cost of such transport facilities will be treated as taxable value of perquisites
in respect of such facilities
If the car has been provided for personal uses only, then the taxable amount is reasonable expenses on
the car maintenance plus depreciation on the car as per income tax rules if the car is owned by the
employer.
If the car is used for private as well as for official purposes then a reasonable proportion of, the above is
the valuation of the car perquisite in the hands of the employee.
c. Domestic servant
Salary of domestic servants of employer paid by the employer, perquisite value will be taken as per
rules.
d. Gas, water or electricity:
• If the employer himself is engaged in the business of providing supply of gas, water, or
electricity, then there will not be any taxable perquisite in the hands of the employee in respect of such
facilities.
• If the employer is not in the business of supply of gas, water or electricity, then the amount
spent by the employee in providing the facilities to the employee will be the taxable value of perquisites
in the hands of the employee provided the entire facilities are for the personal use of the employees
only. Any amount recovered from the employee will be reduced from the perquisite value.
• Where the connection for gas, electricity, water supply is in the name of employee and the bills
are paid or reimbursed by the employer, it is an obligation of the employee discharged by the employer.
Such payment is taxable in case of all employees under Section 17(2)(iv)
e. Educational facilities:
• If the employer is a school, college or educational institution, then there will not be any
perquisites taxable in the hands of any employee.
• If the employer is not a school, college or educational institution, but is engaged in some other
business or profession, the value of school fees or colleges fees of the children of the employee paid by
the employer will be the taxable value of perquisites in respect if such facility.
• If the children of the employee are allowed free education in an institute run by the employer
where the employer is engaged in other

Salaries

Direct Tax activities, then the value of the perquisites is reasonable cost of education and deemed by
the income tax officer in the hands of specified employees.
f. Medical facilities
• A sum of up to Rs 15000 paid by the employer to the employee by way of reimbursement of
medical expenses of the employee and his family will be exempt perquisite in the hand of the
employee. Any payment made in excess of Rs15000 will be taxable.
• If the treatment is made in a government approved hospital or recognized hospital, or in
government hospital, then no value will be taken as the perquisite value in respect of such medical
treatment reimbursement.

15
• If the medical treatment is done outside India, then up to the amount approved by the RBI for
such treatment, no perquisite value will be added to the taxable income of the employee. If payments
made by the employer to the employee in this connection exceed the amount approved by the RBI, then
such excess will be treated as taxable salary in the hands on of the employee.
• If the employer himself is a medical institution, then provision of medical facilities will not
attract any tax in the hands of the employee.
In other words if an employer’s own institution provides transport, education or medical
facilities , there will be no taxable perquisite value in the hands of the employee.

3.8 PROFITS IN LIEU OF SALARY – S 17(3)

U/s 17 (3) profit in lieu of salaries includes:

1. Compensation for Termination of Employment or modification of Terms & Conditions
The amount of any compensation due to or received by an assessee from his employer or former
employer at or in connection with the termination of his employment or the modification of the terms
and conditions relating thereto;
2. Payment from Employer from PF or Other Fund
Any payment (other than any pension, gratuity, HRA, Retrenchment compensation, etc) due to or
received by an assessee from an employer or a former employer or from a provident or other fund , to
the extent to which it does not consist of contributions by the assessee or interest on such contributions.

Salaries

3. Keyman Insurance Policy

Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy.
4. Sums Received from Future or Former Employer
Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person
(A) before his joining any employment with that person or (B) after cessation of his employment with
that person.
5. Payment of Employee’s Obligation Employer
Any sum paid by the employer in respect of any obligation which, but for such payment, would have
been payable by the assessee;
6. Payments from Certain Funds :
Any sum payable by the employer, whether directly or through a fund, other than a recognised
provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund established u/s
3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 or u/s 6C of the
Employees Provident Fund and Miscellaneous Provisions Act, 1952 to effect an assurance on the life of
the assessee or to effect a contract for an annuity;
7. Treatment of Annual Accretion to Provident Fund;
Provident Funds are established to provide for the retirement benefits of the employees. The Scheme of
funds envisages annual contributions from both the employer and the employee and the accumulation
of interest on the balances. The funds are of three types Viz.
I. Statutory Provident Fund set up or established and administered by the Government.
II. Recognised Provident Fund set up by others but recognised by the Commissioner of Income
Tax
III. Unrecognised Provident Fund set up by others but not recognised by the Commissioner of
Income Tax due to non- compliance with the guidelines laid down for recognition.

Other Points:
1. Employer’s Contribution to all the three funds is exempt at the time of contribution.
16
2. If the P.F. is deducted from the salary of the employee, salary will have to be grossed up in all
the three cases.
3. Employees’ Contribution when received back on retirement is exempt in all the three above
mentioned cases.
4. Interest on Employees’ Contribution from Unrecognised Provident Fund will be treated as
Income from Other Sources.
8. Transferred Balance: - S. 7
When an Unrecognised Provident Fund is subsequently recognised, the balances standing in the
Unrecognised Provident Fund are transferred to the Recognised Provident Fund. These balances are
called transferred balances and are deemed to be the income of that year as per section 7. Such amount
consisting of employees’ contribution in excess of 12% of Basic Salary and interest credited in
excess of 8.5% per annum are taxed as the salary under section 17(1).

17
 CHAPTER 3
INCOME FROM HOUSE PROPERTY
Income from house Property” is significantly different than the other heads of income unlike the other
heads as it covers not only the actual income but also the notional income.

According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income under
head of house property. In every section from 22-27 there are detail specification of house property
income. It is defined as income earned by a person through his house or land.

Computation of Income From House Property:

Income from house property is computed on the basis of its annual value determined u/s 23 and after
allowing deductions u/s 24 there from. These provisions are explained below:

Annual Value -Sec 23

Since, there is no definitive meaning of the term annual value defined in Sec 2(22) “as the annual value
determined under Sec. 23, meaning of annual value has to be seen in common parlance. ‘Annual value’
may be defined as the inherent capacity of property to earn income or the amount for which the
property may reasonably be expected to be let out from year to year. It is not the actual rent but the
capacity to fetch rent that is important. It implies that a property need not necessarily be let out.

The annual value of a property will, therefore, depend upon the use of the property- self occupied, let
out or partly vacant etc. The provisions of section 23 for determination of annual value are given below:

Determination of Gross Annual Value [GAV]

Annual value of a house property is higher of the Actual Rent or its Reasonable Let table Value [RLV]
- S23 (1) (a)Actual Rent means the rent received or receivable in respect of the property actually let out
by the owner. Reasonable Let table Value [RLV] is the expected rent which the property might
reasonably be expected to yield from year to year. This value may be computed whether the property is
let out or not. RLV is estimated on the basis of the following factors:

(a) Fair rent or the rent of similar properties in the same locality. The fair rent may be different in
different circumstances or different contractual obligations.
(b) Municipal Ratable Value or the value of the property fixed byte local authorities for the
purposes of assessment of local taxes payable. Often Municipal Ratable Value is taken on the
basis of the market rent receivable on the property and is therefore considered as a very reliable
yardstick to determine the reasonable letting value of the property.
(c) Standard Rent or the rent fixed under the Rent Control Act to control or limit the prevailing
rents in a locality. It only means that the landlord cannot charge more rent than the limit fixed
under the law. However, the landlord is free to charge lower rent than the rent fixed under the
law. Thus actual rent can be more or less than the fair rent but can never exceed the standard
rent.

4.4 HOUSE PROPERTY INCOME EXEMPT U/S 10

Income from house property is exempt from tax u/s 10. If it is earned by certain institutions /
organisations/ persons etc or in certain circumstances such as-
(a) Income of One Palace of an ex- Ruler - S. 10(19A)
(b) A local authority S. -10(20)
(c) A scientific research association -S. 10(20),
(d) An Institution for development of Khadi & Village Industries -S. 10(23BB)
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(e) Khadi & Village Industries Board -S. 10(23BB)
(f) A body for administration of charitable & religious trusts & endowments -S. 10(23BBA)
(g) Approved funds, educational institutions & hospitals- S. 10(23C),
(h) A trade union or association of trade union- S. 10(24)

Income from House Property

Direct Tax (i) Resident of Ladakh district -S. 10(26A)

(j) Statutory corporations/ other institution or association finance by the government for promoting
the interests of the members of the scheduled caste and scheduled tribes- S. 10(26B)
(k) Co-operative society for promoting the interests of the members of the scheduled caste and
scheduled tribes- S. 10(27)
(l) A political party -S. 13
(m) A farmhouse used for agricultural purposes.-S. 10(1)
(n) property held for charitable purposes -S. 11
(o) Property used for own business or profession such as letting out property to paying guest,
employees’ quarters, residence of partners or directors are some of the business uses. –S 22.
(p) If such property yields any income, such income will be treated as business income and not
house property income.
(q) One Self Occupied Property of an individual or a HUF assessee and not for letting out - S.
23(1). This benefit cannot be availed by non- living entities like firms, companies, etc.

5. COMPUTATION HOUSE PROPERTY INCOME:

Income from house property is computed based on its annual value determined u/s 23 and after
allowing deductions u/s 24 therefrom. These provisions are explained below:
5.1 Annual Value -Sec 23
Since, there is no definitive meaning of the term annual value defined in Sec 2(22) “as the annual value
determined under Sec. 23, meaning of annual value has to be seen in common parlance.
‘Annual value’ may be defined as the inherent capacity of a property to earn income or the amount for
which the property may reasonably be expected to be let out from year to year. It is not the actual rent
but the capacity to fetch rent that is important. It implies that a property need not necessarily be let out.
The annual value of a property will, therefore, depend upon the use of the property- self occupied, let
out or partly vacant etc. The provisions of section 23 for determination of annual value are given below:
5.2 Determination of Gross Annual Value [GAV]
Annual value of a house property is higher of the Actual Rent or its Reasonable Lettable Value [RLV]-
S23 (1) (a)

Actual Rent means the rent received or receivable in respect of the property actually let out by the
owner.
Reasonable Lettable Value [RLV] is the expected rent which the property might reasonably be expected
to yield from year to year. This value may be computed whether the property is let out or not. RLV is
estimated based on the following factors:
(a) Fair rent or the rent of similar properties in the same locality. The fair rent may be different in
different circumstances or different contractual obligations.
(b) Municipal Ratable Value or the value of the property fixed by the local authorities for the
purposes of assessment of local taxes payable. Often Municipal Ratable Value is taken based on the
market rent receivable on the property and is therefore considered as a very reliable yardstick to
determine the reasonable letting value of the property.
(c) Standard Rent or the rent fixed under the Rent Control Act to control or limit the prevailing
rents in a locality. It only means that the landlord cannot charge more rent than the limit fixed under the
19
law. However, the landlord is free to charge lower rent than the rent fixed under the law. Thus actual
rent can be more or less than the fair rent but can never exceed the standard rent.

Illustration-1:
Find out the Gross Annual Value from the details given in respect of premises:
Actual Rent: Rs 10,000 per month.
Rent of similar premises in the area Rs. 15,000 per month.
Municipal ratable value Rs. 8000 per month
Standard Rent fixed under the Rent Control Act. Rs. 12,000 per month
Solution:
1. Given Actual Rent -Rs 10,000 per month= Rs 1, 20,000
2. (a) Fair rent - Rs. 15,000 per month = Rs 1,80,000
(b) Municipal ratable value Rs. 8000 per month = Rs 96,000
(c) Higher of the (a) and (b) – Fair Rent Rs 1, 80,000
(d) Fair rent cannot exceed the Standard Rent Rs 1, 44,000
Hence RLV Rs 1, 44,000
3. GAV higher of 1 and 2 i.e. 1, 20,000and 1, 44,000 = Rs1, 44,000

Illustration-2:
Find out the GAV if the Standard rent Rs. 18,000 p.m. in above example.
Solution:
1. Actual Rent -Rs 1,20,000
2. (a) Fair rent -Rs 1,80,000
(b) Municipal ratable value -Rs 96,000
(c) Higher of the (a) and (b) – Fair Rent Rs 1,80,000
(d) Fair rent cannot exceed the Standard Rent Rs 2,16,000
Hence RLV Rs 1,80,000
3. GAV higher of 1 and 2 i.e. 1,20,000 and 1,80,000 = Rs1,80,000
Note: Standard rent being only a limiting factor is ignored

 Computation of Net Annual Value and Income from house property:

Sec 23 classifies the house properties into different categories as discussed below:

(A)Self-occupied Business Properties: Income from house property used for own business or profession
is exempt from tax. If any rent or other income is generated from such property, the same should be
treated as business income. Similarly, municipal taxes, repairs, insurance premium, and other expenses
incurred on such property etc. will be admissible as business expenses.

(B)Self-occupied Residential Properties (SOP):

I. SOP – Annual Value to be Taken as NIL

U/s 23(2)(a) value of one residential house part thereof which is occupied by the owner himself for his
own residence is taken as nil subject to two conditions namely :-:
i. The property or part thereof is not let-out actually for any part of the previous year and
ii. No other benefit has been derived from such property.

Some points are important in respect of SOPs.

1. This exemption is available only to individuals and HUFs. Other non- living persons can not avail
this exemption.
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2. Exemption is restricted to only one self- occupied property,
3. If the assessee owns more than one self-occupied properties, the assessee, at his option, may choose
any one property as self-occupied by him and the remaining properties will be deemed or assumed to
have been let-out.
4. Gross Annual Value of such properties deemed to have been let-out, will be determined on the basis
of their notional rental value as if the properties were let-out even if no rent has actually been received
by the assessee. However, deductions u/s 23 & 24 will be allowed in the normal manner on such
property.
5. If an assessee owns only one property, and cannot occupy the same because he is engaged in
employment or is carrying on a business or profession elsewhere, these provisions will apply mutatis
mutandis- Sec. 24(2).

II. No Deductions allowed from SOP except Interest:

1. Once the annual value of a SOP has been taken as nil, no further deduction will be allowed U/s
23 in respect of municipal taxes or U/s 24 except in respect of interest paid or payable on
borrowed funds for purchase, construction, repair, renewal or reconstruction of house property
as per the following rules Interest paid or payable on loan taken prior to 01/04/1999 will be
allowed to the extent of Rs. 30,000.
2. Interest paid or payable on loan taken after 01/04/1999 for acquisition/ construction of house
property will be allowed to the extent of Rs. 1, 50,000.
3. But if loan is taken after 01/04/1999 or repairs or renovation of the house property, deduction in
respect of interest paid or payable will be restricted to Rs. 30,000.
4. Interest is allowed on accrual basis. Actual payment during the previous is not necessary.
5. Interest paid or payable on money borrowed to acquire or construct the house property, for the
period prior to the previous year in which the property had been acquired or constructed, shall
be deductible in five equal annual installments starting from the previous year in which the
house has been acquired or constructed.
6. A fresh loan may be raised exclusively to repay the original loan taken for purchase/
construction etc, of the property. In such a case also, the interest on the fresh loan will be
allowable.
7. Interest payable on interest will not be allowed.
8. Brokerage or commission paid to arrange a loan for house construction will not be allowed.
9. Any loss arisen under the head ‘income from house property’ may be set-off against the other
heads in the same assessment year.

(C)Let-out Properties:
Following principles will be applicable for determination of annual value of properties let out including
SOP deemed to be let out.

1. Net Annual Value

Let-out properties are charged to tax at the net annual value (NAV), arrived at by deducting Municipal
taxes paid by the owner from GAV- (Proviso to S. 23(1). Municipal taxes paid or borne by the tenant
are not deductible. Municipal taxes are taken on cash basis and not accrual basis.
NAV= [GAV] - [Municipal Taxes paid by the Owner]
2. Deductions under section 24:

(a) Standard deduction

21
From the net annual value a standard deductions in respect of Repairs and Collection Charges is
allowed to the extent of 30% of the net annual value irrespective of whether the assesses has actually
incurred the expenses or not. However, if the repairs are borne by the tenant, this deduction will not be
allowed in the hands of the owner of the property.

(b) Arrears of Rent

A deduction of 30% is allowed for repairs and collection charges from the arrears of rent received in
respect of a property let out , which were earlier not charged to tax and the same will be taxable in the
year of receipt - Sec 25 B

(c) Interest on funds borrowed

Interest on loan taken for acquisition, construction, renewal, repairs or reconstruction is allowed on let-
out properties without any limit of Rs 30,000/ 1,50,000 as in case of SOP. The interest on loans, is
allowable on accrual basis. Similarly, Pre-construction interest from the date of the loan to the end of
the previous year before the previous year in which the house was acquired is amortized 1/5th per year
for 5 years as in case of SOP from the financial year in which the construction was completed.

