Concept Based Notes

Biyani's Think Tank
Concept based notes
Income Tax
B.Com Part II
Dr. Sanjay Biyani

Director of Biyani College
Biyani Girls College, Jaipur
For More Detail: - http://www.gurukpo.com
INTRODUCTION, SCHEME AND DEFINITIONS

INCOME TAX is the major source of revenue for the government, entry 82 of the union list of the Seventh Schedule read with Article 246(i) of THE CONSTITUTION OF INDIA empowers the parliament to make law with respect to taxes on income other than agriculture income Although administration and collection of taxes rest with the central government but net proceeds of the taxes are shared by state government on the basis of recommendation of the Finance Commission appointed by the president of India every five years. 1. INCOME TAX LAW : Proper understanding of the Income Tax law requires a study of the following. (A) The Income-Tax Act, 1961 (B) The Finance Act (Annual) (C) The Income-Tax Rules, 1962 (D) Circulars and Clarification by CBDT (E) Judicial decisions The Income - Tax Act, 1961 : The provisions of income tax are contained in the Income-Tax Act, 1961 which extends to the whole of India and became effective from 1.4.1962. The Income-Tax Act contains provisions for determination of total income, determination of tax on total income procedure for return and assessment, appeals, penalties and prosecutions, powers and duties of various income-tax authorities. It is important to note that since Income-Tax Act, 1961 is a revenue law, there are bound to be amendments from time to time by the Annual Finance Act. Various provisions made at a glance under Income Tax Act, 1961 chapter wise and section wise are given at the beginning of this book for the benefit of reader. The Finance Act (Annual) : Basically Finance Act contains two important functions : (i) Amendments which are required to be made in the area of direct and indirect taxes by the Central Government. Rates of Income-tax and other taxes It is important to note that Finance bill is presented before the parliament by the Finance Minster and after approval, it becomes Finance Act. Income-Tax Individuals, Hindu undivided families, AOPs, BOIs - The rax rates applicable to individuals are also applicable to a Hindu undivided Family, an association of persons, body of individuals or an artificial juridical person. The rates applicable for the assessment year 2010-11 are as follows: For resident woman (who is below 65 years at any time during the previous year) Income Tax Rates Nil 10%
(A)
(B)
(ii)
Net Income Range Up to Rs. 1,90,000 Rs. 1,90,000 - Rs. 3,00,000
Rs. 3,00,000 - Rs. 5,00,000 Above Rs. 5,00,000
20% 30%
For resident Senior Citizen (who is 65 years or more at any time during the previous year) Net Income Range Up to Rs. 2,40,000 Rs. 2,40,000 - Rs. 3,00,000 Rs. 3,00,000 - Rs. 5,00,000 Above Rs. 5,00,000 Income Tax Rates Nil 10% 20% 30%
For any other individual, HUF/AOP/BOI/Artificial Juridical personNet Income Range Up to Rs. 1,60,000 Rs. 1,60,000 - Rs. 3,00,000 Rs. 3,00,000 - Rs. 5,00,000 Above Rs. 5,00,000 Income Tax Rates Nil 10% 20% 30%
Notes: 1. 2. 3. Surcharge - NIL Education Cess - 2% Secondary & Higher Education Cess - 1% A firm is taxable at the rate of 30%. Notes: 1. 2. 3. Surcharge - NIL Education Cess - 2% Secondary & Higher Education Cess - 1%
Firms
Company For the assessment year 2010-11 the following rates of income tax are applicable. Company Tax In the case of a domestic company In the case of a foreign company Royalty received from government or an Indian Concern in pursuance of an agreement made by it with the Indian Concern after March 31, 1961,but before April 1st, 1976, or fees for rendering technical services in pursuance of an agreement made by it after Feb. 29, 1964 but before April 1st, 1976 and where such agreement has,in either case, been approved by the central Govt. Other Income 40% 50% Rate of Income 30%
Surcharge : If net income does not exceed Rs.1Crore Domestic Company Foreign Company Nil Nil If net income does exceed Rs.1Crore 10% 2.5%
It is 2.5% or 10% of income tax. Marginal relief is available which is given below: Marginal Relief : In the case of a company having a net income of exceeding Rs. 1 crore, the net amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on total income of Rs. 1 Crore by more than the amount of income that exceeds Rs. 1 crore. Education Cess - 2% Secondary Higher Education Cess - 1% Cooperative Society Net Income Range Upto Rs. 10,000 Rs. 10,000 - Rs. 20,000 Rs. 20,000 and above Surcharge - Nill Local Authorities Surcharge - Nill (C) Income-tax Rules, 1962 (amended upto date): Every Act normally gives power to an authority, responsible for implementation of the Act, to make rules for carrying out purposes of the Act. Section 295 of the Income-tax Act has given power to the Central Board of Direct Taxes (CBDT) to make such rules, subject to the control of Central Government, for the whole or any part of India. These rules are made applicable by notification in the Gazette of India. These rules were first made in 1962 and are known as Income-tax Rules, 1962. Since then, many new rules have been framed or existing rules have been amended from time to time and the same have been incorporated in the aforesaid rules. If a conflict is detected between any rule and provision of the Act, the provision of the Act shall prevail. (D) Circulars and Clarifications by CBDT : The CBDT in exercise of the powers conferred on it under section 119 has been issuing certain circulars and clarifications from time to time, which have to be followed and applied by the Incometax Authorities. Such circulars or clarifications are binding upon the Income-tax Authorities, but the same are not binding on the assessee, although the assessee can claim benefit under such circulars. [UCO Bank v CIT (1999) 237 ITR 889 (SC)]. (E) Judicial Decisions : Any decision given by the Supreme Court becomes a law which will be applicable on all the assessees. Decisions given by a High Court, Income-Tax Appellate Tribunal, etc. are binding on all the assessees as well asthe Income-Tax Authorities which fall under their jurisdiction, unless it is over-ruled by a higher authority. The decision of a High Court is binding on the Tribunal and the Income-Tax Authorities situated in the area. 2. DEFINITIONS: General definitions are given in section 2 of the Income Tax Act and some definitions that are related with specific heads or chapters are given in that heads or chapters. When definition uses the words means the definition is self explanatory & exhaustive in nature. But some time legislature wants to widen the scope of a term, so it uses the word includes in definition. Hence the inclusive definition provides an illustrative meaning. Hence we conclude, the definition could It is taxable at the rate of 30%. Rate of Income Tax 10% 20% 30%
include what is not specifically mentioned in the definition. When legislature intends to define a term to mean something and also intend to specify certain items to be included, both the words means as well as includes are used. Such definition is not only exhaustive in nature but also illustrative. We can classify definitions as under :
General Definitions [Section 2] Others (Related with particular heads/ chapters) Means and includes Specific definitions Sometime specific items are dealt under are included in the exhaustive respective heads. definitions in order to For example : Agriculture income avoid ambiguity. Sec. 17 Assessment year provide Sec. 43 Capital assets and not Sec. 55 For Example : Indian Company Income Person
Means It is self explanatory, restrictive & exhaustive For Example : illustrative meaning exhaustive meaning
Includes When the legislature wants to widen the scope of a term, it uses the word includes, hence it For Example : Assessee Sec. 63 Transfer
Reader Please Note : All important definitions are given at one place in section wise order. For first study definition & concept of income, definition of person and previous year should be understood thereafter rest definition should be studied when it is referred under subsequent chapters. Section 2(1A) Agricultural income means : (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) Income derived from such land as is referred to in (a) by agriculture, or by performance of the cultivator or receiver of rent in kind, of any process ordinarily employed by a cultivator or receiver of rent in kind to render such agricultural produce to be taken to the market, or by sale of such produce or of such produce so processed. (c) Income derived from buildings on or in the immediately vicinity of such lands subject to certain conditions and exceptions. (d) Income of nursery (W.e.f A.Y. 2009-10) any income derived from saplings or seedlings grown in a nursery shall be deemed to be agriculture income. Accordingly irrespective of whether the basic operation have been carried out on land, such income will be treated as agriculture income, thus qualifying for exemption under section 10 (1) of the Act. Comments : (i) The exemption is thus available only if the assessee is a cultivator or owner of land which is situated in India and is used for agricultural purposes, and the Income is derived from such land. (ii) Where however such land or building mentioned in (c) above is used are let out for any purpose other than agriculture or processing of agricultural produce as is referred to in (b) above, income derived from such use would not be agricultural income. (iii) Levy of tax on agriculture income is a State subject and Central Govt. can not levy tax on agriculture income. Hence agriculture income is exempt u/s 10(1). However agriculture income is aggregated with non-agriculture income to determine the tax payable on the nonagriculture income. 2(1B) Amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
2(7)
2(9)
2(10)
all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than 75% of the value of shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) becomes shareholders of the amalgamated company by virtue of the amalgamation, Comment : The major benefit is exemption from capital gain u/s 47 and carry forward of loss and depreciation u/s 72A. Assessee means a person by whom any tax, or any other sum of money is payable under the Act and it includes : (i) every person in respect of whom any proceeding has been taken under the Act for the assessment of his income or the income of any other person. (ii) a person who is deemed to be an assessee under any provision of the Act. This includes legal representative of a deceased person or the agent of a person who is a non-resident. (iii) every person who is in default under any provision of this Act. Assessment Year means the period of 12 months commencing on the first day of April every year. Comment : As per sec. 4 income-tax shall be charged in an assessment year, with respect to or on the total income earned by the assessee in the previous year. We can say it is a period from 1st April to 31st March. For Example for previous year 2009-10 the assessment year will commence on 1.4.2010 and will end on 31.03.2011. Average rate of income-tax means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income; Comment : This definition becomes relevant in the context of giving rebate u/s 110 in the assessment of member of an AOP. If in case of an individual, the total income is Rs. 1,50,000 and tax payable on amount on such income was Rs. 19,000 the average rate of tax can be calculated as under :
(ii)
100 = 12.67% 2(12A) Books or books of account include ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device; 2(15) Charitable purpose includes relief to the poor, education, medical relief, and the advancement of any other object of general public utility; 2(17) Company means (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India; or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922. (iv) any institution, association or body, whether incorporated or not and whether Indian or nonIndian, which is declared by general or special order of the Board to be a company: 2(18) Company in which public are substantially interested (Widely held company) (i) Government Company : A company which is owned by the Government or the R.B.I. Also a company in which not less than 51% of the shares are singly or jointly held by the Government or the R.B.I. or a corporate owned by that Bank. (ii) Company registered under Sec. 25 of the Companies Act : Such companies are formed to promote commerce, art, science, religion, charity or any other useful object and not to make profit. (iii) Company without Share Capital : A company having no Share Capital and considering its object, the nature and composition of its membership and other relevant consideration is
declared by the Board for any specified assessment year or years to be a company in which public have substantially interest. (iv) Mutual Benefit Finance Company : A Company which carries on as its principal business, the business of acceptance of deposits from its members and is declared by C.G. u/s 620A of Cos Act to be a Nidhi or a Mutual Benefit Society. (v) A company listed in Stock Exchange : A company which is not a private Co. as peer Cos Act and the Equity Shares of such company are listed in a Recognised Stock Exchange in India in accordance with the Securities Contracts (Regulation) Act 1957 as on the last day of the previous year. (vi) Co-operative Society participating Company : A Company where shares carrying not less than 50% ofthe voting power have been allotted unconditionally to, or acquired by, and were throughout the previous year beneficially held by, one or more Co-operative societies. (vii) Any other public Company with specified conditions : A public company whose Equity Shares carrying not less 50% of Voting power have been unconditionally to, or acquired by, and were throughout the previously year beneficially held by, one or more Co-operative societies. (a) the Government or, (b) a company in which public are substantially interested or (c) a corporation established by central, State or Provincial Act or (d) a subsidiary or a Company in which public are substantially interested provided the whole of the share capital of such subsidiary has been held by the parent company or by its nominees throughout the previous year. In case of an Indian Industrial Company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, the above 50% is to be treated as 40%. 2(26) Indian company means a company formed and registered under the Companies Act, 1956 ( 1 of 1956), and includes (i) a company formed and registered under and law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union territories specified in sub-clause (ii) of this clause); (ia) a corporation established by or under a Central, State or Provincial Act; (ib) any institution, association or body which is declared by the Board to be a company under clause (17); (ii) in the case of any of the Union territories of Dadar and Nagar Haveli, Goa, Daman and Diu and Pondicheery, a company formed and registered under any law for the time being in force in that Union territory. (19AA) Demerger, in relation to companies, means the transfer, pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that, (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities related to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; (iv) the resulting company issues, in consideration of the demerger, its shares to the shares holders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged comapny (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerges company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-sections (5) of section 72A of the Central Government in this behalf. Comment : The major benefit is exemption from capital gain u/s 47 and carry forward of loss and depreciation, u/s 72A. 2(22AA) Documents includes an electronic record as defined in clause (f) of sub-section (1) of section 2 of the Information Technology Act, 2000 2(24) Income includes (i) profits and gains; (ii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes. (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17; (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59; (vi) any capital gains chargeable under section 45; (vii) the profit and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society; (viii) [omitted by the finance Act, 1988, with effect from 1st April, 1988] (ix) 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; Explanation : for the purposes of this sub-clause, (i) lottery includes winnings, from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) card game and other game of any sort includes any game show, an entertainment programme on television or electronic made, in which people compete to win prizes or any other similar game; (x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set-up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948); or any other fund for the welfare of such employees; (xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. (xii) any sum referred to in clause (vii) of section 28. (It shall be inserted by the Finance Act, 2002, with effect from 1st April, 2003.) (xiii) recipts without consideration any sum received u/s 56(2)(v) where any sum of money exceeding Rs. 25,000 is received by an individual or HUF from any person on or after 1.9.2009. However this clause is not applied if money received from relative or on occasion of marriage or under will.
CONCEPTS OF INCOME: 1. INCOME FROM MUTUAL ACTIVITY : A person can not make income from a transaction with himself, a mutual concern can not be taxed in respect of its income. This is because such income does not come from the outside sources. Conditions : (a) there should be complete identity of the contributors to the fund and the recipients (b) the surplus should only be either expended or returned to them (c) the arrangements between the concern and its members should be non-trading in character. Example : Income of social club from supplying beverages to its members at rates higher to the cost thereof, is not an income from trading and is thus, not taxable (CIT vs. Merchant Navy club). Similarly surplus left after winding up of such club is distributed to its members can not be taxed in their hand, as it is a receipt from mutual activity. A club provides recreational and refreshment facilities exclusively to its member and their guest and not to non-members. Club is run at no profit no loss basis. Members are not given profit. Surplus if any, is used for maintenance and development of the club. Income of the club in such a case is derived from mutual activity and is thus not taxable. Following income is not regarded as income from mutual activity: Distribution of dividend. Co-operative society. Exception : Insurance Business u/s 2(24), trade professional & others assessed for specific services u/s 28(ii) 2. DISPUTED INCOME : If the title of an income is disputed then the person who has received such income is assessed on it. The assessment of such income is, thus not postponed merely because the title is disputed. Protective assessment may be made by the IT authorities in such a case. 3. INCOME RECEIVED IN KIND : Its valuation is done in accordance with Income-Tax Rules. In absence of such rule, the valuation is done on the basis of market value. 4. ARE GIFTS TREATED AS INCOME? Gifts are received by a person out of natural love and affection or arising out of personal act. For example gift received on marriage anniversary (even if received from business client) or birthday gift from friends and relatives is not treated as income. However gift received in the course of business, profession or vocation is treated as income and are liable to pay tax. 5. TREATMENT OF CAPITAL AND REVENUE RECEIPT : Under Income Tax Act, tax is levied on income and not on capital. Therefore it is very important to distinguish between the two. A capital receipt is not liable to tax unless provided specially in the Act. Revenue receipts are always taxable whether or not provided under the Income-tax Act, 1961. Certain capital receipts have been specifically included in the definition of income. Some of which are: Income by way of capital gains (Section 45) Compensation for modification/termination of services [sec. 17(3)(5)] Compensation under business head. [Sec. 28(ii)] Revenue receipt is always taxable or it is not exempted unless specially provided. Exception : The definition 2(24) includes capital gain. Pension received is always income. Further it is excluded only because sec. 10(10A) gives exemption.
6. DIVERSION OR APPLICATION OF INCOME : Where an assessee applies an income to discharge his liabilities after the income reaches the hand of the assessee, it would be an application of income and this would result in taxation of such income in the hands of the assessee. However, where there is a diversion of the income, it cannot be treated as an income of the assessee. Example : The properties of father were attached during his life - time and were sold after the death of the father, the payment made to Income-tax department out of sales consideration was diversion of income and only balance coming to the hand of son was taxable in his hand. 7. LEGAL OR ILLEGAL INCOME : For the purpose of Income-tax, there is no difference between legal and illegal income. Both are taxable. 8. PIN MONEY : Pin money received by a lady for her personal expenses by her husband would not be income in the eye of law. [Naidu (RBNJ) VCIT (1956)] 9 GROSS TOTAL INCOME : As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income. (i) Salaries, (ii) Income from House Property, (iii) Profits and gains of business or profession (iv) Capital gains (v) Income from other sources Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B] 10. TOTAL INCOME : The total income of an assessee is computed by deducting from the gross total income , all deductions permissible under chapter VIA of the Income-tax Act i.e. deductions under section 80CCC to 80U. 2(28BB) Insurer means any insurer being an Indian insurance company, as defined under clause (7A) of section 2 of the Insurance Act, 1938 (4 of 1938), which has been granted a certificate of registration under section 1 of that Act; Comment : Insurance sector is being privatised. Many companies have now entered in insurance business. In view of this insertion has been made in the definition so as to give recognisation to them for the purpose of various benefits available under the Act. 2(31) Person includes (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm (v) an association of persons or a body of individuals, whether incorporated or not, whether for profit or not (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses; These are briefly explained as under (1) An Individual : Includes male, female, minor child, a lunatic. (2) A HUF : A family which consists of all persons lineally descended from common ancestor including wives and unmarried daughter. The principal of HUF is called Karta and its members are called Co-parceners. (3) A Company : Incorporated association under the Companies Act, 1956 or any other law.
A firm : A partnership firm registered under Partnership Act, 1932 Association of Persons : An AOP must be one in which two or more or A body of Individuals persons join in for a common purpose or common action, the object of which is to produce income, profit and gains. Though a body of individual is not identical with an AOP, they have some similarities. An AOP may consist of non-individuals also but body would require an association for some common purpose or for a common cause or there must be unity under some common occupation. A mere collection of individuals without a common occupation/aim cannot be taken to be a body of individual falling within Sec. 2(31). (6) A Local Authority : Municipality, Cantonment Board, District Board, Port Trust, Gram Panchayat etc. (7) Every artificial juridical person : A Hindu idol or a deity or god or allah. It also includes all artificial person with a juridical personality, such as a Bar Council, a University, Life Insurance Corporation. 2(32) Prescribed means prescribed by rules made under this Act; Comment: It is almost difficult for the income-tax Act to provide for everything relating to the limit, conditions, procedures, forms and various other aspects. Therefore, the legislature has considered it appropriate to delegate to the CBDT the power to frame the relevant rules. The power to frame rules is vested with the board u/s 295 of the Act. 2(41) Relative, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual; Comment: The definition of the term relative becomes relevant in the context of certain provisions calling for disallowance [e.g. 40A(2)] or providing certain deductions [e.g. 80DD]. 2(45) Total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act; Other definitions Tax Avoidance : It is an exercise by the assessee to take advantage of loopholes of law without resorting to illegal ways. Tax Evasion : It is an illegal way of reducing tax liability by suppressing sales and inflating expenses etc. Tax Planning : It means working out of tax without violating in any way the provisions of law and taking full benefit of exemptions, deductions, rebates and reliefs etc. to reduce the tax liability as much as possible. Various methods of tax planning may be short range tax planning or long range tax planning. 3. PREVIOUS YEAR : According to Sec. 2(34) of the Income Tax Act, Previous Year means the previous year as defined in Section 3(1) of the Act. Let us go through Sec. 3(1). According to this section previous year means, the financial year immediately preceeding the assessment year. Therefore, the financial year which precedes the assessment year will be the previous year. It is the income of the previous year, that is put to tax in the assessment year. Example : For the assessment year 2010-11, the previous year would be 2009-10, i.e. a period from 1st April 2009 to 31st March, 2010. Comments : (1) It is preceding financial year. (2) The first previous year for a newly set-up business or profession will be the period beginning from the date of its set-up and ending with the close of that financial year. (3) Previous Year for deemed Income (i) For unexplained Money (Sec. 69A) The previous year of such deemed income shall be the financial year in which the assessee is found to be their owner.