(D) Property let-out and self-occupied for part of the year

If a property is let-out for whole or any part of the year and self-occupied for the remaining part of the
year, it shall be treated as let-out property and computation will be made accordingly by comparing
actual rent with the fair rent for the whole property u/s 23(1). It will not be treated as SOP as Sec 23(3)
makes it clear the SOP shall not be let-out for any part of the year nor should any benefit be derived
from it.

(E) Property partly let-out and partly self-occupied:

If a part of the property – say one or two floors or few rooms have been let out and another part of the
property is self- occupied, then for each portion the calculation will be made separately. Relevant
expenses like property taxes and interest will be allocated suitably for each portion and deductions will
be allowed separately for each portion.

NOTE the difference between properties let out /SOP for split
Period and with split portion used for letting out/SOP.

(F) Co-ownership – Section 26:

A property owned by more than one owners having definite and ascertainable share therein, will not be
assessed as an association of persons but share of each owner shall be included in his individual
income. Supposing the property is occupied by the co-owners themselves, share of each owner will be
treated as nil. Each of the co-owners would be entitled to the deduction in respect of interest subject to
the limit of Rs 30,000 or Rs 1,50,000.

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  MISCELLANEOUS:

TDS
Interest paid to a non-resident outside India without deduction of tax at source will not be allowed as
deduction.

Set off and carry forward of losses :

Any loss arising under the head “Income from House Property” in respect of interest only can be set off
against income arising from other heads and the remaining loss will be allowed to be set off and carried
forward for a period of 8 assessment years

No other Deductions allowed;

No deduction would be available in respect of charges like electricity, land revenue, ground rent,
insurance, etc. even though they may be actual outgoings since the standard deduction of 30% is
supposed to take care of all expenses.

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 CHAPTER 4
PROFITS AND GAINS OF BUSINESS
OR PROFESSION
Concept Of Business And Profession
Section 13, includes “profits and gains of business and profession” in the list of heads of income, hence
the “Business “and “Profession” become the two significant terms.

Business is defined in Sec. 2 (13) in an inclusive definition that “Business includes any trade,
commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture
and profession is defined in section Sec. 2((36), which merely says that “profession" includes vocation;

A “business” means a business as it is commonly understood and it also includes Trade, Commerce,
Manufacture and any adventure in the nature of trade, commerce or manufacture.

Similarly a “profession’ means a profession in common parlance and also includes a vocation.

Trade, commerce and, business refer to normal commercial activities of dealing or trading in goods or
services for profit. Producing new goods or articles will constitute manufacture. Profession covers the
skilled Personalized services like doctors, architects, lawyers, chartered accountants form the profession
and vocation will include all the other services even priests, astrologers, plumbers, mechanics,
delivering discourse, performing project .

Importantly, the phrase “adventure in the nature of trade, commerce or manufacture” indicates that
business or profession need not be organized, systematic or regular. A single act may be treated as the
business or profession. Accordingly, when a land was purchased developed and subdivided in smaller
plots for resale was held as an adventure in the nature of trade or commerce or manufacture.

It makes no difference whether an activity is business or profession, although there are some provisions
dealing with such specific activities.

Business may be legal or illegal, organized or unorganized, regular or occasional, and may or may not
require the personal talents or skill. It will nevertheless be business and attract tax liability. For
instance, judicially, smuggling was held to be a business.

SCHEME OF COMPUTATION -SEC. 28-29

Basic Scheme of computation

Sections 28 to Sec 44D deal with various aspects of business income. Sec. 28 is the charging section,
which defines what constitutes business income and Sec. 29 provides for mode of computation of
business income by deducting expenses from income.

Sections, 30 to 35 cover expenses allowed to be deducted only by some of the businesses, which are
expressly allowed as deduction and sections 36 and 37 deal with general deductions allowed to all the
businesses.

Sections 40, 40A and 43B cover expenses which are not deductible in certain circumstances

Lately, business profits are computed on presumptive basis in case of smaller assessees like retailers,
construction contractors, transporters etc. these provisions are not covered in the syllabus.
24
Chargeable income- Sec 28 :
Section 28 defines the scope of business to inter alia include the income from following sources:
(a) The profits and gains of any business or profession which was carried on by the assessee at any time
during the previous year;
(b) Speculation income treated as separate and distinct source. Speculative transactions are defined to
be the transactions settled by payment of difference in price of goods or securities and not by actual
delivery. Loss from this head cannot be set off against any other head of income but carried forward for
8 years.
(c) Compensation for agency termination etc
(d) Export incentives: cash assistance, duty drawback, DEPB etc.
(e) Profits on sale of import licenses
(f) Income derived by a trade, professional or similar association from specific services performed for
its members;
(g) Partners’ remuneration from a firm by way of salary fees, commission etc
(h) Value of any benefit or perquisites like gifts whether in cash or kind
(i) Non-compete agreements
(j) Any sum received under a Key man insurance policy including the sum allocated by way of bonus
on such policy.
(k) Amount recovered on account of bad debts allowed in the earlier years.
(l) Profits on sale of capital assets if used for scientific research and allowed in the earlier years.

Computation of business income -S.29:

Business income is the aggregate income from all the sources specified in Sec 28 in respect of a
business / profession carried on by the assessee in the relevant previous year as reduced by the expenses
and deductions laid down in S. 30 to 44D
On a collective reading of the two sections, following characteristics and conditions are essential : -
1. There must be a business or profession.
2. Such business or profession must be carried on by the assessee.
3. The business or profession must be carried out during the previous year.
4. If a business or profession is closed down the expenses cannot be deducted.
5. Expenses will be allowed as a deduction from gross receipts only if they have been incurred in the
relevant previous year.
6. Expenses incurred before setting of the business will not be allowed except where specifically
provided by law.
7. Taxable business or professional income or profit is computed by deducting expenses incurred for
earning the income, from the gross income or gross receipts or gross sales subject to modifications
given in S. 30 to 44D.

Method of Accounting:
Business profits are computed in accordance with the method of accounting regularly employed by the
assessee. There are two methods of accounting—mercantile system and cash system.
1. Mercantile system :Under the mercantile system of accounting, all the income and expenses are
recorded on accrual basis. Actual receipt ofincomes or actual payment of expenses during the
year is not necessary. Net profit or loss is computed after considering all income and expenses,
25
 whether or not actually received or paid during the accounting period. If assessee maintains the
books of account according to the mercantile system, income of a business or profession,
accrued during the previous year is taxable. The income may be received or expenditure may be
paid during the previous year or in a year preceding or following the previous year.

2. Cash system Under the cash system of accounting, a record is kept of actual receipts and actual
payments of a particular year. Net profit under the cash system will be equal to difference of
incomes received and expenses paid during the accounting year whether such receipts and
payments relate to the previous year or some other year or years.
3. Hybrid System; A combination of the two methods, whereby some transactions are recorded on
cash basis and some are recorded on mercantile basis is also adopted by some persons. Even
undersea. 43B, tax payments are allowed only on cash basis even though the method of
accounting employed may be mercantile.

Deductions Expressly Allowed Under the Act

The following expenses are expressly allowed as deductions against profits and gains of business or
profession:

Rent, Rates, Taxes, Repairs & Insurance for Building- S. 30:

Under Sec. 30, the following revenue expenses incurred in respect of the business premises are allowed
to be deducted from the business income:

a. the rent of premises,

b. the cost of repairs borne by the assessee in case of a rented business premises ;
c. the cost of current repairs in respect of other premises occupied otherwise than as a tenant;
d. any sum paid on account of land revenue, local rates or municipal taxes subject to the provisions of
section 43B and
e. Insurance premium paid against risk of damage or destruction of the premises. Capital expenses are
not allowed as deduction under this section .

Repairs & Insurance of Machinery, Plant & Furniture – S. 31:

Section 31 allows deduction in respect of revenue expenses incurred on current repairs and insurance in
respect of plant, machinery and furniture used for business purposes. Capital expenses are not allowed
to be deducted under this section.
Machinery hire charges are not covered under this section but as residual expenses u/s 37.

Depreciation - S.32:

Conditions for claiming depreciation:

Sec 32 lays down that depreciation will be allowed as deduction in computing the total income of an
assessee irrespective of whether or not the assessee has made a claim for deduction , If the following
conditions are satisfied :-

(i) Depreciation allowed on eligible assets only:

Depreciation will be allowed only on the following assets called depreciable assets:
buildings, machinery, plant or furniture, being tangible assets ;Know-how, patents, copyrights,
trademarks, licenses, franchises or any other business or commercial rights of similar nature, being
intangible assets acquired on or after the 01/04/1998.

“Building” means the superstructure only. It does not include the land on which it is constructed.
26
“Plant” includes ships, vehicle, books including technical knowhow, scientific apparatus and surgical
equipments used for the purpose of business or profession but does not include tea bushes or livestock
or buildings or furniture and fittings.

Assets not eligible for depreciation

Following assets are not eligible for depreciation:
1. Foreign car acquired between 01/03/ 1975 and 31/03/ 2001unless it is used in a business of
running it on hire for tourists ; or outside India in his business or profession in another country ;
and
2. Any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years
under an agreement entered into by the Central Government under Section 42.

(ii) Ownership – Partial ownership: Depreciable asset must be wholly or partly owned by the assessee
Fractional or partial ownership is recognized for depreciation purpose. The assessee, therefore, may be
owner or the co-owner of the asset. In case of an asset owned by different assesses, each co-owner will
be entitled to depreciation on his contribution to the cost of asset. .

Exception: - Depreciation will be allowed on capital work / renovation or construction of any structure
in building though not owned by the assessee is held on lease or other right of occupancy and the new
structure is owned by the assessee

(iii)Purpose or User of the Assets

The asset must be used for the purpose of business or profession of the assessee

(iv) User of the Assets during the previous year: Depreciation will be allowed if an asset is put to use
for the purpose of business or profession of the assessee at least for sometime during the previous year.
Normal depreciation allowance is reduced to 50 per cent of normal depreciation, if an asset is acquired
during the previous years and is put to use for the purpose of business or profession for less than 180
days during that year.

It may be noted that this condition is applicable only in respect of asset acquired during the year and not
other asset. This is because the machinery would undergo wear and tear even if it was not put to actual
use.

Mode of computation
Following principles are important in computing the depreciation:
i. Depreciation is calculated on the WDV of the block after adjusting the sales and purchase during the
year in that block.
ii. Rates of depreciation for different assets are taken as prescribed in rules.
iii. Depreciation will not be allowed on a block if WDV of that block comes to Zero, even if some
assets in that block may be existing.
iv. Similarly , no depreciation will be allowed on a block, in which no assets are left and the block
become empty, or ceases to exist, . WDV of the block will be treated as short term loss.
v. Depreciation will be allowed at 50% of the prescribed rates, if the an asset is put to use for less than
180 days in the year of acquisition.
vi. Straight Line Method (SLM) method is applied in case of the assets of the power companies i.e.
Undertakings engaged in generation or generation and distribution of power at the prescribed rates of
depreciation on the actual cost of the assets.
27
vii. Additional depreciation of 20% on actual cost in certain cases discussed later on in this lesson.
viii. No Depreciation will be allowed on foreign cars except in some case dealt with separately.
ix. Depreciation will not be allowed on scientific research assets ,entire cost of which is allowed as
deduction u/s 35

DEDUCTIONS EXPRESSLY ALLOWED

The following expenses are expressly allowed as deductions against profits and gains of business or
profession:
4.1 Rent, Rates, Taxes, Repairs & Insurance for Building- S. 30
Under Sec. 30, the following revenue expenses incurred in respect of the business premises are allowed
to be deducted from the business income:
a. the rent of premises,
b. the cost of repairs borne by the assessee in case of a rented business premises ;
c. the cost of current repairs in respect of other premises occupied otherwise
than as a tenant;
d. any sum paid on account of land revenue, local rates or municipal taxes subject to the
provisions of section 43B and
e. Insurance premium paid against risk of damage or destruction of the premises.
Capital expenses are not allowed as deduction under this section .
4.2 Repairs & Insurance of Machinery, Plant & Furniture- S. 31:
Section 31 allows deduction in respect of revenue expenses incurred on current repairs and insurance in
respect of plant, machinery and furniture used for business purposes. Capital expenses are not allowed
to be deducted under this section. Machinery hire charges are not covered under this section but as
residual expenses u/s 37.

4.3. Depreciation - S.32:

4.3.1 Conditions for claiming depreciation:
Sec 32 lays down that depreciation will be allowed as deduction in computing the total income of
an assessee irrespective of whether or not the assessee has made a claim for deduction , If the
following conditions are satisfied :-
(i) Depreciation allowed on eligible assets only:
Depreciation will be allowed only on the following assets called depreciable assets:
□ buildings, machinery, plant or furniture, being tangible assets;
□ Know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or after the 01/04/1998.
“Building” means the superstructure only. It does not include the land on which it is constructed.
“Plant” includes ships, vehicle, books including technical know- how, scientific apparatus and surgical
equipments used for the purpose of business or profession but does not include tea bushes or livestock
or buildings or furniture and fittings.
Assets not eligible for depreciation
Following assets are not eligible for depreciation:
□ Foreign car acquired between 01/03/ 1975 and 31/03/ 2001 unless it is used in a business of
running it on hire for tourists ; or outside India in his business or profession in another country ; and

28
□ Any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years
under an agreement entered into by the Central Government under Section 42.
(ii) Ownership – Partial ownership:
Depreciable asset must be wholly or partly owned by the assessee Fractional or partial ownership is
recognised for depreciation purpose. The assessee, therefore, may be owner or the co-owner of the
asset. In case of an asset owned by different assessees, each co-owner will be entitled to depreciation on
his contribution to the cost of asset. .
Exception:-Depreciation will be allowed on capital work / renovation or construction of any structure in
building though not owned by the assessee is held on lease or other right of occupancy and the new
structure is owned by the assessee

Profits and Gains of Businessor Profession

Direct Tax (iii)Purpose or User of the Assets

The asset must be used for the purpose of business or profession of the assessee
(iv) User of the Assets during the previous year:
Depreciation will be allowed if an asset is put to use for the purpose of business or profession of the
assessee at least for sometime during the previous year. Normal depreciation allowance is reduced to 50
per cent of normal depreciation, if an asset is acquired during the previous years and is put to use for the
purpose of business or profession for less than 180 days during that year.
It may be noted that this condition is applicable only in respect of asset acquired during the year and not
other asset. This is because the machinery would undergo wear and tear even if it was not put to actual
use.
Illustration -2
A Machine purchased on 31/03/2020 is put to use only on 01/01/ 2021. There will be no depreciation in
the A.Y. 2021-22 but it would be eligible for full depreciation in A.Y. 2022-23 even though the actual
usage of the machine is has been less than 180 days.
4.3.2 Important Terms :
□ Block Of Assets
U/s 2(11] - The term “block of assets” means a group of assets falling within a class of assets
comprising of —
a) Tangible assets, being buildings, machinery, plant or furniture;
b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any
other business or commercial rights of similar nature, in respect of which the same percentage of
depreciation is prescribed.
Thus, block of assets will mean classification of depreciable assets according to the group viz. building,
plant, furniture or machinery and each group is further classified according to the applicable rate of
depreciation
Two assets of different groups e.g. temporary shed, books of professionals having same rate of
depreciation 100% will not form the part of the block.
□ Written Down Value (WDV)
i. Written down value of an asset means:

a. actual cost to the assessee of the asset acquired in the previous year, and
b. the actual cost to the assessee less all depreciation actually allowed thereafter
ii. Written down value of any block of assets, means the:
Opening WDV of the block (after 01/04/1988) or in case of slump sale, amalgamation, succession of
business and demerger, conversion into company etc holding /subsidiary company opening value of the
block of the previous owner or entity adjusted by:
a. the increase by the actual cost of any asset falling within that block, acquired during the
previous year; and
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b. the reduction of the moneys payable in respect of any asset falling within that block, which is
sold or discarded or demolished or destroyed during that previous year together with the amount of the
scrap value, if any, so, however, that the amount of such reduction does not exceed the written down
value as so increased.

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 CHAPTER 5
CAPITAL GAINS
The basic concepts and provisions relating to computation of taxable capital gains are briefly explained
in this monograph.

A capital gain is a profit that results from a disposition of a capital asset, such as stock, bond or real
estate, where the amount realized on the disposition exceeds the purchase price. The gain is the
difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if
the proceeds from the sale of a capital asset are less than the purchase price.