(4) (5)
(4)
4.
For undisclosed income/property or for unexplained investments (Sec. 69) or for investments not fully disclosed (Sec. 69B) The previous year for such income shall be the financial year in which above items are found undisclosed or unrecorded. (iii) For unexplained expenditure (Sec. 69C) The previous year for such unexplained expenditure is the financial year in which the expenditure is incurred by the assessee. (iv) For amount borrowed or repaid on hundis (Sec. 69D) The previous year for such deemed income shall be the financial year in which the said amount is borrowed or repaid. (v) Unexplained Cash Credit (Sec. 68) The previous year for such deemed income shall be the financial year in which such credit occur. Circumstances where income of the previous year is assessed in the same year or exceptions to general rule. Following exceptions have been provided to protect the collection of taxes and other dues so that assessee, who may not be available later on, are not permitted to escape the payment of taxes. The exception are as follows: (i) Income from Shipping Business of Non-Residents (Sec. 172) : Seven and half percent (7.5%) of the total freight including dumerage charge and handling charge, earned at Indian port by the owner or charter or any other person on their behalf, shall be deemed to be the taxable income. (ii) Income of Persons Leaving India (Sec. 174) : If it appears to the Assessing Officer that any individual may leave India and that he has no present intention of returning to India, the total income of such individual upto the probable date of his departure from India shall be assessed to income tax in that assessment year. (iii) Persons Transferring Property to Avoid Tax or Persons Trying to Alienate their Assets with a View to Avoid Tax (Sec. 175) : The total income of such person upto the date when the Assessing Officer commences proceedings against them/him, shall be chargeable to tax in that assessing year. (iv) Income of Discontinued Business or Profession (Sec. 176) : In such a case, the Income of the period from the expiry of the previous year for that assessment year upto the date of such discontinuance may, at the discretion of the Assessing Officer, be assessed in that assessment year. (v) Assessment of Association of Person or Body of Individual or Artificial Juridical Person formed for a particular event or purpose (Sec.174 A) : Where it appears to the assessing officers that any association of person or a body of individual or an artificial juridical person formed or established or incorporated for a particular event or purpose is likely to be dissolved in the assessment year in which such association of person or body of individual or artificial juridical person was formed or established or incorporated or immediatedly after such assessment year, the total income of such person or body or juridical person, for the period from the expiry of the previous year for that assessment year upto the date of its dissolution, shall be chargeable to tax in that assessment year. Example : If AOP which is formed in the previous year 2009-10 is going to be dissolved on 15-05-2010 than the income of the period 1-4-2010 to 15-05-2010 shall be charged to income tax in the previous year 2010-11 itself. CHARGE OF INCOME-TAX : As provided in section 4, the total income of the previous year of every person shall be charged to the income-tax in the assessment year at the rates applicable by the respective Finance Act. Hence, we conclude that this section correlates Income Tax Act with Annual Financial Act. Normally income of previous year is taxed in assessment year but some exceptional cases& (as mentioned above), income-tax may be charged in respect of income of a period other than the previous year.
(ii)
Further income-tax shall be deducted at the source, or paid in advance, whenever it is required under any provision of the Act. 5. COMPUTATION STEPS FOR DIFFERENT PERSONS :
IndiviHUF Firm BOI/ AOP/ Company Co-op. Society
# Computation steps dual 1. Gross total income, computed under the following five heads : (a) after giving efffect to set-off and carry forward of losses. (b) after giving effect to the provisions for clubbing of income; and (c) after excluding income exempt under Chapter III, i.e., under sections 10 to 13A. (1) 1. Income from salary 2. Income from house property 3. Profits and gains of business or profession 4. Income from capital gains 5. Income from other sources Gross Total Income
Contd. table
2. Less : Deduction under Chapter VIA 80CCC, 80CCD 80E, 80GG, 80RRB, 80U 80C, 80D, 80DD, 80DDB
80G, 80GGA,80IA, 80IB, 80IC 80 ID, 80IE, 80 JJA 80GGB, 80JJAA, 80P
3. Total Income 4. Tax on total income 5. Add : Surcharge 6. Tax after surcharge 7. Education cess @ 2% on 6 8. SHEC @ 1% on 6 9. Tax after cess 10.Less : Reliefs : Relief under section 86 (in respect of share in the income of AOP or BOI) Relief under section 89 Relief under section 90 and 91 (double taxation relief) 11.Tax liability Add : Interest under sections 234A 234B, 234C and 234D Less : Tax deducted/collected at source Less : Advance tax paid
12.Total tax and interest payable Less : Self-assessment tax paid Less : Other prepaid taxes 13. Net tax/interest payable or refund due
Notes : Where an item falls specifically under one head, it has to be charged under that head and no other. Income-tax is computed on the total income. It is not computed separately on the incomefrom each head. Method of rounding off : Amount of total income computed under the Act is rounded off to the nearest multiple of Rs. 10. Tax (including TDS or advnace tax), interest, penalty, fine or any other sum payable or any refund due is rounded off to the nearest rupee. Sec. 14A provides that, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income (i.e. exempt incomes) under this Act. Problem : Miss Depali Singh teacher in a public school, made available the following information for the year ending 31st March, 2010 : Rs. (i) (ii) (iii) (iv) (v) (vi) Income from salary computed as per Income-Tax Act Income from letout property computed as per Income Tax Act Long term capital gain computed as per Income-Tax Act Winning from Punjab State lottery Interest income from loan to relatives Deductions computed as per Chapter VIA of Income Tax Act : u/s 80G Donation to notified temple u/s 80D u/s 80E Payment of health insurance premium of herself Payment in respect of repayment of loan taken for higher education 5,100 5,128 16,000 1,60,000 (10,000) 20,000 10,000 15,000
(vii) She is also eligible for rebate u/s 88 for amount deposited in Public Provident Fund
10,000
Prepare statement of Total Income and determine tax liability for the A.Y. 2010-11. Also discuss other factors that you should consider while filing income-tax return of Miss Deepali. Solution : Statement of Total Income of Miss Deepali for the Assessment Year 2010-11 Rs. Income from Salaries (compued) Income from House Property (computed) Income from Business or profession Capital Gain : Long term capital gain (computed) Income from other sources : Winning from Punjab state lottery 1,60,000 (10,000) NIL 20,000 10,000
Interest income from loan to relatives Less : Deductions under Chapter VIA u/s 80G Donation to notified temple u/s 80D Health Insurance Premium u/s 80E repayment of loan taken for higher education
15,000 Gross Total Income 5,100 5,128
25,000 1,95,000
16,000 Total Income Total Income (Round off)
26,228 1,68,772 1,68,770 4,000 3,000
Tax Due : Tax on Long term capital gain 20,000 20% Tax on casual income 10,000 30% Tax on Remaining Income 1,68,770 (20,000 + 10,000) 1,38,770 Tax on Remaining Income ADD Education Cess @ 2% ADD SHEC @ 1% Tax Liability PROBLEM Nil Total Tax Nil 7,000 140 70 7,210
Q.1 Mr. /Ms. X is a govt. employee. Calculate tax liability of Mr. /Ms. X for the assessment year 2010-11. Assuming Mr. /Ms. X is a (a) Female (b) Male (c) Senior Citizen. Case 1 : Income Rs. 2,00,000. Case 2 : Income Rs. 3,50,000. Case 2 : Income Rs. 6,00,000. Answer: Female - 1030, 21630, 83430. Male - 4120, 24720, 86520. Senior Citizen - Nil, 16480, 78280.
SCOPE OF TOTAL INCOME AND RESIDENTIAL STATUS

1. RESIDENTIAL STATUS : Tax liability of an assessee varies with his residence or residential status. Hence, the first inquiry should be about residence of the assessee. Tests of residence as specified in Sec. 6 are based on his territorial connection in previous year and are different in case of different assessable units, e.g., individual, Hindu undivided family, firm and company.It is important to note that residential status is absolutely different from the term citizenship. A person may be Indian citizen but may not be resident in India. Similary, a person may be a foreign citizen, but may be resident in India.The assessee are divided into following three categories : (i) (ii) (iii) Resident Not Ordinary Resident Non Resident
The residential status of a person is required to be determined for each assessment year to determine the scope of total income. Residential status will be determined on the basis of certain conditions for each person separately. 2. INDIVIDUAL CONDITION NO. 1 Resident : An individual is said to be resident in India in any previous year if he fulfills any one of the following two basic conditions : (1) He is in India in that year for a period 182 days or more : (2) He is in India for a period 60 days or more during the previous year and 365 days or more during the 4 years preceding that previous year.
Exception : Under the following circumstances the period of 60 days as mentioned above will be extended to 182 days. (i) An Indian citizen who leaves India during the previous year for the purpose of employment outside India. (ii) An Indian Citizen who leaves India during the previous year as a member of the crew of an Indian ship. (iii) An Indian Citizen or a person of Indian origin who resides abroad comes to India on a visit during the previous year. Non Resident : If an individual does not satisfy at least one of the basic conditions, he shall be considered as non-resident. Resident and Not Ordinarily Resident : In addition to fulfilling one of the above basic conditions, in case an individual fulfills any of the following conditions, he will be treated as Not Ordinarily Resident in India in that previous year : a) he has been a non-resident in India in 9 out of the 10 preceding previous years; OR b) he has been in India for a period of not exceeding 729 days during the 7 preceding previous years. Note : (i) Person shall be deemed to be of Indian Origin, if he, or either of his parents or any of his grand parents was born in undivided India. (ii) For the purpose of calculation of residential status u/s 6 of the Income-tax Act, the day on which the applicant entered India as well as the day on which he left India should be taken into
account. If hourly datas are given then physical presence in India should be determined on hourly basis. A total of 24 hours will be treated as one day. (iii) Continuity of stay and stay at one place is not necessary. 3. HINDU UNDIVIDED FAMILY : Resident : A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. Non-Resident : The Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India. Not Ordinarily Resident : If the control and management of the affairs of the HUF is wholly or partly situated in India and if the manager of the family satisfies any of the following conditions, the HUF shall be considered as Not Ordinarily Resident. a) b) he has been a non-resident in India in 9 out of the 10 preceding previous years; OR he has been in India for a period of not exceeding 729 days during the 7 preceding previous years.
4. FIRM, AOP AND OTHER NON-CORPORATE ENTITES : A partnership firm or an association of person is said to be RESIDENT, in India if control and management of its affairs are wholly or partly situated inside India during the relevant previous year. It will, however, be treated as NON-RESIDENT in India if control and management of its affairs are situated outside India. Note : In case of a firm, control and management of its affairs is in the hands of partner and thus if partners generally meet in India regarding the affairs of the firm, then the firm is said to be resident in India. 5. COMPANY : A company incorporated under Indian Companies Act, 1956 is always resident in India. Any other company is resident in India if, during the previous year the control and management of its affairs are situated wholly in India. Usually control and management of a companys affairs is situated at the place where meeting of its board of directors are held. 6. SCOPE OF TOTAL INCOME (Sec. 5) : Subject to the provisions of the Income-Tax Act, the total income of any previous year of a person is determined as contemplated u/s 5. The scope of total income depends upon the residential status of a person for the relevant assessment year. Once the residential status of a person is determined in accordance with sec. 6 of the Income-Tax Act, the income chargeable to tax as part of total income shall be identified as follows : S. Particulars No. ordinarily resident (i) Income received or deemed to be received in India. (ii) Income accruing or arising or deemed to accrue or arise in India. (iii) Income accruing or arising outside India from a) Business controlled in India or Profession set up in India. b) Any other source (iv) Income which accrue or arises outside India and received outside Taxable Taxable Taxable Taxable Taxable Taxable Resident & but not Resident Resident resident Non-
ordinarily
Taxable Taxable Not Taxable
Taxable Not Taxable Not Taxable
Not Taxable Not Taxable Not Taxable
India during the year preceding the previous year and remitted to India during the previous year 7. INCOME DEEMED TO BE RECEIVED (Sec. 7) : The following income shall be deemed to be received in the previous year : (i) Employers contribution to recognized provident fund in excess of 12% of salary. (ii) Interest credited to the recognized provided fund balance at the credit of the assessee in excess of 9.5%. (iii) The taxable transferred balance from unrecognized to recognized provident fund. (vi) Contribution made by the Central Govt. in the previous year, to the account of employee under pension scheme referred to in section 80CCD (w.e.f. A.Y. 2005-06). (v) Tax deducted at source. (vi) Investment, expenditure, cash credit, cash, gold etc. detected during the previous year which are unexplained [Sec. 68, 69, 69A, 69B and 69C] 8. DIVIDEND INCOME (Sec. 8) : Dividend is includible in the total income of the assessee on the following basis : S. No. (i) (ii) (iii) Type of dividend Final dividend Interim dividend Deemed dividend u/s 2(22) Year of chargeability in the hands of the assessee Previous year in which the dividend is declared by the company Previous year in which the dividend is unconditionally made available by the company. Previous year in which such dividend is distributed or paid.
IMPORTANT : The taxability of dividend income declared by domestic companies are exempted in the hands of shareholders u/s 10(34). According to Sec. 115-O, every domestic company is liable to pay dividend distribution tax of 12.5%. It is important to mention that Sec. 115-O does not apply to a foreign company and deemed dividend covered by Sec.2(22)(e). Therefore, a shareholder continues to be liable to tax in respect of such dividends. 9. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA (Sec. 9) : The following incomes shall be deemed to accrue or arise in India : (i) Income accruing or arising through or from any business connection in India. If all the operations of abusiness are not carried out in India, only a reasonable part of the Income from such business shall be deemed to accrue or arise in India. Income through or from any property, any asset or source of income in India.
(ii)
(iii) Income through the transfer of a capital asset situated in India. (iv) Income chargeable under the head Salaries earned for services rendered in India. Income which falls under the head Salaries shall be regarded as income earned in India if the income is payable for : a. Service rendered in India; and b. the rest period or leave period which is preceded and succeeded by service rendered in India and forms part of the service contract of employment. This provision should be read along with sec. 10(6) which grants exemption in respect of salary earned by Foreign Nationals under certain circumstances and subject to certain conditions.
(v)
Salary paid by the Government to a citizen of India for service rendered outside India. It may be noted that allowances and perquisites paid outside India by the Government is exempt by virtue of sec. 10(7).
(vi) Dividend paid by an Indian company outside India. (vii) Interest, Royalty and fees for technical services as indicated below : Payable by Nature of Income a) Interest on arise in India only Government Deemed to accrue monies borrowed Resident Deemed to accrue or or arise in India when used for a business or profession carried on outside India or for any source of Non Resident Deemed to accrue or arise in India except when used for the purpose of business or profession carried on in India. income outside India. do
b) Royalty in
do do respect of any rights or property information do do
used servicesutilised. c) Fees for technical services BUSINESS CONNECTION : The expression business connection is not defined in the Income Tax Act. However, a business connection involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in India which contributes directly or indirectly to the earning of those profits and gains. Business connection may be in several form e.g. a branch office in India or an agent in India, or any establishment of non resident in India. Formation of subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non resident which can be reasonably attributable to such part of operation carried in India through business connection in India are deemed to be earned in India. Note 1 : Business Connection does not includes : In the case of a Non-Resident the following shall not, however, be treated as business connection in India : (i) (ii) Operations confined to purchase of goods in India for purpose of exports; Operations confined to collection of news and views for transmission outside India by or on behalf of Non-Resident who is engaged in the business of running news agency or of publishing newspapers, magazines or journals; Operations confined to shooting of cinematograph films in India if such Non-Resident is : (a) (b) an individualhe should not be a citizen of India; or a firmthe firm should not have any partner who is a citizen of India or who is resident in India; or (c) a companythe company does not have any shareholder who is a citizen of India or who is resident in India. In the case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to operations carried out in India shall be treated as deemed to accrue or arise in India. do
(iii)
Note 2 : Business Connection includes : Business Connection (w.e.f. A.Y. 2004-05) shall include any business activity carried out through a person who, acting on behalf of the non-resident : (i) has and habitually exercises in India an authority to conclude contracts on behalf of the nonresident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (ii) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (iii) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident. Problem 1 : Miss Anju a citizen of India went to California for business purposes on 1-1-2005. She was never been out of India in the past. During previous year 2005-06, 2006-07 and 2008-09 she has been in India for 100 days every year. She returned to India to settle permanently here on 20-12-2009. Determine her residential status for the assessment year 2010-11. Would it make any difference if she comes to India on 1-1-2010 for three months on visit and not to settle here ? Solution : (i) When Miss Anju returned to India to settle permanently She resided in India during the previous year (2009-10) for more than 60 days and more than 365 days in past four years preceding the previous year. But she had not been a resident for 9 years out of 10 preceding previous year. Therefore, the status of Miss Anju is not-ordinarily resident. (ii) When Miss Anju returns to India for a visit She resided in India during the previous year (2009-10) for 90 days and more than 365 days in past four years preceding the previous year. But in case an Indian citizen comes on a visit to India in any previous year his stay in India should be more than 182 days, thus status of Miss Anju is non-resident. Problem 2 : The following are the particulars of income of Rakesh for the previous year 2009-10 : Rent from property in Delhi received in London Income from a business in Canada controlled from Delhi Income from business in Jaipur controlled from U.S.A. Rent from a property in U.S.A. received there but subsequently remitted to India. (e) Interest from deposits with an Indian company received in U.S.A. (f) Profits for the year 2008-09 of a business in U.S.A. remitted to India during the previous year 2009-10 (Not taxed earlier) (g) Gifts received from his parents. (h) Interest payable by Punjab Government, received in USA. Compute his Income for the assessment year 2010-11 if he is : (i) resident and ordinarily resident in India. (ii) resident but not ordinarily resident in India (iii) non-resident in India. (a) (b) (c) (d) Rs. 18,000 22,000 38,000 60,000 4,000 17,500 44,500 10,000
Solution :
Statement of Gross Total Income or Mr. Rakesh for the Assessment Year 2010-11 Particulars Resident and Resident but Ordinarily not Ordinarily Resident (1) Income earned/deemed to Accrue/arise in India Rent from property in Delhi 18,000 18,000 Income from business in Jaipur 38,000 38,000 Interest from Indian company 4,000 4,000 Interest from Punjab Government 10,000 10,000 (2) Income earned and received outside India, from a business controlled from India Income from business in Canada. 22,000 22,000 (3) Income earned and received outside India other than (2) Rent from property in U.S.A. 60,000 1,52,000 92,000
NonResident
Resident
18,000 38,000 4,000 10,000
70,000
Note : 1. Profits of 2008-09 are not income of the previous year 2009-10 and hence cannot be included in the income for assessment year 2010-11. 2. Gifts received are capital receipts and are not regarded as income.
PROBLEMS
Q.1 During the financial year 2009-10 Ms. Naina had the following taxable incomes: (a) Salary Income received in India for the services rendered in Pakistan (b) Income from profession in India but received in Nepal (c) Profit earn from business in Indore (d) Agriculture Income in Kenya (e) Profit from buisness carried out at Bhutan but control from India (f) Past untaxed profit remitted to India during the previous year from USA Compute the total income of Ms. Naina for the assessment year 2010-11, if she is (i) resident (ii) non ordinary resident(iii) non resident in India. (ii) 60,500 (iii) 30,000 Rs. 20,400. Rs. 36,00. Rs. 6,000. Rs. 10,500. Rs. 30,500. Rs. 10,000.
Answer: (i)71,000 Q.2 2010.
Following are the particular of taxable income of Shri Aarav for the previous year ended on 31 March (a) Royalty received from govt. of India Rs. 20,000. (b) Income from investment in Malaysia Rs. 5,000, this amount was received in Malaysia by the authorized representative and sent to India through Bank Draft. (c) Gift in forreign currrency Rs. 15,000 from a relative received in India. (d) Income from sale of house property in Jaipur Rs. 40,000, half of this amount was received in UK. (e) Interest received from Shri Akshay a non resident against a loan provided to him to run business in India Rs. 10,000. (f) Royalty received from Ram a resident for technical services provided to run a business outside India Rs. 25,000.