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the
purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one
year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is
incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

Profit that results when the price of a security held by a mutual fund rises above its purchase price and
the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital
loss would occur when the opposite takes place.

Capital gains may refer to "investment income" that arises in relation to real assets, such as property;
financial assets, such as shares/stocks or bonds; and intangible assets.

Section 45 is the charging section. It states that any profits or gains arising from the transfer of a capital
asset effected in the previous year shall be the income of the previous year in which the transfer took
place. An analysis of the section shows that capital gain tax liability is subject to the following
attributes:

(i) There is a capital asset ,

(ii) The capital asset is transferred by the assessee,

(iii) The transfer takes place during the previous year and

(iv) The transfer results in some gain or loss.

Thus, the capital gain will depend upon – existence of a capital asset, transfer of that capital asset
during the previous year and the resultant profit or loss from such transfer. Besides, sec. 45 extends the
term “capital gain” to cover several other receipts, discussed below:.

2.2 Insurance money:

Money or other assets received during the previous year from an insurer on account on account of
damage to or destruction of a capital asset, as a result of:

• Flood, typhoon, hurricane, cyclone, earthquake or other convulsions of nature or

• Riot or civil disturbance or

• Accidental fire or explosion or

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• Action by an enemy or action taken in combating an enemy

2.3 Conversion of capital asset into stock:

Transfer by way of conversion, by the owner of a capital asset into, or its treatment by him as stock-in-
trade of a business carried on by him, but is chargeable to tax in the previous year in which such stock-
in-trade is sold or otherwise transferred by him.

2.4 Interest in securities

Transfer made by a depository or a participant of beneficial interest in any securities during the
previous year in which such transfer takes place.

2.5 Transfer of asset as capital to firm, AOP or BOI :

Transfer of a capital asset made by a person to a firm or other association of persons or body of
individual (not being a company or a co-operative society) in which he is or becomes a partner or
member by way of capital contribution or otherwise in the previous year , in which the transfer takes
place.

2.6 Transfer of asset on dissolution of firm, AOP or BOI

Transfer of a capital asset x by way of distribution of capital assets on dissolution of a firm or

association of persons or body of individuals (not being a company or co-operative society) or
otherwise, in the year previous year in which the transfer takes place

2.7 Compulsory Acquisition

Transfer of capital asset by way of compulsory acquisition under any law is chargeable to tax in the
previous year in which such compensation or part thereof is received. Any additional compensation
shall be taxable in the previous year, in which it is actually received. If the initial/ enhanced
compensation is subsequently reduced by any court, tribunal or any authority, the capital gains assessed
in the year of receipt of initial compensation or enhanced compensation will be amended to re-compute
the capital gains with reference to such reduced compensation.

2.8 Repurchase of Units of Mutual Funds

Transfer of capital asset being the units of UTI or other mutual funds issued under the Equity-Linked
Savings Scheme on the repurchase thereof by the mutual fund will be taxed in the year of such
repurchase.

2.9 ESOP /ESOS

Sale value of the shares issued to employees under an equity stock option plan/scheme as reduced by
the cost of acquisition / indexed cost of acquisition of the shares will be taxed in the year of such issue.

2.10 Buyback

The value of a consideration received by share of a company under a scheme to buyback its own shares
u/s 77A of the Companies Act, 1956 as reduced by the cost of acquisition /indexed cost of acquisition
will be taxed in the year of buyback. – S 46A
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6.6 TYPES OF CAPITAL GAINS

Based on the type of asset transferred by the assessee, Capital Gains can be classified into two types
i. Short Term Capital Gain (STCG)
Capital gain arising on transfer of a short-term asset i.e., asset held by an assessee for less than 36/12
months will be short term capital gain and any loss arising on the transfer of short-term asset will be
short term capital loss – Section 2(29B)
However, capital gains arising on sale of long-term business assets in a block in case of a slump sale as
covered under section 50 would be treated as a short-term capital gain or short-term capital loss.
ii. Long Term Capital Asses (LTCG)
Long-term capital gain is the gain arising on transfer of a long-term asset or an asset held by an assessee
for 36/12 months or more. Conversely any loss arising on transfer of long-term asset will be long term
capital loss – Section 2(42B)

6.7 PERIOD OF HOLDING- S. 2(42A):

Type of capital gain is determined on the basis of the period of holding of the asset. In determining the
period for which the capital asset has been held by the assessee the following are the important rules –
i. In case of shares held in company liquidation the period subsequent to the date of liquidation
will not be included. Period of holding will stop running on date of liquidation.

Computation of Capital Gains

The capital gain can be computed by subtracting the cost of capital asset from its transfer price,
i.e., the sale price. The computation can be made by making a following simple statement.

Profits or Gains
The incidence of tax on Capital Gains depends upon the length for which the capital asset
transferred was held before the transfer. Ordinarily a capital asset held for 36 months or less is called a
‘short-term capital asset’ and the capital asset held for more than 36 months is called ‘long-term capital
asset’. However, shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or
any security listed in any recognised Stock Exchange are to be considered as short term capital assets if
held for twelve months or less and long term capital assets if held for more than twelve months.

33
 Transfer of a short term capital asset gives rise to ‘Short Term Capital Gains’ (STCG) and
transfer of a long term capital asset gives rise to ‘Long Term Capital Gains’ (LTCG). Identifying gains
as STCG and LTCG is a very important step in computing the income under the head Capital Gains as
method of computation of gains and tax payable on the gains and treatment of losses is different for
STCG and LTCG.

Short Term Capital Gains (STCG)

Short Term Capital Gains is computed as below:

STCG = Full value of consideration - (Cost of acquisition

+ Cost of improvement + cost of transfer)

The STCG as arrived above, is taken as income under the head Capital Gains and the total income and
tax liability is worked out above.

Long Term Capital Gains (LTCG))

Long Term Capital Gains is computed as below:

LTCG = Full value of consideration received or accruing

- (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Where, Indexed cost of acquisition = Cost of acquisition x CII of year of transfer

CII of year of acqeuisit
Indexed cost of improvement = Cost of improvement x CII of year of transfer
CII of year of improvement
CII = Cost Inflation Index

The LTCG computed as above is taken as income under the head Capital Gains for the purposes
of determining the total income in the manner described in Chapter I, subject to the following:

􀁺 Deduction under Chapter VIA should not be given from LTCG.

􀁺 Tax liability on LTCG to be taken at 20%.

􀁺If total income other than LTCG is less than zero slab, LTCG over the zero slab only attracts tax at
20%.

The following example illustrates the difference between STCG and LTCG.

34
 ‘X’ a resident individual sells a residential house on 12.4.09 for Rs.25,00,000/-. The house was
purchased by him on 5.7.2006 for Rs.5,00,000/- and he had spent Rs.1,00,000/- on improvement during
May 2005. During the previous year 2009- 2010 his income under all other heads (other than capital
gains) was NIL.

Since ‘X’ has held the capital asset for less than 36 months, (5.7.2006 to 12.4.2009) it is a short
term capital asset for him and its transfer gives rise to short term capital gains.

STCG on sale of house = 25,00,000 - 5,00,000 - l,00,000

= 19,00,000
Income under “Capital Gains” = 19,00,000
Income under the heads other than Capital Gains = Nil
Income under “Capital Gains” = 19,00,000
Gross Total Income = 19’00,000
Total Income = 19, 00,000
Tax on total income = 5, 19,000

In case ‘X’ sales the same house on 12.3.2010 for the same consideration, the residential house
becomes a long term capital asset as the period of holding would be more than 36 months (5.7.2006 to
12.3.2010) and its transfer gives rise to long term capital gains.

Sale consideration = 25,00,000

Indexed cost of acquisition: 5,00,000 x 551/480 = 5,73,958
Indexed cost of improvement: 1,00,000 x 551/497 = 1,10,865 6,84,823
Income under the head “Capital Gains” = 18,15,177
Income under the head other than capital gains = Nil
Income under “Capital Gains” = 18,15,177
Gross total income = 18,15,177
TOTAL INCOME (rounded off) = 18,15,180

Tax thereon:
Tax on income other than LTCG = Nil
Tax on LTCG @ 20% of (18,15,180-1,10,000) = 3,43,036
*minimum slab for that assessment year
Total tax payable = 3,43,036.

6.9 VALUE OF CONSIDERATION- S-48

“Full total value of consideration” means the value received or accruing as a result of the transfer.
Value may be in terms of money or money’s worth or both, which accrues or arises upon transfer of a
capital asset.
Consideration is a result of the act of the parties inter se. It refers to the whole price bargained for
between the parties. Sale price of an asset, for instance will be the value of consideration accrued.
Actual receipt is irrelevant. Capital gains are chargeable on accrual basis and not on cash basis.
The expression “full value of consideration” does not refer to the market value of the asset transferred
or the adequacy of the price. However, there are some specific provisions, which require ascertainment
of fair market value accruing or arising on transfer of a capital asset
The consideration that cannot be expressed in money’s worth does not form part of full value of
consideration for the transfer, giving rise to capital gain. Following are some cases:

35
• There will be no consideration for a property transferred without consideration or transferred out
of natural love and affection or patriotism. Some of such transfers are taxable as gifts u/s 56.
• Full value of consideration in case of a transfer under a gift or irrevocable trust of shares,
debentures, or warrants allotted by a company directly or indirectly to its employees ESOP/ESOS of the
company as per the guidelines issued by the Central Government, will be the fair market value of shares
on the date of transfer
• In case of a transfer resulting in exchange of two or more assets, full value of consideration of
the assets transferred will be equal to the fair market value of the asset received.

Capital Gains

Direct Tax • Amount of any insurance claims received in respect assets destroyed in natural
conditions like tsunami, floods, earthquakes, would be deemed the full value of consideration.

6.12 FAIR MARKET VALUE

Fair market value, in relation to a capital asset, means the price that the capital asset would ordinarily
fetch on sale in the open market on the relevant date. If the assessee has acquired the asset prior to
1/4/81, he has the option of substituting the fair share market value of the asset as on 1/4/81 instead of
actual cost of acquisition. However this option is available to the assessee only when the asset has been
acquired prior to 1/4/81.Fair market value is adopted in many cases like where ascertainment of actual
cost is not possible; assets distributed on liquidation have already been dealt with at their appropriate
places. Some other cases are considered below:
a) Conversion of capital asset into stock-in-trade
When the assessee converts a capital asset held by him into stock-in-trade, it will be treated as taxable
transfer giving rise to notional capital gains or loss. For this purpose, the fair market value of the capital
asset on the date of conversion is treated as notional sale proceeds from which the cost of acquisition /
indexed cost of acquisition is deducted in order to get the capital gain. Later, when this converted
capital asset is sold there will be business profit or loss i.e. actual sale proceeds less notional fair market
value taken, as cost will be the taxable business profit or loss. However business income as well as
capital gains will be chargeable to tax only in the year of actual sale to a third party.

CHAPTER 6
INCOME FROM OTHER SOURCES
Introduction:

Income from other sources’’ is last and residuary head of income- S 56[1]. It covers all such incomes,
which are not chargeable under any other head of income via salary, Income from house property,
capital gains and profits and gains of business and profession. This head also comprises of some well-
defined incomes such as interest, dividend, winnings from lotteries and gifts, etc. –S 56(2).

BASIS OF CHARGE- S 56(1)

Income of every kind which is not to be excluded from the total income and which is not chargeable
under any of the specified heads shall be chargeable to income tax under the head “Income from Other
Sources- S 56(1)”.

In other words, if any incomes are taxable, but they cannot be classified under other heads of income
viz salary, Income from house property, capital gains and profits and gains of business and profession
shall be charged under the head Income from Other Sources
36
INCOMES SPECIFICALLY CHARGEABLE S. 56(2)
Section 56(2) lists incomes specifically chargeable to tax under the head “Income from Other Sources”.
These incomes are:

i. Dividends u/s 2(22) (a) to (e)

ii. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature whatsoever.
iii. Any sum received by the assessee from his employee as contribution to any provident fund or
superannuation fund or any fund set up under the provisions of the Employee State Insurance Act, 1948
or any other fund for the welfare of such employee is treated as income as referred under Section 2(24)
(x), if not chargeable under the head business or profession.
iv. Income by way of interest on securities, if not chargeable under the head business or profession.
v. Rental income from machinery, plant or furniture belonging to the assessee and let on hire if not
chargeable under the head business or profession.
vi. Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings and
letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, if not
chargeable under the head business or profession.
vii. Any sum including bonus received under Key man Insurance Policy shall be treated as income
chargeable to tax under this head if not taxable as salary or business income.
viii. Aggregate of any sum of money exceeding Rs. 50,000 received without consideration by an
individual or HUF on or after 1.10.2009
ix. Aggregate fair market value of movable property if it exceeds Rs 50,000 received without
consideration by an individual or HUF after 1.10.2009
x. The difference between the aggregate fair market value and the consideration received if movable
property exceeding Rs50,000 is received for inadequate consideration received by any individual or
HUF.
xi. The stamp duty value whether assessed or assessable of any immovable property if the stamp duty
value of such property exceeds Rs 50,000 received without consideration by an individual or HUF after
1.10.2009.

OTHER INCOMES CHARGEABLE UNDER THIS HEAD:

Income from other sources is the residual head of income comprising of all the incomes, which are not
chargeable elsewhere. Therefore, apart from the incomes specified above, all the other incomes
includible under any other heads of income the same will be charged under this head. Some of such
items are as follows:

i. Dividend received from any entity other than domestic company. This is because dividend
received from a domestic company is exempt under section 10(34) in the hands of the
receiver. Accordingly dividend received from a cooperative bank or dividend received from
a foreign company will be taxable as income from other sources.

ii. Any pension received by the legal heirs of an employee. Pension received by the employee
himself during his lifetime will charged under section 17(3) as the income from salaries.
iii. Any winnings from lotteries, crosswords, puzzles, races including horse races, card games
or other games of any sort or gambling or betting of any form or nature.
iv. Income from any plant, machinery or furniture let out on hire where it is not the business of
the assessee to do so.
v. Income from securities by way of interest.
vi. Any sum received by the assessee from his employees as contribution to any staff welfare
scheme. However when the assessee makes the payment of such contribution within thetime
37
 limit under the scheme of welfare, then the payment will be allowed as a deduction; only the
balance amount will be taxable.
vii. Income from sub-letting viii .Interest on bank deposits and loans and securities.
viii. Royalty
ix. Directors’ fees
x. Casual income
xi. Agricultural income when taxable e.g. land say situated in foreign country,
xii. Income from undisclosed sources.
xiii. Rent of plot of land
xiv. Mining rent and royalty.
xv. Casual income under a will, contract, trust deed.
xvi. Salary payable to a member of parliament.
xvii. Gratuity received by a director who is not an employee of a company.
xviii. Any other receipt which is income but which does not fall under the other four heads of
income viz. salary or business income or income from house property or capital gain.
7.5 SOME SPECIFIC INCOMES :

5.1. Dividend - Sec 56(2) (i)

Dividend means distribution of profits by the management to the real owners- the shareholders.
Dividend is chargeable to tax whether paid in cash or kind or paid out of taxable profits or tax -free
income, out of revenue profits or capital gains. Dividend is taxable when declared at the Annual
General Meeting of a company and not when received, but interim dividend is taxable on the basis of
payment.
Income from dividend (not being deemed dividend) from an Indian company is tax free in the hands of
the shareholders as the distribution of dividends is taxable in the hands of the company.
5.2. Deemed dividend: -Loan to shareholders- S. 2(22) (e)
According to section 2(22)(e), if a closely held company gives a loan or advance to a person for his
individual benefit and the person is having substantial interest (10 per cent)in the company or to a
concern (HUF/Firm etc) where the person having substantial interest has at least 20 per cent interest,
then the receiver of that loan will be treated as if he has received the dividend amount to the extent of
loan and it will be taxable in his hands as dividend income.
This provision has been inserted to prevent persons having substantial control and influence over the
affairs of a company to take away all funds of the company as low-interest loans for their personal
benefit to the prejudice of the other shareholders.
Some other important points should be kept in mind:
1. The dividend under this clause is taxed in the hands of the shareholder, who is entitled to set off
the same if and when company declares any dividend. The dividend will be taxable in the year when the
loan was given – S.8. (In practice, since the dividend is tax-free in the hands of the shareholder, the set
–off provision does not grant any real benefit of set-off to the shareholder;

Income from Other Sources

Direct Tax 2. If the loan is repaid, dividend income will still be taxable in the hands of the recipient.
The courts have repeatedly held that there is no inequity in this;
3. The loan will be taxable as dividend only to the extent of free reserves of the company;
4. The section will be applicable only on cash loans or advances and not on advances in kind say
by way of sale of goods in the normal course of business;
5. Loans or advance made by the lending company for which lending is the main or substantial
part of its business will also not be covered by this section;

38
6. Any advance or loan made to a shareholder or the concern by a company in the ordinary course
of its business, for purchase of its own shares or on demerger etc will also be not be covered under this
section;
7. The dividend will also be subject to TDS;
8. Substantial interest may be existing at any time during the year;
9. Any deemed dividends u/s 2(22) (e) or dividend from any other entity is, however taxable in the
hands of the recipient; and.
10. Deduction of expenses on collection and interest on loan, taken for investment in shares, is
available against dividend income.