Answer:
(i) 10,500
(ii) 70,000
(iii) 70,000
INCOME WHICH DO NOT FORM PART OF TOTAL INCOME

1. AGRICULTURE INCOME According to Sec. 2(1A) Agriculture Income means : a) b) Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes. Any income derived from such land by agricultural operations including processing of the agricultural produce raised or received rent-in-kind so as to render it fit for the market for sale of such produce; and Income attributable to a farm house subject to the condition that the building is situated on or in the immediate vicinity of the land and used as a dwelling house, store house or other out building and the land is assessed to land revenue or a local rate or in the alternative, the building is situated on or in the immediate vicinity of land which (though not assessed to land revenue or local rate) is situated outside the urban areas, i.e. any area which is comprised within the jurisdiction of a municipality or cantonment board having a population of ten thousand or more or in any area within eight kilometers from the local limits of such municipality or cantonment board.
c)
IMPORTANT : Sec. 10(1) exempts agriculture income from income tax. But it is taken for rate purpose. 2. INTEGRATION OF AGRICULTURE INCOME WITH NON-AGRICULTURE INCOME : The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied: (i) The tax payer has non agricultural income exceeding the amount of exemption limits (i.e. Rs. 190000) (in the case a resident woman below 65 yrs.), Rs. 240000 (in the case of a resident seniorcitizen 65 yrs. or more) and Rs. 160000 (in the case of any other individual or every HUF) for the assessment year 2010-11.
(ii) The net Agricultural Income exceeds Rs. 5,000 Computation of tax : The following steps should be followed to calculate the tax : Step 1 : Calculate tax on aggregate of agriculture income and non-agriculture income. Step 2 : Calculate tax on aggregate of maximum exemption limit and agriculture income. Step 3 : Income tax payable (step 1 - step 2) Step 4 : Deduct amount of rebate u/s 88, 88B, 88C, 88D Tax Payable Add : Surcharge Total Tax Payable
Example : Total Income of Mr. Ritik is computed under Income-tax Act, for the assessment year 2010-11 is Rs. 3,50,000. Compute the tax payable by Ritik assessing that he has agricultural income of (a) Nil; (b) Rs. 5,000 and (c) Rs.80,000.
Solution : (a) and (b) Since the agricultural income is either Nil or does not exceed Rs. 5,000, there will be no partial integration and the Income-tax will be calculated on Rs. 90,000 as usual. Tax on Rs. 3,50,000 will be Rs. 21,000. Case (C) : Rs. Step 1 : Calculation of tax on aggregate of agriculture income and non agriculture income i.e. Rs. 4,30,000 Step 2 : Calculation of tax on aggregate of maximum exemption limit and agriculture income i.e. Rs. 2,70,000 Step 3 : Tax under Step 2 Step 1 (37,000- 8,000) Therefore, tax on non-agricultural income 37,000 8,000 29,000 29,000
PROBLEM For the assessment year 2010-11, X, an individual (age 66yrs.), submits the following information : Rs. House property income Income from the business 1,25,000 of growing and manufacturing coffee in India (gross) 4,00,000 Expenditure on earning coffee income 2,000 Determine the tax liability of X for the assessment year 2010-11 on the exemption that he contributes Rs. 20,000 towards public provident fund. Answer : Tax Liability Rs. 5290. 3. INCOME WHICH IS PARTIALLY AGRICULTURAL AND PARTIALLY FROM BUSINESS (RULE 7) Where an assessee has composite income which is partially agricultural and partially non-agriculture, for example, where M/s. Agro Farms, grows wheat and further it is used to manufacture biscuits the composite income has to be classified as under : Agricultural Income : The fair market value of wheat when it is used in the business less cultivation expenses. Business Income : The sale proceeds received from biscuits less the fair market value of wheat when it is utilised in the business and subsequent experses incurred for manufacturing of biscuits. 4. TEA BUSINESS (RULE 8) The income in respect of the business of growing tea leaves and manufacturing tea is in the first instance computed under the Act as if it were derived from business. After making permissible deductions, 40% of the income so arrived at is treated as business income and the balance 60% is treated as agricultural income. Salary and profit received by a partner from a firm (growing leaves and manufacturing tea) is taxable only to the extent of 40% and the balance 60% is treated as agricultural income. But dividend received from a company, growing leaves and manufacturing tea, is not apportionable in the aforesaid manner. 5. RUBBER BUSINESS (RULE 7A) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and 35% of such income shall be deemed to be income liable to tax. The balance 65% shall be deemed as agriculture income. 6. COFFEE BUSINESS (RULE 7B) Income from the sale of Coffee grown and manufactured in India is dealt as under :
a) b)
where income is derived from the sale of coffee grown and cured, 25% shall be deemed to be business income liable to tax and the remaining 75% will be deemed as agriculture income. apart from sale of coffee grown and cured if assessee is engaged in roasting and grounding of coffee then 40% shall be deemed as business income liable to tax and remaining 60% will be deemed as agriculture income.
Summary : Rules 7A 7B (1) 7B (1A) 8 Produce Rubber Coffee grown, manufactured and cured, or Coffee grown, manufactured, cured and roasted Tea Agricultural Income 65% 75% 60% 60% Business Income 35% 25% 40% 40%
7. FOLLOWING INCOMES HAVE BEEN HELD TO BE NON-AGRICULTURAL INCOME Income from stone quarries. Income from breeding of livestock. Income from dairy farming, butter and cheese making. Income from poultry farming. Income from fisheries. Income from brick making. Income from supplying surplus water to other agriculturists. Profits on sale of standing crops/agricultural produce purchased by the assesee. Income derived from letting out of land/godown for storing crops. Income from sale of forest, trees, wild grass, fruit and flowers grown spontaneously and without human effort. Income from salt produced by flooding the land with sea water and then extracting salt therefrom. Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator. Royalty income of mines. Annuity payable to vendor of agricultural land or payable to a person giving up his claims to piece of agricultural land. Harvest crop on purchased land. Compensation or damages paid for loss of agricultural income due to late payment of installments of the consideration price of rubber plantation site. Registration fee collected from the contractor who is bidding at the auction conducted for sale of plantation is not an agricultural income as such registration fee had no nexus with land. 8. FOLLOWING INCOMES HAVE BEEN HELD TO BE AGRICUTURE INOME Remuneration and interest on capital received by a partner from a partnership firm engased in agricultral operation. Income from sale of seeds. Compensation received from insurance company for damage caused to the agriculture produce; Income from growing flowers and creepers. 9. EXEMPTION FOR INDUSTRIES NEWLY ESTABLISHED INDUSTRIAL UNDER-TAKINGS IN CERTAIN AREAS : (A) Sec. 10A : Profits and gains from the export of articles/computer software if undertaking is located in any Free Trade Zone/Export Processing Zone/Sofware Technology Park/Hardware Technology Park/Special Economic Zone Notified by the Central Govt.
(B) Sec. 10B : Profits and gains from 100% Export oriented undertaking (EOU) under the Industries (Development and Regulation) Act from export of goods. Amount of Exemption :
Profit of the business Export Turnov er e (of abov e undertakin ) Total Turnov er for 10 consecutiv year gs
Essential Conditions : (1) No deduction under this section shall be allowed to any undertaking for the A.Y. beginning on the 1st day of April 2010 and subsequent years. Thus all undertakings set up on or before 31.3.2000 shall be entitled to a deduction for a period of 10 years, that set up during the period 1.4.2000 to 31.3.2001 for the period of 9 years, that set up in during the period 1.4.2001 to 31.3.2002 for the period of 8 years and so on. (2) In respect of an undertaking situated in special economic zone begins manufacture or produce article or things or computer software on or p.y. 2005-06, the deduction in respect of profits and gains derived from export of such articles or tings or computer software shall be as follows : First 5 consecutive Assessment Years Next 5 Assessment Years Next 5 Assessment Years 100% of Profits & Gains 50% of Profits & Gains Any amount transferred to Special Economy Zone Reinvestment Allowance Reserve Account or 50% of the profits whichever is lower.
(3) The amount credited to the Special Economic Zone Reinvestment Allowance Reserve is to be utilised for the purpose of acquiring new machinery or plant which is put to use before the expiry of 3 years next following the year of creation of reserve. (4) The year of creation of reserve the particulars about the new machinery & plant is furnished along with the return of income for assessment year relevant to previous year in which it was first put to use.
(5) In case the violation of above condition the exemption under the section shall be withdrawn and consequences are as under:
S. No. 1. Violation of Condition In case special reserve is utilised for any purpose other than the specified purpose. In case the reserve is not utilised before the expiry of 3 years from the end of the previous year in which the reserve is created. Tax Implications The amount so utilised shall be chargeable to tax in the year of such utilisation. The amount of reserve shall be deemed to the profits in the immediately following the period of 3 years
2.
(6) The industrial undertaking must fulfil the following other conditions in order to avail the deduction u/s 10A or u/s 10B : i) ii) It manufactures or products any article or thing in any of the specified zones mentioned above; It is not formed by the splitting up, or the reconstruction, of a business already in existence;
iii) It is not formed by transfer to a new business of machinery or plant previously used for any purpose. However, if the value of the machinery or plant so transferred does not exceed 20% of the total value of the machinery or plant this condition is not violated.
iv) The sale proceeds of articles or things or computer software exported out of India should be received in, or brought into, India by the assessee in convertible foreign exchange within a period of of 6 months from the end of the previous year or within such extended time as may be allowed by the Reserve Bank of India or such other appropriate authority. v) In order to claim deduction under these sections the assessee shall furnish report from a Chartered Accountant in the prescribed form no. 56 F certifying that the deduction claimed is correct. EXAMPLE : R Ltd. furnishes the following particulars for the previous year 2009-10 in respect of industry established in Free Trade Zone : Total sales of the above undertaking Export sales Domestic sales Money brought to India in convertible foreign exchange upto 30.9.2010 Profit from the above undertaking Compute the deduction available from the total income under section 10A. Solution : Amount of deduction available u/s 10A
Profit from business of the undertakin g Export turnover Total turnover of the undertakin g
Rs. 60,00,000 50,00,000 10,00,000 40,00,000 8,00,000
Deduction available u/s 10A shall be Rs. 5, 33,000 10. OTHER EXEMPTIONS : (i) Amount received by a member from HUF [Sec. 10(2)] Any sum received by an individual, as a member of a HUF, shall be exempted in the hand of the member.