5.6. Family Pension

Family pension means a regular monthly payment made to the legal heirs of the employee after his
death. This is treated as income from other source and not salary because there is no employer-
employee relationship between the legal heirs and the employer.
Standard deduction equal to 1/3rd of the pension or Rs. 15,000 is available as deduction from this
income. Significantly, pension amount received

during the lifetime of employee is taxable as salaries u/s 17(3) and not entitled to standard deduction.

5.7 Gifts in the hands of individuals and HUFs:

In a major deviation to the principle that income tax is a tax on income and not on capital receipts, the
Finance Act, 2004 amended Sec 56 to bring gifts under the tax net. Since then, the section has been
amended several times to widen the scope of taxable gifts. The latest legal position as applicable in the
assessment year 2021-22 summarised as follows:
5.7.1 Taxable Gifts
U/s 56(2) ((vii), Following receipts by an individual or a Hindu undivided family, in any previous year
from any person or persons will be taxable as “Income from Other Sources:
a. Any sum of money, without consideration, the aggregate value of which exceeds fifty thousand
rupees, the whole of the aggregate value of such sum
b. Any immovable property,
i. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp
duty value of such property;
ii. for a consideration which is less than the stamp duty value of the property by an amount
exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:

Direct Tax Following points are important in this regard :

• Date of valuation
Date of agreement will be the date for considering the stamp , if the date of agreement and the date of
registration are not the same and part or whole of the amount of consideration thereof, has been paid by
any mode other than cash on or before the date of the agreement, in other cases it will be the date of
registration.
• Disputed Value
If the stamp duty value of immovable property is disputed by the assessee u/s 50C(2) , the Assessing
Officer may refer the valuation of such property to a Valuation Officer as per the provisions of Sec 50C
and 155(15) will apply for valuation of capital asset.
c. Any property, other than immovable property-
i. without consideration, the aggregate fair market value of which exceeds fifty thousand
rupees, the whole of the aggregate fair market value of such property; or
ii. for a consideration which is less than the aggregate fair market value of the property by
an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds
such consideration
39
5.7.2. Exceptions:
The provisions will not apply to any sum of money or property received- :
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor; or
(e) from any local authority defined in S 10[20]-Explanation
(f) from any fund or foundation or university or other educational institution or hospital or other
medical institution or any trust or institution referred to in S. 10 (23C) ; or
(g) from any trust or institution registered u/s 12AA
5.7.3 Meaning of Property:
Property” means the following capital asset of the assessee: —
a. immovable property being land or building or both;
b. shares and securities;

c. jewellery;
d. archaeological collections;
e. drawings;
f. paintings;
g. sculptures;
h. any work of art; or
i. Bullion w. e. f 01/06/2010
5.7.4 Meaning of Relative
Relative “means:
I. In relation to an Individual :
a. spouse of the individual;
b. brother or sister of the individual.
c. brother or sister of the spouse of the individual ;
d. brother or sister of the either of the parents of the individual,
e. any lineal ascendant or descendant of the individual
f. any lineal ascendant or descendant of the spouse of the individual
g. spouse of the persons referred to in (2) to (6) above.

Income from Other Sources

RELATIVE OF A OR MRS. A
Spouse Mrs. A A
Siblings A’s brother Mrs. A ‘s Brother
A’s sister Mrs. A’s sister
Lineal Ascendants – paternal A’s Parents Mrs. A’s Parents
A’s grandparents Mrs. A’s grandparents
Lineal Descendants
Paternal A’s sons Mrs. A’s sons
A’s daughters Mrs. A’s daughters
A’s grandsons Mrs. A’s grandsons
Siblings of Parents Of Individual ( Not of Spouse )
Mother’s brothers / sister + Father’s brother / sister
Spouses of All the above persons

40
Direct Tax Note: This relationship is explained in a diagram, where Lineal ascendants or
descendants taken on male side
II. In Relation a Hindu Undivided Family any member thereof.
5.8 Cost of Acquisition
While computing capital gains, cost of acquisition of a property received by a transferor from any
exempted mode of transfer e.g. will, is taken at the same cost as that of the previous owner. Further,
cost of acquisition of a property received without consideration and is chargeable u/s 56 when it is
subsequently sold or transferred shall be the value considered u/s 56.
Illustration -8
A painting valued at Rs 5,00,000 is transferred for Rs 3,00,000. Difference of between the
consideration and the fair market value of Rs 2,00,000 ( 5,00,000-300,0000)will be charged u/s 56
being value of inadequate consideration. The painting is resold for Rs 10,00,000, the capital gain will
be computed by taking the cost of acquisition of Rs 5,00,000 i.e. Rs 10,0000-5,00,000 or Rs. 5,00,000
5.9 Issue of shares at premium
Aggregate consideration received by a closely held company (private company),which issues shares at
premium or above their face value during a previous year to any person being a resident, to the extent
such consideration exceeds the fair market value of the shares by Rs 50,000 except when the shares are
issued
• to a venture capital company or
• other company notified by the Central government..
Fair market value of the shares will be determined as per the prescribed rules( Net Asset Value or
Break-Up Value Method ) any other method as may be substantiated by the company to the satisfaction
of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including
intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature
Illustration -9
Fair market value of a company’s share is Rs 100 per share. It issues 1000 shares for Rs 800 per share,
then 10500X (800-100) = Rs 7,00,000 will be treated as “ income from other sources , unless the
company is a venture fund or other notified company. .

Following table summarizes the position of gifts U/s56

TAXABLE GIFTS AT A GLANCE

INDIVIDUALS AND HUFS
RECEIPTS WITHOUT CONSIDERATION
Cash 50,001 Aggregate
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
INADEQUATE CONSIDERATION [ FMV- CONSIDERATION]
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
Shares 0f Pvt Co. 50,001 Consideration or
difference with FMV
Recd by firm or Co
Sh. Premium by Pvt Co 50,001 Difference with FMV

Important Points:
1. Limit of Rs 50,000 is for each category in case of cash and movable assets and cash but
Rs. 50,000 is per immovable property as the section says “such property’
2. Rs 50,000 is not the basic limit. Once the limit of Rs 50,000 exceeds, entire sum will be taxable.
For instance, A receives cash gift of Rs 40,000 it will be exempt as it is below Rs 50,000 If he receives
41
another gift of Rs. 10,100 from C. The aggregate gifts of Rs 50,100 will be taxable without any basic
exemption
3. The list of relatives does not include nephews/nieces/ cousins
4. List of relatives includes Spouses, Siblings - own, spouses’ and parents
, lineal ascendants and descendants and spouses.
5. List of relatives includes uncles and aunts of the individual but not those of the spouse.
6. Stamp duty valuation will have same meaning as in S 50C.
7. Fair Market Value can be determined by the valuers.
8. Business assets like stock are not covered by these provisions and normal sale or purchase
transactions will not attract the provisions of this section.

Income from Other Sources

Direct Tax 9. Any movable property like shares, securities, jeweler, drawings, paintings, sculptures,
work of art or archaeological collections or immovable , without consideration the fair market value of
which exceeds Rs 50,000 in aggregate during a previous year, or for a consideration falling short of
their aggregate fair market value by more than Rs 50,000 will be covered by this provision.

7.7 AMOUNTS NOT DEDUCTIBLE- S. 58

The following amounts are not deductible while computing income under the head “Income from Other
Source”:-
• Personal expenses of the assessee;
• Any interest which is payable outside India on which income tax has not been paid or deducted
at source;
• Any sum paid on account of wealth tax in India or abroad;
• Any amount not allowable by virtue of it being unreasonable;
• In case of foreign companies, expenditure in respect of royalties and technical services received
under an agreement made after 31/3/76; and
• Any expenditure in connection with income from winning from lotteries, crosswords, puzzles,
races including racehorses, car races and other games of races, gambling, betting of any form.
However, expenses are allowed as a deduction in computing the income of an assessee who earns
income from maintaining as well as holding racehorses.

7.8 MISCELLANEOUS

a) Balancing charge taxable-S. 59

Any amount received or benefit derived in respect of any expenditure, incurred or loss or trading
liability allowed shall be deemed to be the income of the year in which such benefits is accrued or
received as the case may be.
b) Method of accounting.- S. 145
Section 145 relating to method of accounting is also applicable to the computation of income from
other sources. Income under this head is computed in accordance with the method of accounting
regularly employed by the assessee i.e. if the assessee accounts only on cash receipt and cash payment
basis, income will be treated on cash payment and cash receipt basis only; otherwise it will be treated
on mercantile basis. An assessee can adopt either the cash method or accrual method of accounting.
Hybrid method is not permissible. However, certain items like

Income from Other Sources

42
Direct Tax lottery, horse races, dividend u/s 2(22)(e) can only be recorded on cash basis because of
their variable nature.
c) Grossing Up:
Many times dividends, interest from securities are received after TDS. In such case amount to be
included in total income is gross amount and not the amount received. Amount of TDS should be added
back.

43
 CHAPTER 7
EXCLUSIONS AND DEDUCTIONS

DEDUCTIONS ALLOWABLE UNDER VARIOUS SECTIONS OF CHAPTER VIA OF INCOME TAX ACT
Exclusions:
Every income is chargeable to income tax unless it is specifically exempt. It is not relevant that the
Income is received in cash or in kind or it is of capital nature or of revenue nature. Income not
chargeable to income tax is called exempt income. Such income will not be included in computation of
income
Every person, who claims an income to be exempt, has to prove that such receipt is so exempt.
Exemption may be available to persons e.g. Charitable Trusts or group of income such as agricultural
income. Agriculture income of all persons is exempt. On the other hand, all the incomes of a charitable
trust are exempt. Further exemptions may be conditional or unconditional.
Sections 10 -13 provide a broad list of income exempt from tax. In addition, Sec. 15 to 56 which
provide for computation of income under different heads viz Salaries, Income from house property,
Profits and gains of business & profession, capital gains and Income from other sources, also provide
for certain exemptions available under a particular head.
Moreover, a receipt of capital nature may be claimed as exempt if it is not specifically chargeable to
income tax and also a receipt if does not fall under the definition of income.
To summarize exempt incomes may be of following types:
• Income exempt u/s 10-13
• Income exempted under different heads of income S 15-56
• Income of capital nature not specifically chargeable to income tax and
• Income not falling in the definition of income.
Exempt Income by definition means income not chargeable to tax hence such income is excluded from
the computation of total income.
2.2 Deductions
Deductions are allowed after the gross total income is computed. Chapter VIA and various sub-sections
of S 8o give a list of deductions allowable on the basis of income or revenue or on the basis of payment
and expenditure.
Revenue or income is allowed as deductions U/s 80IA, 80IB etc to a class of assessees like software,
infrastructure companies, companies engaged in construction of ,affordable housing etc

Exclusions and Deductions

Direct Tax On the other hand, , deductions are available in respect of investments in specified
securities, payment of mediclaim, expense on handicapped dependent etc. Deductions are allowed after
the gross total income is computed.

3INCOME EXEMPT UNDER SECTION 10:

Section 10 provides that some classes of incomes will be not chargeable to income tax and will not be
considered computation of total income. Burden of proving that a particular item of income falls within
this section is on the assessee. Some of such incomes (covered in syllabus) are discussed as under:
3.1 AGRICULTURAL INCOME – S 10(1):
Under the constitution of India, agriculture is in the state list and the Central Government is not
constitutionally competent to levy taxes on agriculture. Accordingly, Section 10(1) of the Income Tax,

44
Act, 1961 exempts agricultural income, except for rate purposes, if agricultural income exceeds Rs
5000)
Meaning of agricultural income
U/s 2(1A) Agricultural income” means any
A. any rent or revenue derived from land-
 which is situated in India and
 is used for agricultural purposes
B. any income derived from such land by
 agriculture; or
 raising the performance by a cultivator or receiver of rent-in-kind of any process to
render the produce raised or received by him fit to be taken to market or
 the sale of such produce without performing any other process as stated above. ;
C. any income derived from any building is :
Owned and occupied by owned and occupied by the
i. receiver of the rent or revenue of any such land, or
ii. cultivator or
iii. receiver of rent-in-kind, of any such land as above IF such building is

a) on or in the immediate vicinity of the land, and

b) required as a dwelling house, or store-house, or other out-building by reason of his connection
with the land, and the land is
 assessed to land revenue in India OR
 subject to local rates and taxes assessed and collected by the Government And
 ( w. e. f 01/04/2014 ) situated in any area within the distance measured aerially from the
local limits of any municipality or cantonment board depending upon its population as per the last
published census
 Eight Kms if population is more than 10lakh.
 6 KMs if it is more than 1 lakh but not exceeding 10 lakh; or
 2 KMs if population is of more than 10,000 but not exceeding one lakh; or
Other Points
1. Income from land situated in urban area is not exempt
2. Land situated in areas having population of 10,000 or less will qualify for exemption.
3. The exemption is only in respect agricultural income received in India.
4. Agricultural income from a foreign country is treated as non- agricultural income in India.
5. Receipts arising on transfer of agricultural land u/s 2(14) is not considered agricultural
income
6. Any income arising from letting out the building for residential or business purpose other than
agriculture will not be agricultural income
DEDUCTIONS UNDER CHAPTER VI A

4.1 Basic framework of deduction is given in S. 80A, 80B and 80AB of chapter VIA. Salient feature
of the framework are as follows:
• Aggregate income computed under various heads of income but before making any deduction
under this chapter is called gross total income -S 80B
• From the Gross total income, deductions allowable under chapter VIA ( S 80C -80U) are
reduced .

Direct Tax • Deductions under this chapter are specific and allowed to only specified tax payers
fulfilling the prescribed conditions–S-80A. For instance deductions s U/s 80-IA, 80-IAB,-IB, 80-IC, 80-
ID or 80-IE, are admissible only if the assessee furnishes a return of his income for that year before the
due date of filing the return..
45
• Aggregate deduction under this chapter cannot be more than the gross total income. - Sec.
80AB.
• Most of the deductions are available only to the extent of amount included in the gross total
income.
• Deduction can be claimed only once. If any deduction is claimed by and allowed to an AOP or
BOI, or a firm, it will not be again allowed as deduction to the member.
• Deduction are allowable from the gross total income after excluding long term capital gains,
short term capital gain under section 111A, winnings from lottery, crossword puzzles etc as these items
are treated differently for tax purposes.
• Deductions are allowed only if the assessee claims these and gives proof of such investments/
expenditure/ income.
• Deductions under Chapter VIA available of three types: Sect
I. Sec. 80C to 80G allow deduction in respect of expenditure or investments made by the
assessee
II. Sec. 80HH to 80RRB are In respect of certain income on
III. Sec 80 U is in the category allowable to a handicapped person irrespective of either
income or expenditure.
Following deductions, covered by the syllabus are taken up for detailed discussion in the following
paras:
Deduction In Respect of Certain Saving Schemes-S 80C: Section 80C provides for deduction in respect
of investment or contribution towards specified saving schemes. The basic scheme of the section is as
follows:
a. Only individuals and HUFs are eligible for deduction under this section. Other assessees are not
eligible for deduction u/s 80C.
b. Both residents and the non-resident assessee are eligible for the deduction under the section
c. The deduction is allowed in respect of the aggregate amount paid or deposited during the
previous year by the assessee in eligible saving schemes.
d. The aggregate amount paid or deposited towards these schemes is called Gross Qualifying
Amount.

e. The payments/investments eligible under this section are:

i. Life Insurance premium paid on a policy taken (or renewed) by an individual on his own life,
life of the spouse or any child (child may be dependent/ independent) or any member of the family in
the case of a Hindu undivided family. The premium including the arrears of premium should not exceed
10% of sum assured if policy taken after 0-1-04-2013 (15% for persons with handicap/s 80U or person
with suffering from serious disease u/s 80DDB on policy taken after 01- 04-2014). Prior to this, the
restriction was up to 20% for all assessees.
ii. Any sum deducted from salary payable to a Government employee for the purpose of securing
him or his wife or children to pay a deferred annuity subject to a maximum of 20% of salary;
iii. Contribution towards Statutory or Recognized Provident Fund;
iv. Contribution towards 15 year public provident fund(PPF) in the name of himself, wife or child
or a family member upto a maximum of Rs 70,000;
v. Contribution towards an approved Superannuation Fund;
vi. Subscription to National Savings Certificates, VIII Issue
vii. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of India;
viii. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual Fund (i.e.
Dhanraksha plan of LIC Mutual Fund);
ix. Payment for notified annuity plan of LIC (i.e. Jeevan Dhara, Jeevan Akshay, New Jeevan
Dhara, etc. or any other insurer;
x. Subscription towards notified units of Mutual Fund or UTI
xi. Contribution to notified pension fund set up by Mutual Fund or UTI;
46
xii. Any sum paid including accrued interest as subscription to Home Loan Account Scheme of the
National Housing Bank(NHB);
xiii. Any sum paid as tuition fees (but not donation) to any university/college/educational Institution
in India for full time education for maximum 2 children;
xiv. Investment in 10 / 15 years Post Office Cumulative Term Deposits CTDS;
xv. Any subscription towards infrastructure bonds or units of Mutual Funds;

Exclusions and Deductions

Direct Tax xvi. Any amount paid for the purchase or construction of a residential house property
or for purchase of land;
xvii. Term deposits for a fixed period for at least 5 years with a scheduled bank under a notified
scheme;
xviii. Deposit in an account under Senior Citizens Savings Scheme, 2004;
xix. 5- years Post Office Time Deposit Account;
xx. Subscription to notified bonds issued by NABARD;
xxi. Subscription to eligible issues of equity shares or debentures of an Indian public company or a
public financial institution where the entire proceeds of the issue is wholly and exclusively for the
purposes of any business specified for developing, maintaining and operating an infrastructure facility
for generation or generation and distribution of power or for providing telecommunication services
whether basic or cellular or for developing, developing and operating or operating and maintaining an
industrial park or a special economic zone- SEZ
f. Amount of deduction
Amount of deduction allowable u/s 80C will be :-
• Whole of the amount paid or deposited in the above mentioned schemes called the gross
qualifying amount or
• Rs 1,50,000, - whichever is less.
• Maximum deduction u/s 80C, 80CCC and 80CCD cannot exceed Rs 1,50,000.
g. Some important points:
• Payment for house may be made to authorised developers or even repayment of loans.
• The amount of investments need not necessarily be made out of the taxable income
• Life insurance premium paid for parents will not be allowable even if parents are dependent on
the assessee.
• Life insurance premium paid for married daughter will be allowable.
• Dependence of wife or children is not necessary for claiming deduction under this section
• Refundable premium and bonus on premium are not eligible for deduction

• Premature termination( before the period shown below) from any scheme will have the
following effects:
• In the year of termination deduction will not be allowed and
• Premium earlier paid and allowed as deduction will be brought back to tax in the current year
and added to the total income in the assessment year pertaining to the year of withdrawal.

47
 SECTION 80C:
This section has been introduced by the Finance Act 2005. Broadly speaking, this section provides
deduction from total income in respect of various investments/ expenditures/payments in respect of
which tax rebate u/s 88 was earlier available. The total deduction under this section (along with section
80CCC and 80CCD) is limited to Rs. 1 lakc only.
 Life Insurance Premium For individual, policy must be in self or spouse's or any child's name. For
HUF, it may be on life of any member of HUF.
 Sum paid under contract for deferred annuity For individual, on life of self, spouse or any child .
 Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self-spouse or
child Payment limited to 20% of salary.
 Contribution made under Employee's Provident Fund Scheme.
 Contribution to PPF For individual, can be in the name of self/spouse, any child & for HUF, it can be
in the name of any member of the family.
 Contribution by employee to a Recognized Provident Fund.
 Sum deposited in 10 year/15 year account of Post Office Saving Bank
 Subscription to any notified securities/notified deposits scheme. e.g. NSS
 Subscription to any notified savings certificate, Unit Linked Savings certificates. e.g. NSC VIII issue.
 Contribution to Unit Linked Insurance Plan of LIC Mutual Fund e.g. Dhanrakhsa 1989
 Contribution to notified deposit scheme/Pension fund set up by the National Housing Scheme.
 Condition has been laid that in case the property is transferred before the expiry of 5 years from the
end of the financial year in which possession of such property is obtained by him, the aggregate
amount of deduction of income so allowed for various years shall be liable to tax in that year.
 Contribution to notified annuity Plan of LIC(e.g. Jeevan Dhara) or Units of UTI/notified Mutual Fund.
If in respect of such contribution, deduction u/s 80CCC has been availed of rebate u/s 88 would not be
allowable.
 Subscription to units of a Mutual Fund notified u/s 10(23D).
 Subscription to deposit scheme of a public sector, company engaged in providing housing finance.
 Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made
by a public company or public financial institutions.
 Tuition fees paid at the time of admission or otherwise to any school, college, university or other
educational institution situated within India for the purpose of full time education of any two children.
Available in respect of any two children

SECTION 80CCC: DEDUCTION IN RESPECT OF PREMIUM PAID FOR ANNUITY PLAN OF LIC OR
OTHER INSURER
Payment of premium for annuity plan of LIC or any other insurer Deduction is available up to a
maximum of Rs. 100,000/-. (This limit has been increased from Rs. 10,000/- to Rs. 1,00,000/- w.e.f.
01.04.2007).
The premium must be deposited to keep in force a contract for an annuity plan of the LIC or any other
insurer for receiving pension from the fund.
Note: The limit for maximum deduction available under Sections 80C, 80CCC and 80CCD (1)
(combined together) is Rs. 1,00,000/- (Rs. one lack only). An additional deduction up to a maximum of
Rs. 20,000/- will be available from Assessment Year 2011-12 (FY 2010-11) for investment in
Infrastructure Bonds.
48
 SECTION 80CCD (1): DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSION ACCOUNT (BY
ASSESSEE}
Deduction available for the amount paid or deposited in a pension scheme notified or as may be notified
by the Central Government subject to a maximum of :
(a) 10% of salary in the previous year in the case of an employee (b) 10% of gross total income in any
other case.

SECTION 80CCD (2): DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSION ACCOUNT (BY

EMPLOYER}
Deduction available for the amount paid or deposited by the employer of the assessee in a pension
scheme notified or as may be notified by the Central Government subject to a maximum of 10% of
salary in the previous year :

SECTION 80D: DEDUCTION IN RESPECT OF MEDICAL INSURANCE

Deduction is available up to Rs.20,000/- for senior citizens and up to Rs 15,000/ in other cases for
insurance of self, spouse and dependent children. Additionally, a deduction for insurance of parents
(father or mother or both) is available to the extent of Rs. 20,000/- if parents are senior Citizen and Rs.
15,000/- in other cases. Therefore, the maximum deduction available under this section is to the extent
of Rs. 40,000/-. From AY 2013-14, within the existing limit a deduction of up to Rs. 5,000 for
preventive health check-up is available.

DEDUCTIONS ALLOWABLE UNDER SECTION 24 OF INCOME TAX ACT:

Where a housing property has been acquired / constructed / repaired / renewed with borrowed capital,
the amount of interest payable yearly on such capital is allowed as deduction under Section 24 of
Income Tax Act, subject to the limits stated below. Penal interest on housing loan is not eligible for
deduction. If a fresh loan has been raised to repay the original loan and the new loan has been used only
for the purpose of repaying the original loan then, the interest accrued on such fresh loan is allowed for
deduction.
1. If the property is acquired or constructed with the capital borrowed on or after 01-04-1999 and such
acquisition or construction is completed within 3 years of the end of the financial year in which capital
was borrowed then the actual interest payable is allowed as deduction subject to a maximum Rs.
1,50,000/-.
2. In other case interest up to maximum Rs.30,000/- is deductible.
3. The ceiling of Rs.1,50,000/- or Rs. 30,000/- is only in case the property is self occupied. There is no
limit on deduction of interest if the property is let out.

Deductions on Interest ( U/s 80L)

Up to Rs. 12,000/- : If interest is earned on Govt. Securities, Bank deposits, Post Office
deposits, debentures, National Savings Certificates etc.,
Additional deduction up to On interest from Govt. Securities, if not already covered in the Rs.
Rs. 3,000/- 12,000/- limit mentioned earlier.

Deductions on premium for medical insurance (U/s 80cc)

Up to Rs. 10,000/- If premium for medical insurance is paid by cheque for a person, or
his dependent family member or member of the HUF.
Up to Rs. 15,000/- For senior citizens
49
 Deductions on expenditure on handicapped dependent (U/s 80DD)
Up to Rs. 40,000/- If any expenditure has been incurred on the treatment, nursing,
training of a handicapped dependent, or for creating an insurance
benefit for such person subject to the condition that doctor working in
a government hospital has issued the necessary certificate.

Deductions on treatment of diseases ( u/s 80DDB)

Up to Rs.40,000 /- If an individual or an HUF actually incurs expenditure for treatment
of certain specified diseases for himself, dependents or a member of
HUF.
Rs.60,000 /- For treatment of senior citizens
(This deduction is available only for certain specified diseases.)

Deductions on contribution to pension funds ( u/s 80CCC)

Up to Rs.10,000 /- If an individual contributes to specified pension funds The pension
will however be taxable on receipt.

DEDUCTIONS UNDER CHAPTER VI A

4.1 Basic framework of deduction is given in S. 80A, 80B and 80AB of chapter VIA. Salient feature
of the framework are as follows:
• Aggregate income computed under various heads of income but before making any deduction
under this chapter is called gross total income -S 80B
• From the Gross total income, deductions allowable under chapter VIA ( S 80C -80U) are
reduced .

Direct Tax • Deductions under this chapter are specific and allowed to only specified tax payers
fulfilling the prescribed conditions–S-80A. For instance deductions s U/s 80-IA, 80-IAB,-IB, 80-IC, 80-
ID or 80-IE, are admissible only if the assessee furnishes a return of his income for that year before the
due date of filing the return..
• Aggregate deduction under this chapter cannot be more than the gross total income. - Sec.
80AB.
• Most of the deductions are available only to the extent of amount included in the gross total
income.
• Deduction can be claimed only once. If any deduction is claimed by and allowed to an AOP or
BOI, or a firm, it will not be again allowed as deduction to the member.
• Deduction are allowable from the gross total income after excluding long term capital gains,
short term capital gain under section 111A, winnings from lottery, crossword puzzles etc as these items
are treated differently for tax purposes.
• Deductions are allowed only if the assessee claims these and gives proof of such investments/
expenditure/ income.
• Deductions under Chapter VIA available of three types: Sect
I. Sec. 80C to 80G allow deduction in respect of expenditure or investments made by the
assessee
II. Sec. 80HH to 80RRB are In respect of certain income on
50
III. Sec 80 U is in the category allowable to a handicapped person irrespective of either
income or expenditure.
Following deductions, covered by the syllabus are taken up for detailed discussion in the following
paras:
Deduction In Respect of Certain Saving Schemes-S 80C: Section 80C provides for deduction in respect
of investment or contribution towards specified saving schemes. The basic scheme of the section is as
follows:
a. Only individuals and HUFs are eligible for deduction under this section. Other assessees are not
eligible for deduction u/s 80C.
b. Both residents and the non-resident assessee are eligible for the deduction under the section
c. The deduction is allowed in respect of the aggregate amount paid or deposited during the
previous year by the assessee in eligible saving schemes.
d. The aggregate amount paid or deposited towards these schemes is called Gross Qualifying
Amount.

e. The payments/investments eligible under this section are:

i. Life Insurance premium paid on a policy taken (or renewed) by an individual on his own life,
life of the spouse or any child (child may be dependent/ independent) or any member of the family in
the case of a Hindu undivided family. The premium including the arrears of premium should not exceed
10% of sum assured if policy taken after 0-1-04-2013 (15% for persons with handicap/s 80U or person
with suffering from serious disease u/s 80DDB on policy taken after 01- 04-2014). Prior to this, the
restriction was up to 20% for all assessees.
ii. Any sum deducted from salary payable to a Government employee for the purpose of securing
him or his wife or children to pay a deferred annuity subject to a maximum of 20% of salary;
iii. Contribution towards Statutory or Recognized Provident Fund;
iv. Contribution towards 15 year public provident fund(PPF) in the name of himself, wife or child
or a family member upto a maximum of Rs 70,000;
v. Contribution towards an approved Superannuation Fund;
vi. Subscription to National Savings Certificates, VIII Issue
vii. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of India;
viii. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual Fund (i.e.
Dhanraksha plan of LIC Mutual Fund);
ix. Payment for notified annuity plan of LIC (i.e. Jeevan Dhara, Jeevan Akshay, New Jeevan
Dhara, etc. or any other insurer;
x. Subscription towards notified units of Mutual Fund or UTI
xi. Contribution to notified pension fund set up by Mutual Fund or UTI;
xii. Any sum paid including accrued interest as subscription to Home Loan Account Scheme of the
National Housing Bank(NHB);
xiii. Any sum paid as tuition fees (but not donation) to any university/college/educational Institution
in India for full time education for maximum 2 children;
xiv. Investment in 10 / 15 years Post Office Cumulative Term Deposits CTDS;
xv. Any subscription towards infrastructure bonds or units of Mutual Funds;

Exclusions and Deductions

Direct Tax xvi. Any amount paid for the purchase or construction of a residential house property
or for purchase of land;
xvii. Term deposits for a fixed period for at least 5 years with a scheduled bank under a notified
scheme;
xviii. Deposit in an account under Senior Citizens Savings Scheme, 2004;
xix. 5- years Post Office Time Deposit Account;
51
xx. Subscription to notified bonds issued by NABARD;
xxi. Subscription to eligible issues of equity shares or debentures of an Indian public company or a
public financial institution where the entire proceeds of the issue is wholly and exclusively for the
purposes of any business specified for developing, maintaining and operating an infrastructure facility
for generation or generation and distribution of power or for providing telecommunication services
whether basic or cellular or for developing, developing and operating or operating and maintaining an
industrial park or a special economic zone- SEZ
f. Amount of deduction
Amount of deduction allowable u/s 80C will be :-
• Whole of the amount paid or deposited in the above mentioned schemes called the gross
qualifying amount or
• Rs 1,50,000, - whichever is less.
• Maximum deduction u/s 80C, 80CCC and 80CCD cannot exceed Rs 1,50,000.
g. Some important points:
• Payment for house may be made to authorised developers or even repayment of loans.
• The amount of investments need not necessarily be made out of the taxable income
• Life insurance premium paid for parents will not be allowable even if parents are dependent on
the assessee.
• Life insurance premium paid for married daughter will be allowable.
• Dependence of wife or children is not necessary for claiming deduction under this section
• Refundable premium and bonus on premium are not eligible for deduction

• Premature termination( before the period shown below) from any scheme will have the
following effects:
• In the year of termination deduction will not be allowed and
• Premium earlier paid and allowed as deduction will be brought back to tax in the current year
and added to the total income in the assessment year pertaining to the year of withdrawal.

4.2 Investment in Infrastructure Bonds- S 80CCF

The Scheme of deduction is summarised below
 Eligible assessees: Only Individuals and HUF -Resident or Non – Resident both Other
assess not eligible
 Conditions – Amounts is paid or deposited during the previous year for Subscription to notified
infrastructure bonds
 Maximum Deduction: Amount paid or deposited for subscription of notified infrastructure
bonds or Rs 20,000 , whichever is less
• Other Points - The deduction is in addition to Rs 1,00,000 available U/s 80C amount so paid
will not be eligible U/s 80C.