(ii) Partners share in the firm [Sec. 10(2A)] Where a firm is assessed in the status of firm under section 184, a partners share in the incomeof the firm is not includible in his total income. It is to be noted that the interest and remuneration etc. received from the firm, to the extent of deduction therefor has been allowed to the firm under Section 40(b), does not constitute such share and is taxable as business income of the partner. The amount attributable to such interest or remuneration, as is disallowed under Section 40(b) in computation of the total income of the firm is however exempt in the hand of partners. (iii) Awards and Rewards [Sec. (17A)] : Any payment made (whether in cash or in kind) in pursuance of any award instituted in public interest by the Central or State Government is not includible in his total income. This exemption is also allowable in case of awards instituted by any other body and is approved for this purpose by the Central Government. (iv) Interest on certain Bonds, Securities, Certificates or Deposits [Sec. 10(4)] Interest (including premium on redemption or other payment) payable on the following securities, bonds, certificates and deposits: (a) Post Office Saving Accounts (b) Post Office Cumulative Time Deposit Rules, 1981. (c) Scheme of Fixed Deposits governed by Government Savings Certificates (Fixed Deposit) Rules, 1968. (d) Special Deposit Scheme, 1981
(e) Public Account referred to in item (6) in the Table below the 4 of Post Office Savings Account Rules, 1981, is also exempt subject to a maximum of Rs. 5,000. (f) Resurgent India Bonds issued by the State Bank of India. (g) Gold Deposits Bonds, 1999. (h) Bonds issued by a local authority and notified by the Central Government for this purpose. (i) Interest on 10% Relief Bonds, 1995, 9% Relief Bonds, 1999, 8.5% Relief Bonds, 2001 and 8% Relief Bonds, 2002. (j) Deposits under the Deposit Scheme for retiring Government employees and under the Deposit Scheme for retiring employees of the Public Sector Companies. (k) Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims Bhopal in Reserve Banks S.G.L. Account No. SL/DH048. (l) Interest on deposits for the benefit of victims of Bhopal gas leak tragedy held in account with Reserve Bank of India, or a public sector bank by Sir lan Percial, Sole Trustee, Bhopal Hospital Trust. (m) Interest on such bonds and debentures of a public sector company as are notified for this purpose. (v) Exemption of capital gain on compensation received on compulsory acquisition of urban agriculture land w.e.f A.Y. 2005-06. The exemption will be given if following conditions are satisfied : The assessee is an individual or HUF and owns an agriculture land situated in urban area; The compulsory acquisition or consideration for transfer is effected by the Central Govt. or RBI; The agriculture land was used for agriculture purpose during last 2 years prior to the date of transfer; The assets may be long-term capital assets or short-term capital assets. Compensation is received by the assessee after 31st March, 2004. Exemption for promotion of investment and development in certain sections. (vi) Venture Capital Funds [Sec. 10(23FB)] Any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking, is not includible in its income. Note : (a) The term venture capital company means a company that has obtained a certificate of registration under the Securities Exchange Board of India Act, 1992 and regulation made under that Act, and also fulfils the conditions notified for this purpose by the Securities Exchange Board of India with the approval of the Central Government. (b) Venture capital undertaking means a venture capital undertaking referred to in SEBI Regulation, 1996 and which is notified by the CBDT. (vii) Institution for development of Khadi and Village Industries [Sec. 10(23B)] Income of such an institution is exempt to the extent it is attributable to the production, sale or marketing of Khadi or products of village industries, where : - the institution is constituted as a public charitable trust or is a registered society; - it exits solely for the development of Khadi or Village Industries or both and not for purposes of profit; - it applies its income or accumulates it for application solely for the development of Khadi or Village Industries or both; and - it is for the time being approved for this purpose by the Khadi and Village Industries Commission.
The approval for the purpose of this exemption, however, can be granted by the commission for not more than three assessment years at any one time. The commission can also withdraw the approval granted. (viii) Income of certain Co-operative Societies Any income of a co-operative society formed for promoting the interests of members of either the Scheduled Castes or the Scheduled Tribes or both is exempt, where : (a) its membership consists of only other co-operative societies formed for similar purposes, and (b) its finance are provided by the Government and those other societies. (ix) Facilitating provision of credit for small scale industries The income of Credit Guarantee Fund Trust for Small Industries, created by the Government of India and SIDBI (Small Industries Development) Bank of India) has been exempted for assessment years 2002-03 to 2006-07. Funds, institutions and authorities etc. for the benefit of general public (x) Income of a news agency [Sec. 10(22B)] The income of a news agency for any assessment year is exempt, when : it is set up in India solely for collection and distribution of news. the news agency has been notified for this purpose for the relevant assessment year; it applies its income or accumulates it for application solely for collection and distribution of news; and if does not distribute its income in any manner to its members. (xi) Income of a local authoriry [Sec. 10(23A)] The entire income shall be exempted except the income derived from the supply of commodity or service other than water and light, outside its own jurisdiction area. (xii) Association or institution for control, supervision etc. of certain professions [Sec. 10(23A)] Any income (other than the income chargeable under the head income from house property, income received from members for rendering any specific services, and income by way of interest or dividends on investments) is not includible in the total income of a professional association, when following conditions are fulfilled. - the association or institution is established in India; - has its object control, supervision, regulation or encouragement of the professions of law, medicines, accountancy, engineering or architecture or any other profession notified for this purpose. - it applies its income or accumulates it for application solely for the object above. - it is for the time being approved for this purpose by the Central Government. (xiii) Trade Unions [Sec. 10(24)] Income under the heads Income from house property and income from other sources of a registered trade union formed primarily for the purpose of regulating the relations between workmen and employer, and between workmen and workmen, as also of trade union formed for the purpose of regulating relations between such trade unions is exempt. (xiv) Universities and other educational institutions [Sec. 10(23C)(iiiab)] The income of any university or other educational institution existing solely for educational purposes and not for purposes of profit is exempt when; - it is wholly or substantially financed by the Government, or - its aggregate annual receipts does not exceeds Rs. 1.00 crore. - in any other case, it is approved by the Director-General (Income-tax Exemptions) subject to further conditions as specified in provisos to Section 10(23C)
An educational trust or other similar body running an educational institution solely for educational purposes and not for purposes of profit would be regarded as other educational institution. (xv) A hospital or other medical institution [Sec. 10(23C)(iiiac)] Any income of a hospital or other institution for; - reception and treatment of, persons suffering from illness or mental defectiveness, or - the reception and treatment of persons during convalescence or persons requiring medical attention or rehabilitation, and existing solely for philanthropic purposes and not for purpose of profit, is exempt if; (a) it is wholly or substantially financed by the Government, or (b) its aggregate annual receipts do need exceed Rs. 1 crore, or (c) it is approved by the Chief Commissioner subject to further conditions specified in provisos to Sections 10(23C). (xvi) Life Insurance Policy Any sum received under a life insurance policy including the sum allocated by way of bonus on such policy this exemption does not apply to any amount received : - Under the scheme referred to in section 80DDA or u/s 80DD or - Under a Keyman Insurance Policy including bonus or - Under an Insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the year exceeds 20% of the actual sum assured. However if the amount is received on the death of a person exemption shall be available. (xvii) Dividend [Sec. 10(34)] Any income by way of dividend referred to in section 115-O. According to section 115-O dividend distributed is taxable in the hand of the company @12.5 plus surcharge @2.5% and not in the hand of shareholder. Dividend includes deemed dividend u/s 2(22)(a) to (d). It is important to note that the exemption is not available for deemed dividend u/s 2(22)(e). (xviii) Other exemptions available to individuals The following amounts received by certain individuals are not includible in the total income of that individual. The amount received in commutation of pension under a pension scheme of the Life Insurance Corporation approved by the Controller of Insurance, or any scheme of other insurer approved by the Insurance Regulatory and Development Authority is not includible in the total income of the individual contributor to the scheme. Scholarships granted to meet the cost of education. Daily allowance received by a member of Parliament of or any committee thereof, any allowance received by him under Members of Parliament (Constituency Allowances) Rules, 1956. Daily allowance received by a member of State Legislature or of any committee thereof and all other allowances received by him by reason of his membership of any State Legislatureor any committee thereof, to the extent notified by the Central Government. The pension received by an individual who has been in service of the Central or State Government and has been awarded Param Vir Chakra, Mahavir Chakra or Vir Chakra or other gallantry awards notified by the Central Government is not includible in his total income. Family pension received by the spouse the child, a parent, brother or sister of such individual in terms of such award, is also exempt. Annual value of any palace or palaces in occupation during the relevant previous year of a Ruler in whose case the annual value of any once palace in his occupation was exempt before the commencement of the Constitution (Twenty-seventh Amendment) Act, 1971, by virtue of the provisions of the Merged State (Taxation Concession) Order, 1949, or the Part B
State (Taxation) Concession Order, 1950 or the Jammu and Kashmir (Taxation Concession) Order, 1958, is not includible in his total income.
*Family pension received by the family members (widow or children) of a member of armed forces and death of such member has occurred in the course of operational duties is exempted, from A.Y. 2005-06.
CHAITABLE OR RELIGIOUS TRUST

1. CHARITABLE PURPOSE : As per Sec.2(15) Charitable Purpose includes. Relief to the poor; Education & medical relief; The advancement of any other object of general public utility. The expression of any other object of general public utility includes any object which will be beneficial to a segment of the society and not necessarily to the whole man kind. But it is important to note that the object should not be for the benefit of specified individuals. If the main object of a chamber of commerce is to promote and protect trade, commerce and industry in India or in any part of India, the said object can be said to be for general public utility. CIT Vs. Andhra Chamber of Commerce (1964) 55 ITR 722 (SC). If the main object of the Chartered Accountants Society is dissemination of knowledge and education of commercial law and tax law for the benefit of society, it can be regarded as general public utility CIT Vs. Jodhpur Chartered Accountants Society, 258 ITR 548 (Raj.). 2. CONDITIONS FOR CLAIMING EXEMPTIONS U/S 11 AND 12 : Income from property held under trust, wholly for charitable and religious purpose shall be exempted. The assessee is required to apply atleast 85% of such income for charitable or religious purposes during the previous year. Assessee can accumulate upto 15% of such income to be utilized for charitable or religious purposes in India at a later date. The income derived from property held under trust wholly for charitable or religious purposes is exempt from tax u/s.11 if it satisfy certain conditions. As per sec.12 any voluntary contributions received by a trust or an institution shall be deemed as income for the purpose of Sec.11. But it exclude corpus donation received with specific direction that the donated amount shall treated as the corpus of the trust. The conditions to be fulfilled are as follows : i) The trust should be registered with the Commissioner of Income-Tax u/s12A. ii) The accounts of the trust for the previous year should be audited if the total income exceeds Rs. 50,000. iii) At least 85% of the income is required to be applied for the approved purposes. iv) The unapplied income and the money accumulated or set apart should be invested or deposited in the specified investments. 3. (SEC. 12A) REGISTRATION OF TRUST : Every trust or institution shall submit an application for registration in the prescribed form (Form 10A) as required u/s. 12A to the Commissioner of Income-tax before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution.
4.
(SEC. 12AA) PROCEDURE FOR REGISTRATION : On receipt of the application, the Commissioner shall call for such documents or information as considered necessary in order to satisfy about the genuineness of activities of the trust or institution. Inquiries can also be made as deemed necessary. After being satisfied about the objects and the genuineness of activities an order shall be passed in writing, registering the trust or institution. If not so satisfied, an order shall be passed in writing, refusing to register. Copy of any such order shall be sent to the applicant. Before an order is passed refusing registration , reasonable opportunity of being heard should be given. The time limit for passing an order u/s. 12AA is six months from the end of the month in which the application is received.
MPORTANT: If a trust or institution has been granted registration and subsequently the commissioner is satisfied that the activities of such trust or institution are not with the object of the trust or institution he shall pass an order in writing cancelling the registration of such trust or institution. Provided that no order shall be passed unless such trust or institution has been given a reasonable opportunity of being heard. 5. APPLICATION OF INCOME : A trust must utilise 85% of its income within the previous year for the objects of trust. A trust can apply its income either for revenue expenditure or for capital expenditure provided the expenditure is incurred for promoting the objects of the trust. If, in any previous year, the income applied to the objects of the trust falls short of 85% of the income derived during that year due to the reason that the whole or any part of the income has not been received during that year, then such income can be applied during the previous year in which the income is received or in the immediately following previous year. If the non-application of income is due to any other reason, then such income can be applied during the previous year immediately following the previous year in which the income was derived. The option to apply the income in the other year as above should be exercised before the expiry of the time allowed u/s. 139(1) for furnishing the return of income. The amount equivalent to 15% of the income of the trust is exempt even if it is not spent for the objects of the trust during the previous year or at the later point of time. Such income can be retained permanently by the trust and still it qualifies for exemption. 15% is required to be worked out after reducing expenses and depreciation directly incurred for earning the income. ACCUMULATION OF INCOME : a) The trust can accumulate or set apart its income for a specified purpose by informing the concerned Assessing officer. However the period for which the funds can be accumulated cannot exceed 5 years. If the income accumulated is not utilised for the specified purpose during the specified period or in the immediately following year, it will be deemed to be the income of the trust for the previous year immediately following the expiry of the specified period. If the trust is unable to apply the accumulated funds for the purpose for which it was accumulated due to circumstances beyond control, the Assessing Officer may allow the application of such funds for other charitable or religious purpose requested for by the assessee in conformity with the objects of the trust. A Charitable Trust is expected to make an application for accumulation of income along with the return of income.
6.
b)
c)
d) 7.
CASES WHEN INCOME SHALL NOT BE EXEMPT U/S. 11 : According to sec.13, in the following cases the income derived shall not be exempt; i) any part of the income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public;
ii)
the income of charitable trust or institution created for the benefit of any particular religion, community or caste. Exception : Trust formed for the benefit of scheduled castes, backward classes, scheduled tribes or women & children.
iii)
any income of a trust used directly or indirectly for the benefit of specified person u/s 13(3) shall be deemed to be income of such trust or institution. If a charitable or religious trust is running an educational institution or a hospital, exemption shall not be denied by reason only that such trust has provided educational or medical facilities to any of these specified persons. However, the value of such education or medical facility shall be deemed to be income of such trust or institution and shall be chargeable to income-tax.
U/s 13(3) Specified person means : a) author or founder of the trust or institution. b) any person who has made a substantial contribution to the trust (total contribution exceeding Rs. 50,000 upto the end of relevant previous year) c) Where such person is a HUF, a member of the family d) any trustee or manager of the institution. e) any relative of above said person. f) any concern in which the above person has a substantial interest. 8. SEC. 11(1A) CAPITAL GAIN : Where a capital asset held under trust is transferred and the whole of the net consideration is utlised for acquiring another capital asset then the entire capital gain is deemed to have been applied for the objects of the trust. If only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utlised exceeds the cost of the transferred asset shall be considered to have been so utilised. SEC. 11 (4) & (4A) BUSINESS INCOME : Income from business by a trust would be eligible for exemption if the following two conditions are satisfied : (i) The business carried on the trust should be incidental to the attainment of the object of the trust. (ii) Separate books of accounts should be kept in respect of such business. 10. SEC. 13A POLITICAL PARTIES : Exempt Income : The following categories of income derived by a political party are exempt. i) income from house property; ii) income from other sources; iii) income by way of voluntary contributions; iv) income from capital gain. Conditions : The above exemption is available only if the following conditions are fulfilled; 1) the political party is registered with the Election Commission of India; 2) the political party keeps and maintains such books of account and other documents as wouldenable the Assessing Officer to properly calculate its income there from; 3) the political party keeps and maintains a record of each such voluntary contribution in excess of Rs. 20,000 and of the name and address of the person who has made such contribution; and the accounts of the political party should be audited.
9.
4)
5)
such political party has to file a report to the Election Commission before the due date for furnishing a return u/s 139 of the Incom-Tax Act.
Problem 1 : A Charitable Public Trust derives income, net of expenses, of Rs. 15,00,000 and corpus donation of Rs. 8,00,000 for the year ending 31.3.2010. It invests the entire corpus donation in Bank Deposits and does not spend at all. It accumulates Rs.10,00,000 out of Rs. 15,00,000 for a specified purpose and informs the Assessing Officer accordingly. Out of the balance a sum of Rs. 1,00,000 is spent for the objects of the Trust. Determine the taxable Income of the Trust for the A.Y. 2010-11. What will be the tax implication if the trust could spent only Rs.7,50,000 of the amount accumulated upto 31.3.2015 and Rs. 1,00,000 during the assessment year 2015-16? Solution : Computation of taxable income of the trust for the Assessment Year 2010-11 Rs. Income - Net of expenses Less : 15% exempt without being spent Balance Less : Accumulated for specified purpose Balance that ought to have been applied for the objects Less : Actual amount spent Taxable income of the trust 15,00,000 (2,25,000) (10,00,000) 2,75,000 1,00,000 1,75,000
The accumulated income of Rs. 10,00,000 for specified purpose can be spent within a period of 5 years or in the immediately following year failing which, it shall be taxed as income of such immediately following year. In this case, if trust spends Rs. 7,50,000 by 31.3.2013 and Rs. 1,00,000 during 2013-14, the unspent amount of Rs. 1,50,000 shall be taxed as income of the previous year 2014-15. Problem 2 : A public charitable trust registered under section 12A of the Income-tax Act, for the previous year ending 31-3-2010, derived gross income of Rs. 16 lakhs, which consists of the following : (Rs. in lakhs) (a) (b) (c) Income from properties held by trust (net) Income (net) from business (incidental to main objects) Voluntary contributions from public 5 4 7
The trust applied a sum of Rs. 11.60 lakhs towards charitable purposes during the year which includes repayment of loan taken for construction of orphan home Rs. 3.60 lakhs. Determine the taxable income of the trust for the assessment year 2010-11. (May, 2003)
Solution : Statement of computation of income of public charitable trust for the Assessment Year 2010-11 Rs. (i) (ii) (iii) Income from property held under trust Income from business Voluntary contributions not forming part of corpus as no specific directions are given 5,00,000 4,00,000 7,00,000 16,00,000 Deduct : (i) 15% of the income of Rs. 16 lakhs accumulated or sent apart (ii) (iii) Amount applied for charitable purposes Rs. 11,60,000 Rs. 11,60,000 3,60,000 Repayment of loan for construction of orphan home also treated as application
2,40,000 8,00,000 3,60,000 14,00,000 2,00,000
Taxable Income
INCOME UNDER THE HEAD

SALARY
4 5. Salary from more than one sources : If an individual works with two employers on part time basis, salary from both the employer will be chargeable to tax under this head. Salary income must be real and not fictitious : There must be an intention to pay and receive salary. Example : In order to comply with the requirement of Board of Education Rules, there was an agreement between the assessee, a school teacher and school granting a certain salary to the assessee and simultaneously there was another agreement by which identical sum was to be returned by the assessee to school it cannot treated as salary. Salary and Wages : Conceptually no difference. Both are taxed under this head. Place of accrual of salary income is important : Golden rule is that salary will be deemed to accrue or arise at a place where services are rendered. Exception : In case of a citizen of India who is a Govt. employee and renders any service outside India. Salary received by him would be treated as Income deemed to accrue or arise in India, although services are rendered outside India.(sec 9) 8. Surrender of Salary to the Central Govt. : Not taxable. 9. Foregoing of Salary : Once salary earned and subsequently there is waiver of the right to receive, it is treated as application of income and therefore is taxable. Period of salary taken into consideration : (a) Salary of Govt. Employee and Semi Govt. employee : 1st March 2009 to 29th Feb. 2010. As govt. employees salary is due on the first day of the next month. (b) Non Govt. Employee : 1st April 2009 to 31st March 2010. As private employees salary is due on the last day of the current month. 11. Computation of Salary in Grade System / Pay-Scale :
6. 7.
10.
X joins the service in the grade of 12000-300-13800-400-17800 on 1st June 1999, Compute : Salary for the Previous Year 2009-10 when he is a Private Employee Govt. Employee.