Exclusions and Deductions

Direct Tax 4.3 Medical Insurance Premia- S. 80D:

Section 80D provides for a deduction in respect of the payment made towards medical insurance
premia. These provisions are summarised below:
i. Eligible Assessee
52
The deduction is available only to an individual or HUF, whether resident or non-resident, if such non-
resident was entitled to hold such insurance policy.
ii. Mode of Payment
Premium must be paid by mode other than cash such as cheque, credit card or electronic clearance ECS,
internet banking except in case of checkup as discussed later, where cash payment is also permissible.
iii. Amount of Deduction – individual assessees
a. In case of an individual assessee, the amount of deduction shall be aggregate of the following:
i. Premium paid under a Medical Insurance Scheme of the General Insurance Corporation
approved by the Central Government or any other insurer approved by the Insurance Regulatory and
Development Authority popularly known as Mediclaim Policy.
ii. Contribution paid towards the Central Government Health Scheme; and
iii. any payment made on account of preventive health check-up of the parent or parents of
the assessee
b. premium paid on the insurance for self, spouse and dependent children
• Amount paid or Rs 15,000 , whichever is less OR
• Amount paid or Rs. 20,000 if any insured person is a senior citizen AND
c. Additional Deduction for premium paid for parents
• Amount paid or Rs 15,000 , whichever is less OR
• Amount paid or Rs. 20,000 if any insured person(Parent) is a senior citizen
d. If aggregate payment comprise of the payments made on account of preventive health check-up,
the deduction will be the amount paid or Rs 5,000 whichever is less .

iv. Other points

a. Senior citizen means an individual resident of India who is of the age of 60 years or more at any
time during the relevant previous year. If the senior citizen is a Non- resident , deduction will of Rs
15,000 not Rs 20,000;
b. The parents and the spouse need not be dependent upon individual assessee but children should
be dependent for claiming the deduction
c. Deduction is available under this section to an individual in respect of payments made to insure
his children but not vice versa and therefore , children cannot claim deduction under this section.
v. Amount of Deduction to A HUF :
In case of a HUF deduction will be only in respect of premium paid to effect or to keep in force on the
insurance for the health of any member of that HUF and the deduction under this section shall be
• Amount paid or Rs 15,000 , whichever is less or
• Amount paid or Rs 20,000 , whichever is less ,if any insured member of the family is a senior
citizen.

Deduction U/s 80DD: Expenses on Maintenance of a Handicapped Dependent

Provisions of S. 80 DD, which provides for deduction in respect of maintenance and treatment of a
handicapped dependent are summarised below:
i. Eligible assessee:
Only an individual or a HUF assessee resident in India is eligible to claim deduction under this
section.
i. Eligible Payments:
Deduction is available in respect of the following:
a. Expenditure incurred for medical treatment including nursing, training and rehabilitation of a
dependent, being a person with disability or
b. any amount paid or deposited under a scheme framed by LIC or UTI or other insurer approved
by the CBDT for maintenance of a dependent being a person with disability
ii. Amount of Deduction :

53
Rs. 50,000 [Rs 1,00,000 if the dependent suffers from severe disability IF SOME eligible amount must
be spent and such amount spent need not be 50,000 0r 1 lakh rupees .
iii. Conditions: for of Deduction :
The deduction can be claimed subject to the following conditions:
a) Deduction is available in respect of a dependent. A dependent in relation to an individual
means self, his/her spouse, children, parents or brothers and sisters and in relation to a HUF means any
of its members, who is wholly or mainly dependent upon the Assessee
;
b) Such dependent person should not claim deduction U/s 80U while computing his total
income ;
c) The assessee nominates either the handicapped dependent or any other person or trust to receive
the payment under the scheme for the benefit of the handicapped dependent;
d) In the event of the death of the subscriber assessee, the amount of annuity or lump-sum under
the scheme is paid for the benefit of the handicapped dependent.
e) If the handicapped dependent predeceases the subscriber assessee, then the amount so received
shall form part of the total income of the subscriber assessee in the previous year in which the amount is
received.

f) The assessee must furnish a certificate from a neurologist (in case of children, a paedriatic
neurologist) or a civil surgeon or Chief Medical Officer of a Government hospital in form 10IA (in case
of autism, cerebral palsy or multiple disability)
g) Where the condition of disability requires reassessment, a fresh certificate shall have to be
obtained on expiry of the period mentioned in the original certificate.
4.5 . Deduction in respect of Medical Treatment, -S 80DDB
Section 80DDB is introduced to give relief to persons suffering from any major disease and required to
spend huge amounts on it. Provisions of the section are explained below :
 Eligible Assessee :
An individual or a HUF assessee resident in India, Other assessees not eligible
 Eligible Payments :
Amount actually paid for medical treatment of specified disease or ailment of the assessee himself or a
person dependent on him or a member of HUF
 Amount of Deduction ( Lower of the following )
- Amount actually paid in the previous year or Rs. 40,000,
- (Rs 60,000 if the person or member is a senior citizen).
 Other Points
i. Dependent relative means an individual himself or , his/her spouse, children, parents or brothers
and sisters or a member of the HUF , who is wholly or mainly dependent for support and maintenance
on the individual or the HUF
ii. senior citizen” means an individual resident in India who is of the age of sixty years or more at
any time during the relevant previous year.
iii. The assessee shall furnish with the return of income, a certificate in prescribed form, from a
neurologist, an oncologist, a urologist, a haematologist, an immunologist or such other prescribed
specialist, working in a Government hospital :
iv. Amount of deduction shall be reduced by any amount received under an insurance from an
insurer, or reimbursed by an employer
4.6 Deduction for Interest on Education Loan - S. 80E
S. 80E allows deduction of Interest on loan taken for higher studies. Provisions of the section are
explained below:

Exclusions and Deductions

54
Direct Tax

 Eligible assessee
- Any individual assessee, whether resident or non-resident,
- who has taken loan
- from a financial institution or any approved charitable institution
- for pursuing higher studies of himself or his relative
 Amount and term of deduction
- Interest on such loan paid by the assessee without any limit.
- Upto a maximum period of 8 years from the year in which the payment of interest on the loan
begins or till the interest is paid in full, whichever is earlier.
 Other Points
i. Higher education’’ means any course or study pursued after passing Senior Secondary Education or
its equivalent from any Government recognized school, Board or university
ii. Course may be any post-SSC course whether full -time or part time any Government recognised
school, Board or university
iii. Higher education may be for the assessee himself or any of his relatives. Relative means the
spouse and children of the assessee or the student for whom such individual is the guardian.
iv. The deduction can be claimed by the student assessee himself if the interest is paid by him or his
relative say father if interest on the student’s loan is paid by the relative.
Illustration: 7
Advise A on the deduction in respect of interest on loan of Rs. 10 lakhs taken from SBI on 01/04/2020
for doing MBA repayable in 10 equal annual instalment carrying interest @ 10%. per annum.
Solution:
A being the student himself, is eligible to get deduction/s 80E.
He will get deduction of Rs 1,00,000 in respect of education loan taken for higher studies r the A.Y.
2021-22.
Thereafter , for the next seven years up to and inclusive of A.Y. 2021-22 , he will get deduction of Rs.
90,000, 80,000,70,000 60,000,50,000, 40,000 and Rs 30,000 respectively.
Thereafter , for remaining two years, no deduction will be available.

CHAPTER 8
ILLUSTRATION
Illustration 1:
Compute the taxable income of Mangesh for the AY 2022-23
from the following and also compute the tax liability.:

Profit and Loss Account for the year ended 31st March, 2022.
Particulars Rs. Particulars Rs.
To Salaries 2,10,000 By Gross Profit 5,18,000
To Rent 20,000 By Interest on Bank 8,000
FD
To postage 7,000 By Dividend-Indian 20,000
Co
To Stationery &Ptg 27,000 By Dividend -Co-Op 2,000
55
 Bank
To Advertising Exp. 20,000 By Lottery Prize 15,000
To Repairs to Office 22,700 By Interest on 5,000
Debentures
To Conveyance 17,000
To Income Tax 30,000
To IT scrutiny Exp 4,000
To CA’s Fees for Tax 10,000
To Misc. Expenses 25,000

To Depreciation 5,000
To Donation 20,000
To Net Profit 1,50,300
5,68,000 5,68,000

Additional Information:
1. Salaries include bonus due to employees Rs. 30,000 which was not paid before the due date of
filing of Income Tax return.

2. Rent is paid for the residential house of Mr.Mangesh.

3. Repairs to office include a one-time cash payment of Rs. 20,000 on 18/08/2021.

4. Miscellaneous expenses include purchase of shares of an

5. Indian company for Rs. 20,000.

6. Donations include charity of Rs. 15,000 and Rs 5,000 given

7. to GIC for maintenance of his handicapped brother.

8. Depreciation as per Income tax rules is Rs. 4,000.

Solution:
Computation of Total Income of Mangesh for A.Y. 2022-23

Particulars Rs Rs
Income from Business
Net Profit as per P/L Account 1,50,300
Add: Disallowable Expenditure
Bonus due but not paid u/s 43B 30,000
Rent (Personal 20,000
Purchase of share (Misc Exp) 20,000
Income Tax 30,000
Donation (15,000+ 5,000) 20,000
Depreciation 5,000 1,25,000
2,75,300
Less: Income Considered Separately
Interest on Bank FD 8,000
56
 Dividend from Indian Company 20,000
Dividend from Co-operative Bank 2,000
Winning from Lottery 15,000
Interest on Debentures of Ltd Co 5,000 50,000
2,25,300
Less: Depreciation as per rules 4,000
INCOME FROM BUSINESS 2,21,300
II Income from Other Sources
Interest on Bank FD 8,000
Dividend from Indian Company ( Exempt) 0
Dividend from Co-operative Bank 2,000
Winning from Lottery 15,000
Interest on Debentures of Ltd Co 5,000
INCOME FROM OTHER SOURCES 30,000
GROSS TOTAL INCOME 2,51,300
Less: Deductions- under Ch. VI-A
80-DD: Maintenance. of handicapped dependant 50,000
TAXABLE INCOME 2,01,300
Tax Payable 2,130
Surcharge -3% 64
Total Tax Payable 2,194

INCOME TAX SLAB:

57
 INDIRECT TAX

Indirect taxes are the taxes levied on goods and services on the basis of production, sale or
purchase of goods or provision of services, in the form of import and export duty, excise, sales
tax, Value Added Tax (VAT), service tax, entertainment tax, electricity duty, tax on passenger
fares and freights etc. They are called indirect taxes as the burden on tax is passed on to the
consumer unlike direct taxes which are supposed to be borne by the persons on whom these
taxes are levied.
Broadly, the existing indirect tax regime can be looked at from the point of view of Central and
State laws. For the Central Government, Central Excise, Customs and Service tax were the
three main components of indirect taxes. Similarly, for the State Governments, Value Added
Tax and Central Sales Tax were major taxes along with Octroi , Entertainment Tax etc.
The taxation reforms in India go back right from liberalization and globalization in the early
1990s to the recent Goods and Services Tax (GST). Goods and Services Tax is one of the most
comprehensive single tax reforms of independent India. GST is a comprehensive indirect tax
levied on goods as well as services at the national level. It consolidated multiple indirect tax
levies into a single tax thus subsuming an array of tax levies. However, Basic Customs Duty
continues to be levied on imports.

58
 GST consists of the following four Acts :

Central Goods State Goods &

& Services Services Tax
Tax Act, Act, 2017
2017

Goods &
Union Territory
Services
Goods &
(Compensation
Services Tax
to States) Act,
Act, 2017
2017

This is a comprehensive study material updated till December, 2017. The material contains the
indirect tax portion with the purpose of guiding the students appearing in June, 2018
examination.
Taxation is one of the essential and decisive elements in the working of machinery of a Nation. It
forms a quintessential part of development of any country. The revenue that is collected in the form
of taxes is used for providing goods and services for public utility such as infrastructure,
transportation, facilities like rain shelters and common areas, sanitation and all other such amenities
which are provided by the government of the country.
A tax can be said to be a non-penal, yet compulsory transfer of resources from the private to the
public sector levied on the basis of a predetermined criteria. Taxes are collected for serving the
primary purpose of providing sufficient revenues to the State and have become a mechanism through
which the social and economic objectives of a welfare state could be achieved. Every amount that is
collected is contributed towards providing better infrastructure facilities for public at large. The same
is also utilized towards rural revival and social well- being of general public. Taxation system is
instrumental in removing poverty and inequality from the society. On the other hand, tax reform is
fundamental equipment in strategy development aiming at holistic growth of the society. Thus, the
importance of an efficient tax system and reforms in tax system cannot be undermined.

59
There are two types of taxes levied in India, i.e., Direct tax, which is levied directly on income,
profession, etc, of an individual and where the tax burden cannot be passed on to any other person.
Indirect tax, on the other hand, is not paid on the direct income of an individual person but is levied
indirectly on the ultimate consumer of goods and services for consumption of goods and services.
Hence, the former is levied on the income while latter is levied on the goods and services. In indirect
taxes, immediate burden is on one person and ultimate burden is on some other person i.e., the
person who ultimately consumes.
Goods and Services Tax (GST) was rolled out in India with effect from 1st July, 2017. GST is one of
the greatest tax reforms in India. It transforms the system of taxation and tax administration into a
digital world by adopting the latest information technology. With the introduction of GST, India has
joined the club of developed and progressing Nations which are already having a common tax on
goods and services.
Following are some of the distinctions between direct and indirect taxes :
DIRECT TAXES INDIRECT TAXES
These are mainly on income, wealth, These are consumption based taxes on
profession etc. goods and
of persons services
Tax payer pays taxes directly to Tax payer pays taxes indirectly through
government intermediaries
like importers , suppliers etc.
Direct taxes become payable after the Indirect taxes are payable even before
benefit/ income the goods/
reaches the tax payer services reach the tax payer.
Income tax, corporation tax are main Customs and GST are major indirect taxes
sources of direct in India.
tax

INDIRECT TAXES IN INDIA – AN OVERVIEW

In the erstwhile regime of indirect taxes, goods were subject to tax by both i.e., the Centre as well as
the States. Up to the manufacture stage, Central Government was collecting excise duty except for
on alcohol for human consumption, narcotics and narcotic drugs, etc. on which state excise was
being imposed. Even after the implementation of GST, states continue to levy tax of state excise
duty and sales tax on liquors. States have exclusive powers to collect tax on both intra state and
interstate sales.
Service tax was levied and collected by Union Government exclusively. There were plenty of taxes
collected by State governments on various subjects like luxury tax, purchase tax, entry tax and so on.
Till 1987, Central Excise was collected on the gross value which resulted in cascading effect.
MODVAT scheme was introduced to reduce cascading effect. MODVAT Scheme was replaced by
CENVAT Credit scheme was extended to service tax later on. Further, Centre was able to convince
the states to introduce VAT on local sales. The process continued from 2003 to 2008 by which all the
states in India became VAT states. In 2003, Haryana was the only state to introduce VAT. In 2005,
60
majority of the states introduced VAT, the rest followed in the later years.

61
 11

The following diagram summarizes the erstwhile indirect taxation in India :

TAX VII Schedule-

TAXABLE
TA TAX LAW COLLECTION Constitution of
X EVENT
AUTHORITY India

Customs Act,
Customs duty Import/ export Central Govt. 83
1962

Central Excise Manufacture/

Central Excise Central Govt. 84
Act, 1944 production

Central Sales Central sales

Tax tax Act, 1956
Interstate sale State Govt . 92A

Finance Act,
Service Tax Taxable service Central Govt. 97
1994

Sale within the

VAT State VAT Act State Govt. 54 of state list
state

BASIC SUMMARY OF GOODS & SERVICES TAX

 The first country to implement Goods & Services Tax was France in as early as 1954.
 India has the highest tax slab in the world i.e., 28%, next only to Argentina which is at 27%
 Almost 160 countries around the world follow this scheme of indirect taxation
 Indian GST has four rate structure, viz. 5%, 12%, 18% and 28% with cess on sin goods
and luxury items
 There is a special rate of 3% on precious metals like gold
 GST is covered under five legislations i.e., Central GST Act, State GST Act, Integrated GST
Act, Union
Territory GST Act and GST (Compensation to States) Act
 Integrated GST, Compensation cess and Central GST are charged by Central Government
 All taxation policies and their implementation are based on the recommendations of the GST
Council
 The taxable event under GST is supply
 GST Bill was introduced under 122nd Constitutional Amendment Bill, but passed under
101st Amendment Act,2016

62
 Assam was the first state to ratify GST Bill but Telangana was the first state to pass State GST
Bill
 GST Council was constituted with its headquarters in Delhi. The Union Finance
Minister is the Chairperson
 State Finance Ministers are members of GST Council

63
12

 1st July will be observed as the GST day

 The threshold limit under GST is Rs. 20 Lakhs, for some special category states it is Rs. 10
Lakhs
 There is a special purpose vehicle called GSTN which caters the IT needs of GST. GSTN
comes under Companies Act, 2013 with combined stake of Central and State
Governments is 49%. The rest is contributed by LIC Finance with 11% and ICICI Bank,
HDFC, HDFC Bank and NSE Strategic Investment Corporation with 10% each.
 GST Council is meeting frequently to monitor and modify taxation policies. In order to
simplify the procedures, it relaxed the system of filing the returns for small suppliers upto the
annual turnover of Rs.1.5 crore. These suppliers can file returns quarterly instead of monthly.
 The GST Council also recommended a uniform policy on e way bill which is being
implemented all over the country. This totally eliminates the checkpost system breaking the
entry barriers and reducing bottlenecks in transportation.
 GST Council has also reviewed the rate structure of GST on goods and services. It also
recommended reduction of rates on cases of merit.

PRE GST TAX STRUCTURE & DEFICIENCIES

There are various economic factors internal as well as external due to which reforms in tax system
become necessary. Issue of reforms in Indian tax system has always been a priority for all the
administrative machinery even at the highest policy forums in the country. Integration of domestic
economy with world economy makes it desirable.
Previous structure of indirect taxation in India had some challenges which needed to be addressed.
Some of the challenges under the previous indirect tax structure could be attributed to:
 Central Excise wherein there were variable rates under Excise Duty such as 2% without
CENVAT, 6%, 10%, 18%, 24%, 27%, coupled with multiple valuation system and various
exemptions
 VAT where different states were charging VAT at different rates, which were resulting in
imbalance of
trade between the states
 Also, under VAT, there was a lack of uniformity in terms of registration, due date of
payment, return filing assessment procedures, refund mechanism, appellate process etc., thus
complicating the compliance mechanism. For example: A business establishment having
offices in different states were required to follow the laws of the respective states.
 In respect of taxation of goods, CENVAT was confined to the manufacturing stage and did
not extend to the distribution chain beyond the factory gate. As such, CENVAT paid on
goods could not be adjusted against State VAT payable on subsequent sale of goods. This
was true both for CENVAT collected on domestically produced goods as well as that
collected as additional duty of customs on imported goods.
 CENVAT comprised of several components in the nature of cesses and surcharges such as the
National Calamity Contingency Duty (NCCD), education and secondary and higher
education cess, additional duty of excise on tobacco and tobacco products etc. This

64
 multiplicity of duties complicated the tax structure and often used to obstruct the smooth
flow of tax credit.
 While input tax credit of CENVAT or additional duty of customs paid on goods was
available to service providers paying Service Tax, they were unable to neutralize the State
VAT or other State taxes paid on their purchase of goods.
 State VAT was payable on the value of goods inclusive of CENVAT paid at the manufacturing
stage and
thus the VAT liability of a dealer always used to get inflated without compensatory set-off.

65
 13

 Inter-State sale of goods was liable to the Central Sales Tax (CST) levied by the Centre and
collected
by the states. This was an origin-based tax and could not be set-off against VAT in many
situations.
 State VAT and CST were not directly applicable to the import of goods on which Special
Additional Duties (SAD) of customs were levied at a uniform rate of 4% by the Centre. Input
tax credit of such duties was available only to those entities who were manufacturing
excisable goods. Other importers had to claim refund of this duty as and when they pay VAT
on subsequent sales.
 VAT dealers were unable to set-off any Service Tax that they paid on procurement of
taxable input
services.
 State Governments also levied and collected a variety of other indirect taxes such as
luxury tax,
entertainment tax, entry tax etc. for which no set-off was available.

CENTRAL TAXES
Excise, service tax etc.

STATE TAXES LOCAL BODY

TAXES
Value Added Tax, Property
Central Sales Tax tax,Municipal
etc. taxes etc.

Following can be summarized as major reasons for implementation of a new indirect tax regime:
(a) Plethora of taxes : There were various indirect taxes in India in existence prior to
introduction of GST. There was a three tier system of tax collection in India :
i. Taxes levied by Central Government i.e. Customs Duties, Central Excise Duties,
Service tax, additional duties of Excise etc.
ii. State Excise, VAT, CST, Entry tax, entertainment tax, luxury tax etc. are levied by
the State Governments
iii. Local Bodies levy taxes like: entertainment tax Octroi, property tax, local body tax, etc.
(b) Plenty of Taxable Events : Taxes were levied at various stages on various taxable events by
different authorities on the same subject matter or transaction. For example, Excise duty was
levied at central level on manufacture. Service tax was levied on transport and other
incidental services again by Central Government. Sales tax (VAT/CST) was collected by the
66
 State Government on sale. Entry tax was collected by State Government on the entry of
goods in the state. Octroi was collected by municipal authorities when the goods enter the
municipal area. The same goods were being subjected to varieties of taxes on variety of
taxable events like entry, transport, manufacture, sale and so on. Most of the taxes were
having cascading in effect as there was no benefit of input tax credit.
(c) Double taxation : On a single transaction, multiple taxes were being imposed, often by
different authorities. For e.g. for a stay in a hotel in Delhi, you had to pay luxury tax as well
as service tax. Service tax was collected by Central Government and applicable local taxes by
State Government.

67
14

(d) Multiplicity of compliances : Payment of tax to various authorities, different due dates,
assessment, refund process at various levels made the taxation system more complex and led
to an increase in compliance cost.
Further, there was inbuilt cascading effect of taxes due to:
(i) Lack of Cross-utilization facility between goods and services : Taxes paid on procurement
of input
purchases were not allowed to be set off against output tax payable on services and vice versa.
(ii) Non-availability of set off arrangement against other State or Central Government levies :
CST paid in one state was not available as set off against sales tax payable in another state.
Similarly, central taxes were not available as credit to set off against the taxes payable at the
state level and vice versa. E.g., Excise duty and service tax paid on goods could not be used
to pay VAT or CST. In the same way, VAT Credit (ITC) could not be used to pay excise
duty or service tax.

Plethora of
Taxes

No inter Numerable
state-Centre Taxable
set off Events

Problems
of
Previous
Regime
No cross
utilisation
Double
between
Taxation
goods &
services

Multiplicity o
Compliances

ADMINISTRATION OF INDIRECT TAXATION IN INDIA

Framework of GST
India is a federal country where both the Centre and the states have been assigned the powers to levy
and collect taxes through respective legislations. Both the levels of Government i.e., at Centre and at
the State level, have distinct responsibilities to perform according to the division of powers
prescribed in the Constitution. A dual GST is thus implemented keeping in mind the Constitutional
requirement of fiscal federalism.
Along with the amendment in the Constitution, to empower the Centre and the states to levy and
collect the GST, four legislations were given assent by the President on April 12,2017, which
68
include:
 The Central GST Act, 2017
 The Integrated GST Act, 2017
 The GST (Compensation to States) Act, 2017 and
 The Union Territory GST Act, 2017

69
 15

Goods &
Services
Tax

GST
Central GST Integrated Union (Compensat
Act GST Territory ion to
Act GST Act States) Act

70
 ADMINISTRATIVE MECHANISM AT THE CENTRAL LEVEL

MINISTRY OF FINANCE

REVENUE DEPARTMENT

CBIT

REGIONS

ZONES

COMMISSIONERATES

DIVISIONS

AUTHORITY HEADED BY
MINISTRY OF FINANCE Union Finance Minister
REVENUE DEPARTMENT Revenue Secretary
CBIT (Central Board of Indirect Taxes) Chairman and Members
REGIONS Principal Chief Commissioners
ZONES Chief Commissioners
COMMISSIONERATES Commissioners/ Principal Commissioners
DIVISIONS Divisional officers/ deputy commissioner etc.

GST Council is the apex body for making recommendations on various issues relating to policy
making, formulation of principles, implementation of policies under Goods and Services Tax regime.
Administration and Procedural Aspects of Goods and Services tax are administered by the Central
Board of Indirect Taxes (CBIT) which is under the control of the Department of Revenue, Ministry of
Finance.

GST IN INDIA
GST is one of the biggest taxation reforms of independent India with the objective of integrating
State economies. GST, the most historic indirect tax reform, is implemented with the aim of
enhancing the overall growth of the Nation along with supporting the Make in India initiative. It
aims at creating a single, unified Indian market throughout the Nation. It is a comprehensive
destination based indirect tax levy of goods as well as services at the national level. Its main
objective is to consolidate multiple indirect tax levies into a single tax thus subsuming an array of tax
levies, overcoming the limitations of previous indirect tax structure, and creating efficiencies in tax
administration.
GST is a consumption based tax which is levied on the basis of “Destination principle.” The concept
relates to taxing the supply of goods or services at the point of consumption. It is a comprehensive

71
tax regime covering both goods and services, and is collected on value-added at each stage of the
supply chain. Further, GST paid on the procurement of goods and services can be set off against that
payable on the supply of goods or services. Simply put, Goods and Services Tax is a tax levied on
goods and services imposed at each point of supply. GST is a national level tax based on value added
principle just like State level VAT which was levied as tax on sale of inter-state goods.
The essence of GST is in removing the cascading effects i.e., tax on tax of both Central and State
taxes by allowing setting-off of taxes throughout the value chain, right from the original producer
and service provider’s point up to the consumer level. GST is a major improvement over existing
system of VAT and disjointed Service Tax ushering a collective gain for industry, trade and common
consumers as well as for the Central Government and the State Governments at large. GST, as a
well-designed value added tax on all goods and services, is the most elegant method to eliminate
distortions and to tax consumption.

72
 19

The following taxes have been subsumed under GST:

Central State
Taxes Taxes

Central Excise Duty State VAT

Duties of Excise
(Medicinal
and Toilet Central Sales Tax
Preparations)

Additional Duties of
Excise (Goods of Purchase Tax
Special Importance)

Additional Duties of
Excise (Textiles and Luxury Tax
Textile Products)

Additional Duties of
Customs (commonly Entry Tax (All forms
known as CVD)

Special Additional Entertainment Tax

Duty of Customs (except those levied
(SAD) by the local bodies)

Taxes on
Service Tax
advertisements

Cesses and surcharges

insofar as they relate to Taxes on lotteries,
supply of goods or betting and gambling
services

State cesses and

surcharges insofar as
they relate to supply of
goods or services

73
The following subject matters kept outside the purview of GST. As such these are taxed under the
existing laws of centre and states as the case may be.

74
20

Alcohol for
human
consumption

Entertainment
tax Petroleum Products
:petroleum crude, motor
collected by local spirit (petrol), high
bodies speed diesel, natural gas
and aviation turbine fuel

Motor vehicles Electricit

tax y

Property taxes,
such
as stamp duty

Tobacco and tobacco products would be subject to GST. In addition, the Centre would have the
power to levy Central Excise duty on these products.

BASIC CONCEPTS AND OVERVIEW OF GOODS AND SERVICES TAX

GST is a single, unified tax on every value-add, right from manufacture to sale / consumption of
goods / services. Hence, with the advent of GST, the legacy taxes on manufacture (Excise), Inter-
state sales (CST), Intra-state sales (VAT) and Service Tax have been subsumed. There has been a
75
paradigm shift in the way the tax is being levied. We have now moved from source based to
destination-based taxation, with GST coming into foray. Hence GST is also labelled as a destination-
based / consumption-based tax.
GST also does away with the cascading effects of taxation, by providing a comprehensive and
continuous chain of tax credits, end to end and taxing only the value-added at every stage. The final
tax is borne by the end consumer, as all the parties in the interim can extinguish their respective
collections against their respective liabilities and the tax already paid by them (Input Tax Credit).
A numerical example of the same below helps understand the concept better:

Tax Collected from C 21600

Tax Collected from B 18000 Tax paid to A -18000 Tax Paid to B -21600
Tax paid to Govt -18000 Tax Paid to Govt 3600
Tax Incidence NIL Tax Incidence NIL Final Tax Incidence -21600

Value Add 20%

Party A (Wholeseller) Party B (Retailer) Party C (Consumer)

Value of Supply 100000 Value of Supply 120000

GST 18000 GST 21600
I NVOICE V ALUE 118000 I NVOICE V ALUE 141600

76
EXEMPTIONS UNDER GST
Exempt supply has been defined as supply of any goods / services / both, which attract a NIL rate of
tax, or
which may be wholly exempt from tax, and therefore includes non-taxable supplies.
Essential goods / services, have been exempted, some of the key ones are:
a) Unbranded atta / besan / maida
b) Milk
c) Eggs
d) Curd
e) Fresh vegetables
f) Health care &
g) Education
h) Services by the Government (except Post Office, transport of goods / passengers etc.)
i) Services by RBI
j) Services by ESIC / EPFO
k) Services by IRDA, SEBI

CONCEPT OF SUPPLY

Nature of Supply [Section 7 to 9 of Integrated Goods & Services Tax Act, 2017]
Goods and Services Tax (GST) envisages two types of supply, intra state and interstate. The
following table illustrates the nature of supply. It is important to know whether a given supply is
interstate or intra-state. The tax or taxes payable are different in each case. For example, IGST is
payable for interstate supply and CGST
+SGST is payable for intra-state supply.
The following services shall be treated as inter-state supply –

Supply Goods Services Nature of supply

Where location of the two different States; Interstate
supplier and the place
of supply are in two different Union territories; or
a State and a Union territory
(1) Import till they cross the No specific requirement I
customs
(2) supplier located in frontiers of India (all services imported N
India and the place of will be treated as inter
supply is outside India state supply) T
(3) to or by a Special E
Economic Zone R
S
77
 developer or a Special
Economic Zone (SEZ)
unit
T
(4) in the taxable A
territory, not being an
intra-State supply and T
not covered elsewhere
in this section E
SUPPLY
The following supplies shall be treated as intra- state supply:

Intra State Supply

Supply of Goods Services Nature of Supply
Where location of the same State or same Union Territory Intra State
supplier and the place
of
supply are in
Essentially, if the location of supplier and the place of supply is within the same state, it is an Intra-
State supply,
and if these are in different states, then that is Inter-State supply.
What is not intra-state supply?
(i) Supplies to and by SEZ
(ii) Imported goods till they cross the customs frontiers of India
(iii) Supplies made to a foreign tourist taking the goods out of India
Earlier, purchases made by foreign tourists in India were treated as intrastate sale and VAT was being
collected. Now under GST regime, IGST paid on goods taken out of India by a foreign tourist will
be refunded under IGST Act, 2017. This practice is to conform to global taxation policies.

78
 40

The following supplies will be treated as interstate supplies:

(i) Supplies received from SEZ unit in Noida to Domestic Tariff Area
(ii) Supplies made to SEZ developer in Kandla from Ahmedabad
(iii) Goods imported from France
(iv) Supplier is in Delhi and supply is made in Switzerland
(v) Supplier is within Rajasthan and supply is made in Punjab, place of supply being Punjab
(vi) Supplier is in Chandigarh (UT) and supply is made in Himachal Pradesh

Same state – intra state supply

Supplier & supply in
Different states – interstate supply

Imported

Supplies

Exported Interstate supply

To/ from SEZ

Non intra state

Supply in Territorial Waters [Section 9 IGST Act, 2017]

Notwithstanding anything contained in this Act, –
(a) where the location of the supplier is in the territorial waters, the location of such supplier; or
(b) where the place of supply is in the territorial waters, the place of supply,
shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the
nearest point of the appropriate baseline is located.
The expression territorial waters have not been defined under the GST law. It should be understood
that area
upto 12 nautical miles from base line of sea coast into the sea.
Note: 1 nautical mile = 1.853 Km
If the supplier is in territorial waters, the location of supplier or if the supply is in territorial waters,
the place of supplies shall be taken as the coastal state or Union Territory closest to the base line.
79
Example 1: Suppose there is a supply from the territorial waters where the supplier is located and the
nearest base line is at Kandla, Gujarat state, then the place of supply is said to be in Gujarat.
Example 2: Some goods were supplied to a fishing trawler located in territorial waters near
Yanam, a part of Union Territory of Puducherry. Since the nearest base line is at Yanam, place of
supply shall be the Union Territory of Puducherry. If the supplier is located in Puducherry, it shall be
an intra-state supply. If the supplier is located in Chennai, it is an interstate supply.

INPUT TAX CREDIT

Taxes paid on inward supply of inputs, capital goods and services are called input taxes. These may
be Integrated GST, Central GST, State GST or Union Territory GST. Taxes paid under reverse
charge mechanism are also input taxes.
The credit of the above taxes is called input tax credit, that is, the taxes paid on inputs are available as
a set off
against the taxes payable on outward taxable supplies.
CGST Act, 2017 contains the provisions relating to ITC, its availment, utilization and conditions and
restrictions attached therewith.
Definitions of input tax and input tax credit:
Section 2(62) “input tax” in relation to a registered person, means the Central tax, State tax,
Integrated tax or Union Territory tax charged on any supply of goods or services or both made to
him and includes –
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the
Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the
respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union
Territory Goods and Services Tax Act, but does not include the tax paid under the
composition levy;
Section 2(63) “input tax credit” means the credit of input tax;
Input Tax Credit (ITC) is considered as a cornerstone of GST. In the previous tax regime, there was
non- availability of credit at various points in supply chain, leading to a cascading effect of tax i.e.,
tax on tax and therefore increasing the cost of goods and services. This flaw has been removed under
GST and a seamless flow of credit throughout the value chain is therefore available consequently
doing away with the cascading effect of taxes.
To avail the benefit of ITC, it is required that the person availing such benefit is registered under
GST. An unregistered person is not eligible to take the benefit of ITC. Section 155, of the CGST
Act, 2017 states that where any person claims that he is eligible for input tax credit under this Act,
the burden of proving such claim shall lie on such person.
Section 49(5) of the CGST Act, 2017 provides for utilization of ITC in Electronic credit ledger for
payment of GST.

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ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT [SECTION 16]
(1)Every registered person shall, subject to such conditions and restrictions as may be prescribed
and, in the manner, as specified in section 49, be entitled to take credit of input tax charged on any
supply of goods or services or both to him which are used or intended to be used in the course or
furtherance of his business and the said amount shall be credited to the electronic credit ledger of
such person.
(2)Notwithstanding anything contained in this section, no registered person shall be entitled to the
credit of any input tax in respect of any supply of goods or services or both to him unless,
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this
Act, or such other tax paying documents as may be prescribed;

81
 61

(b) he has received the goods or services or both.

To be eligible for ITC he must be in possession of a tax invoice or debit note issued by a
supplier registered under this Act, or such other tax paying documents and received the
goods or services or both.
The registered person need not receive the goods himself. It is sufficient even if the goods are
delivered
to some other person on his direction.
Explanation. – For the purposes of this clause, it shall be deemed that the registered person
has received the goods where the goods are delivered by the supplier to a recipient or any
other person on the direction of such registered person, whether acting as an agent or
otherwise, before or during movement of goods, either by way of transfer of documents of
title to goods or otherwise;
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been
actually paid to the Government, either in cash or through utilization of input tax credit
admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or installments, the registered
person shall be entitled to take credit upon receipt of the last lot or installment.
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other
than the supplies on which tax is payable on reverse charge basis, the amount towards the value of
supply along with tax payable thereon within a period of one hundred and eighty days from the date
of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient
shall be added to his output tax liability, along with interest thereon, in such manner as may be
prescribed.
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made
by him of the amount towards the value of supply of goods or services or both along with tax
payable thereon.
(3)Where the registered person has claimed depreciation on the tax component of the cost of capital
goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit
on the said tax component shall not be allowed.
(4)A registered person shall not be entitled to take input tax credit in respect of any invoice or debit
note for supply of goods or services or both after
• the due date of furnishing of the return under section 39 for the month of September
following the end of financial year to which such invoice or invoice relating to such debit
note pertains or
• furnishing of the relevant annual return
whichever is earlier.
Section 16 of the CGST Act, 2017, states the conditions and eligibility to obtain ITC. Following four
conditions
are required to be fulfilled by a registered taxable person:

82
 • he should be in possession of tax invoice or debit note or such other taxpaying documents as
may be
prescribed;
• he should have received the goods or services or both;
• the supplier should have actually paid the tax charged in respect of the supply to the
government; and
• he should have furnished the return under section 39.
Where the goods against an invoice are received in lots or installments, the registered person shall be
entitled to take credit upon receipt of the last lot or installment.

83
62

Availability of ITC to recipient has been made dependent on payment of tax by supplier. Thus, even
if the receiver has paid the amount of tax to the supplier and the goods and/or services so procured
are eligible for ITC, no credit would be available, till the time, tax so collected by the supplier, is
deposited to the Government.
Every registered person is eligible to take credit of GST charged to him for his inward supply of
goods/ services
if he uses such supplies in the course or furtherance of his business.
Such credit is called input tax credit and the same is to be credited to his electronic ledger.
Payment of tax and filing of return is also necessary to claim ITC. However, Section 41 allows ITC on
provisional
basis.
Depreciation under Section 32 of the Income Tax Act shall not be claimed on the tax portion on
which ITC has been claimed. It is a violation under Income Tax Act also.
Note: In a financial year, the return for September is to be filed by 20th of October under Section 39
of CGST Act, 2017.
Section 16- Eligibility & Conditions to obtain IT C

4 conditions required to be fulfilled by a

registered taxable person

he should be in the supplier should

possession of tax have actually paid the he should have
invoice or debit note or he should have
received the goods tax charged in respect furnished the
such other taxpaying of the supply to the return under
documents as may be or services or both
government and section 39
prescribed

INTRODUCTION TO IGST
The Integrated Goods and Services Tax Act, 2017 [IGST] was passed by the Parliament for levy and
collection of tax on inter-state supply of goods or services or both by the Central Government and
for matters connected therewith or incidental thereto.
The Union Government presented the Integrated Goods and Service Tax Bill, 2017 in Lok Sabha
and it was passed by the same on 29th March, 2017. The Rajya Sabha passed the bill on 6th April,
2017 and was assented to by the President on 13th April, 2017.

INTEGRATED GOODS & SERVICES TAX ACT, 2017

IGST is levied and collected by the Centre on inter-state supply of goods and services. Under Article
269A of the Constitution, IGST on supplies in the course of inter-state trade or commerce is levied
and collected by the Government of India and such tax shall be apportioned between the Union and
the States in the manner as may be provided by Parliament by law on the recommendations of the
84
Goods and Services Tax Council. IGST paid is available as credit to set off against the payment of
IGST, CGST and SGST sequentially on output supplies
IGST (Integrated Goods & Services Tax) Act, 2017 deals with supplies interstate, import into India
and supplies made outside India. The following table illustrates the same.

SUPPLY TAX /
TAXES
Intra state CGST+ SGST
Intra UT CGST+
UTGST
Interstate/ import/ SEZ IGST
IGST is applicable all over India including the state of Jammu & Kashmir.
As per section 5 of IGST Act, 2017 a maximum rate of 40% maybe imposed on interstate supply of
goods and/
or services.
A “Dual GST” model has been adopted in view of the federal structure of our country. Centre and
States simultaneously levy GST on every supply of goods or services or both which, takes place
within a State or Union Territory. Thus, there are two components of GST:

Levied &
Central tax collected under
(CGST) the authority of
Two
Components of CGST Act, 2017
GST
State tax
(SGST)

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APPLICABILITY OF THE UTGST ACT, 2017
This Act may be called the Union Territory Goods and Services Tax Act, 2017. It would be
applicable in the following Union Territories:

Dadra and Daman and

Nagar Haveli Diu

Chandigarh
Lakshwadeep and

Applicability of
Andaman and
the UTGST Act, Other territory.
Nicobar Islands
2017

Delhi and Puducherry are the other two Union Territories but this Act will not be applicable there as
they have their own State Legislature and Government. State GST would be applicable in their case.

PAYMENT OF TAX [SECTION 9]

As per the provision of section 9 of the Act, the amount of input tax credit available in the electronic
credit ledger of the registered person on account of:
a) integrated tax shall first be utilised towards payment of integrated tax and the amount
remaining, if any, may be utilised towards the payment of Central tax and State tax, or as the
case may be, Union territory tax, in that order;
b) the Union territory tax shall first be utilised towards payment of Union territory tax and the
amount
remaining, if any, may be utilised towards payment of integrated tax;
c) the Union territory tax shall not be utilised towards payment of Central tax.

The amount of input tax credit available in the electronic credit

ledger of the registered person on account of:

• integrated tax shall be utilised in order of:

1. • towards payment of integrated tax and

•amount remaining, may be utilised towards the payment of Central
tax and State tax, or as the case may be, Union territory tax

86
• the Union territory tax shall be utilised in order of:

2. • towards payment of Union territory tax and

•amount remaining, may be utilised towards payment of integrated
tax
 OVERVIEW OF CUSTOMS LAW
Customs Duty is an indirect tax, imposed under the Customs Act formulated in 1962. The Customs
Act, 1962 is the basic statute which governs entry or exit of different categories of vessels, aircrafts,
goods, passengers etc., into or outside the country. The Act extends to whole of India.
The Customs Act, 1962, not only regulates the levy and collection of duties, but also, serves equally
important purposes, like :
i) Regulation of Imports & Exports
ii) Protection of Domestic Industry
iii) Prevention of smuggling
iv) Conservation and augmentation of foreign exchange
It may be pertinent to note that it is Section 12 of the Customs Act, 1962 that provides duties of
customs to be levied at such rates as may be specified under the Customs Tariff Act, 1975 or other
applicable Acts on goods imported into or exported from India.

Rules & Regulations

The rule making power is delegated to the Central Government while the regulation making power
delegated to the Central Board of Excise and Customs (CBEC).
Differences between Rules and Regulations

Parameter Rules Regulations

Power to make rules Section 156 Section 157
Content Transaction Value; Chargeability of The form of Bill of Entry; shipping
accessories & Repairs & bill; bill of export; import & export
Maintenance Spare Parts; Detention manifest; form & manner of making
& Confiscation of Goods; Goods application for refund of duty;
mentioned in the shipping bill / Bill conditions for transhipment &
of Export but either not exported OR removal of good without payment of
exported and subsequently duty; manner of conducting audit of
re-landed; duty
assessment of imported / exported
goods

Definitions [Section 2]
Section 2 of the Customs Act, 1962 contains the definitions of various terms used at various places in
the Act. Conveyance : Section 2(9) :- Includes vessels (by sea), an aircraft (by air), and a vehicle (by
land).
Customs Area : Section 2(11) :- Any customs station or areas in which goods are kept prior to the
clearance (warehouse could be one example).
Customs Station : Section 2(13) :- Any customs port including Inland Customs Depot (ICD),
Customs Airport or land customs station.
Foreign going Vessel / Aircraft : Section 2(21) :-Vessel or aircraft for carriage of goods / passengers
between any port / airport in India and any port / airport outside India whether touching any
87
intermediary location or not, and includes :
a) Any naval vessel of any foreign government taking part in any naval exercises;
b) Any vessel engaged in fishing or any other operations outside the territorial waters of India;
c) Any vessel or aircraft proceeding to a place outside India for any purpose whatsoever.

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 139

Import : Section 2(23) :- Bringing in to India from a place outside India.

Imported Goods : Section 2(25) :-Any goods brought in to India from a place outside India but
doesn’t include
Goods which have been cleared for home consumption.
Importer : Section 2(26) :- Importer, in relation to any goods, at any time between their importation,
and the time when they are cleared for home consumption, includes any owner or any person holding
himself out to be the importer.
Prohibited Goods : Section 2(33) :- Any goods, the import or export of which is prohibited by the
Customs Act or any law for the time being in force, but doesn’t include any goods, in respect of which
the conditions subject to which the goods are permitted to be imported or exported have been
complied with.
Warehouse : Section 2(43) :-Public warehouse appointed under section 57 OR Private Warehouse
licensed under section 58. A warehouse therefore is a designated area where goods are allowed to be
stored after landing, without the payment of duty.

LEVY & COLLECTION OF CUSTOMS DUTIES

Levy of and Exemption from Customs Duty

Goods become liable for import OR export duty when Goods are Imported into India OR Exported
out of India. Levy is the stage where the declaration of such liability is made and the persons /
properties in respect of which the duty is to be levied is identified. If the Central Government is
satisfied that it is necessary in the public interest to do so, it may, by notification in the Official
Gazette, exempt generally either absolutely or subject to such conditions (pre-clearance) as may be
specified in such notification, goods of the specified description, from the whole or any part of the
customs duty leviable thereon. An exemption notification cannot be withdrawn and duty cannot be
demanded with retrospective method.

TYPES OF CUSTOMS DUTIES

Import Duty
a) Basic Customs Duty
i) Levied as a percentage of value as determined under section 14(1)
ii) General basic rate of Basic Custom Duty is 10%
iii)Could be levied at “Standard” OR “Preferential Rates” (where imported from a
preferential area as
may be specified by the Government)
iv) Onus is on the person (owner) to substantiate with the supporting evidence that the
goods are chargeable with a preferential rate of duty
b) Additional Customs Duty / Countervailing Duty (CVD)
i) It is equivalent to the amount of excise duty on like goods manufactured / produced in
India

89
 ii) Under the GST regime, this duty is subsumed under GST and additional duty / IGST is
payable
on assessable value plus basic customs duty
iii) In case of alcoholic liquor for human consumption is imported into India, the same is still
under state excise which has not been subsumed under GST. Therefore, IGST is not
leviable under Import
iv) In case inward taxable supplies are in the nature of Imported Goods, which have been
taxed and have been consumed in the manufacture of outward taxable supplies, Input
Tax Credit is available to the extent of IGST paid

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140

c) Additional Duty / Special Additional Duty (SAD)

i. It used to be levied to offset the Sales Tax / VAT
ii. However, this has now been subsumed under GST and as such is leviable only on
imported goods for which GST is not applicable (example : Petroleum Products)

Provisions under Goods & Services Tax (GST)

The goods imported in to India, are now subject to IGST and not CVD or SAD. However, petroleum is
outside the scope of GST, and hence CVD and SAD are applicable to them. IGST is now payable on
Assessable Value
+ Basic Customs Duty.

Types of Duties
BCD is the Revenue Duty, others were always protective duties to protect the indigenous industry.
Schedule I
defines the rates for imports and Schedule II defines the rates fro Exports

91
VALUATION FOR CUSTOMS DUTY
Valuation for Customs Duty begins with determination of “Transaction Value”. Transaction Value
includes the price paid / payable as consideration. In case of transaction between related parties, sale
transaction would be examined to ascertain the influence of relationship on the declared value, and
whether the same could then be accepted as transaction value (it needs to be at arm’s length)
Parties are said to be related when –

They are Officers / They are legally

They are employer and
Directors of each recognised partners
employee
other's business in business

One of them directly /

Any person holds directly / indirectly > 5% of the
indirectly controls the
voting rights / shares in the other
other

Where both of them control or are controlled by the

same person

Establishment under Customs

CBEC may appoint by notification in Official Gazette

92
 Customs Inland Land Foreign Post International
Routes Coastal Ports Courier
Ports OR Container Customs Offices
Airports Depots / Air Stations Terminals

The CBEC will appoint all such places which alone shall be either Customs’ Ports / Airports / Inland
Container Depots / Routes / Coastal Ports / Foreign Post Offices / International Courier Terminals
FOR
A) The unloading of Imported Goods AND / OR Loading of Exported Goods

B) Routes for Imports in to India OR Exports out of India

C) Clearance of such Goods

Administration

Customs Customs These areas Supported

regulate the designate would then by Jt. / Dy. /
be earmarked Asst. /
Imports & areas within for Loading /
Exports ports Appraisers &
Unloading Inspectors

Imports &
Exports Customs
Government
allowed only appoints a
Officers Commissioner
at designated City as a appointed to of Customs
Ports administer
port

Types of Ports
a) Sea Ports
b) Airports
c) Land Customs Stations (LCS)
d) Inland Container Depots (ICD)
e) Container Freight Stations (CFS) attached to ports

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 151

Mode of Clearance
a) Regular Cargo
b) Courier
c) Foreign Post Office
d) Baggage

CONCLUSION
Income tax is levied by the Central Government under entry 82 of the Union of Schedule VII
to Constitution of India. This entry deals with ‘Tax on income other than agricultural
income’. This task is achieved by the enactment of the Income Tax Act, 1961[“The Act”].

94
The Act provides for the scope and machinery for levy and collection of service tax in India.
It is supported by central govt and Maharashtra govt, 2000,2004 and several other
subordinate rules and regulations. Besides, circulars and notifications are issued by the
Central Board of indirect tax Taxes (CBIT) and sometimes by the Ministry of Finance,
Government of India dealing with various aspects of the excise duty of service tax. Unless
otherwise stated, references to the sections will be the reference to the sections of the m vat of
Maharashtra and cenvat of India

BIBILOGRAPHY
Websites:

 http://www.investopedia.com/
 http://ntj.tax.org/
 http://www.incometaxindia.gov.in/
 http://www.charteredclub.com/
 http://www.moneycontrol.com/
 http://www.financialexpress.com/

List of Sales Tax Offices in the State of Maharashtra

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96