01-06-99 01-06-00 01-06-01 01-06-02 01-06-03 01-06-04 01-06-05 01-06-06 01-06-07 01-06-08 01-06-09 to 31-05-2000 = to 31-05-01 = to 31-05-02 = to 31-05-03 = to 31-05-04 = to 31-05-05 = to 31-05-06 = to 31-05-07 = to 31-05-08 = to 31-05-09 = to 31-05-10 = TOTAL SALARY 12,000 12,300 12,600 12,900 13,200 13,500 13,800 14,200 14,600 15,000 15,400
Pvt. Employee : Govt. Employee : 15,000 2 = 30,000 15,000 3 = 45,000 15,400 10 = 1,54,00015,400 9 = 1,38,600 1,84,000 1,83,600 1,84,000 1,83,600
12.
Contract of Service Vs. Contract for Service : Under Contract of service employer employee relationship exists and the employer can direct and control the work required to be done by employee. Where as under contract for service the contractee can at best specify the work required to be done and it is left to the contractor to decide the details of his work. Thus income earned out of contract of service is taxed under salary head and income earned out of contract for service is taxable under the head business or profession.
Deduction from Salary : Certain sum are usually deducted by the employer from the salary of the employee acccording to law or agreement, e.g. P.F., E.S.I. contribution, payment of Income Tax & Life Insurance Premium the above deductions are treated as application of income by the employee, hence the deduction so made by the employer will be added back to the salary actually received by the employee for the purpose of income tax. Example : Net salary Rs. 80,000/- after deduction of tax at source Rs. 10,000/- contribution to Recognised Provident Fund Rs. 9,000/- and rent of bunglow @10% of salary. 14. Definition of Salary : Section 17(1) gives an inclusive definition of Salary. Salary includes : (i) wages; (ii) annuity or pension; (iii) any gratuity; (iv) any fees, commission, perquisit (refer para 7) or profit in lieu of or in addition to any salary or wages. (v) any advance of salary (vi) any payment received by an employee in respect of any period of leave not availed by him; (vii) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax. (viii) the aggregate of all sums that comprised in the transferred balance of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax. (ix) *the contribution made by the Central Govt. in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. 15. Definition of Profits in lieu of salary : Section 17(3) gives an inclusive definition of Profits in lieu of salary. As per this definition it includes : (i) compensation; (ii) payment from an unrecognised provident fund or an unrecognised superannuation fund (iii) payment under Keyman Insurance Policy. (iv) Any amount due or received before joining or after cessation of employment. (v) any other sum received by the employee from the employer, if not exempted under section 10 to 10(13A)
13.
16.
Deductions (sec.16) The income chargeable under this head shall be the computed after giving the following deduction from gross salary : (i) Entertainmnet allowance section 16 (ii) (ii) Tax on employment/Professional Tax section 16 (iii) (B) Practical Part : COMPUTATION OF INCOME FROM SALARY S.No. Particulars U/S Amount 01. Basic Salary, Advance Salary, Arrears of Salary, Annuity 17(1) Remuneration for extra work, foregoing of Salary. 02. Bonus Fees Commission do 03. Gratuity do Less : Exemption u/s 10(10) 04. Pension do Less : Exemption u/s (10A) 05. Encashment of Leave do Less : Exemption u/s 10(10AA) 06. (A) Employer contribution to Recognised Provident Fund do Less : Amount not taxable (B) Interest credited to Recognised Provident Fund do 07. Perquisites/Facilities (Valued as per Rule 3) 17(2) 08. Allowances do Less : Exemption u/s 10(13) to 10(14) 09. Compensation do Less : Exemption u/s 10(10B). u/s 10(10C) 10. GROSS SALARY Less : Deductions : (ii) Entertainment Allowance (iii) Professional Tax TAXABLE SALARY 1. 2.
16(ii) 16(iii)
BASIC SALARY, ADVANCE SALARY, ARREAR OF SALARY, REMUNERATION FOR EXTRA WORK, FOREGOING OF SALARY - Entirely Taxable. BONUS, COMMISSION, FEE, EX-GRATIA Bonus, Commission, Fee, Ex-gratia received by an employee is included in his income from salary. Bonus, Salary in lieu of notice is taxed on receipt basis.
3.
GRATUITY Gratuity is paid to an employee as a retirement benefit for his long and meritorious service. Exemptions u/s 10(10) are calculated as under :
Exemption U/S 10(10)
Case (1) Govt. & Local Authority Employee Sec. 10 (10)(i)
Case (2) Employees covered by the Payment of Gratuity Act, 1972 Sec. 10(10)(ii)
Case (3) Other Employees Sec. 10(10)(iii)
Fully Exempt
(a) Actual Gratuity Received Nearest Last Basic + DA Completed Salary (b) 15 Y of ear 26 Service. (NCYS) (c) Rs. 3,50,000 Whichever is lower NCYS : For the purpose of calculating NCYS. More than 6 months shall be taken as a completed year
(a) Actual Gratuity Received completed (b) 1/2 months Average. ears Salary Y of Service (CYS) (c) Rs. 3,50,000 Whichever is lower
CYS : For the purpose of CYS only completed years are taken and fraction of the year whether more or less than 6 months shall be ignored.
Notes : 1. In Case (3) half months salary has to be calculated on the basis of last 10 months average salary immediately preceeding the month in which employee retires. Futher salary for that period includes. Basic salary, dearness allowance if the term of employment so provide and commission based on sales. 2. 3. Completed years of service means : Total period (Present + Past) In case where the employer has received gratuity in any earlier year from his former employer and also received gratuity from another employer in a later year, the limit of Rs. 3.5 lakhs will be reduced by the amount of gratuity exempt from tax in any earlier year. In case of piece rated employee for calculating 15 days salary, daily wages shall be computed on the average of the total wages received by him for a period of 3 months immediately preceding the termination of employment. In case of seasonal employment, Instead of 15 days, 7 days shall be taken.
4.
5.
Illustration 1 : Shri Rajendra Kumar started his service on 1st April, 1974. His salary was fixed in the pay scale of 8,000 500 15,000 with effect from 1st Jan., 2008. He got 50% of his salary as dearness allowance (not considered for retirement benefit) He retired from service from 1st Jan. 2010. He received Rs. 5,00,000 as gratuity calculate his gross salary for A.Y. 20010-11 if he is : (i) (ii) (iii) a Govt employee. an employee of a company an employee of Jodhpur University. Computation of Gross Income from salaries for the Assessment Year 2010-11 Particulars Basic Salary (8,500 10) (8,500 9) Dearness Allowance If Govt. Employee 85,000 42,500 If Company Employee 76,500 38,250 If University Employee 85,000 42,500
Solution :
Gatuity (taxable) Gross Income from Salary
NIL 1,27,500
2,42,548 3,57,298
3,55,500 4,83,000
1. In case of a company, Gratuity Act, 1972 applies, hence exempt gratuity is least of following : (i) (ii) Acutal Gratuity Received Rs. 5,00,000. (Last Basic salary + DA)/26 15 NCYS (8,500 + 4,250)/26 15 35 = 2,57,452 (iii) Rs. 3,50,000 Hence exempt amount is Rs. 2,57,452 and Rs. 2,42,548; (5,00,000 2,57,452) is taxable. 2. In case of University, Gratuity Act, 1972 does not applies. The least of following amount will exempt : (i) (ii) Actual Gratuity received Rs. 5,00,000 1/2 month Average salary CYS = Rs, 1,44,500 (8,500/2 34) (iii) Rs. 3,50,000 Hence Rs. 1,44,500 is exempted and Rs. 3,55,500 (Rs. 5,00,000 Rs. 1,44,500) is taxable.
PROBLEM 1
Q.1
Calculate taxable amount of gratuity for the p.y. 2009-10: (a) (b) (c) (d) (e) Mr. X is a private employee in X Ltd. Date of appointment 1st Jan. 1994. Date of retirement 1st July 2009. Gratuity received on retirement Rs. 2,22,500. Average Monthly salary of last 10 months Rs. 3000.
Answer:
2,00,000.
4. PENSION : Pension is a periodical payment received by an employee after his retirement. Exemptions u/s 10(10A) are calculated as under. Exemption on Pension U/S 10(10A)
Uncommuted Pension or Periodically
Commuted Pension or Lumpsum
Fully Taxable
Govt./Semi Govt. Employees
Non Govt. Employees
Fully exempt Gratuity received Gratuity not received
1/3rd of commuted value of normal pension receivable would be exempt.
1/2 of commuted value of normal pension receivable would be exempt.
Example : Normal pension = 8,000 p.m., 75% Commuted pension received on 01.01.10 at the time of retirement = 1,50,000, Gratuity not received. Calculate taxable pension for P.Y. 2009-10. Solution : Calculation of exemption = 1,50,000 =1,00,000
Calculation of taxable pension = (1,50,000 - 1,00,000) + (75% of 8000) 3 = 56,000
IMPORTANT : Family pension received by the legal heir after the death of the employee is taxable in the hands of the legal heir under the head income from other sources.
PROBLEM 2
Mr. Anuj is a private employee and retired from service on 1st Nov. 2009, he received monthly pension of Rs. 5000 but he received lumsum pension Rs. 1 lac in respect of 75% of his pension on 1st Jan.2010. Calculate taxation amount of pension for the assessment year 2010-2011, assuming: (a) (b) Gratuity is received. Gratuity is not received.
Answer 69306, 47083 5. ENCASHMENT OF LEAVE Any amount received by an employee in lieu of leave is taxable.
Exemption on Encashment of Leave U/S 10(10AA)
During the course of service
At the time of retirement
Central or State Govt. Employee Non Govt. Employee (excluding local authority)
Fully Taxable Fully Exempt
(i) Actually amount received. (ii) Average Salary x Earned Leave period to the credit of employee at the time of retirement. (Note : Earned leave entitlement can not exceed 30 days for a year.) (iii) 10 months Average Salary 10 (iv) Rs. 3,00,000. Whichever is lower.
Note : 1. Average salary is to be calculated on the basis of actual salary drawn immediately 10 months preceding the date of retirement. Salary for thus purpose includes D.A. If in term of retirement benefit and commission based on sales.
IMPORTANT : Leave salary paid to legal heirs of a deceased employee at the time of his/her death is not taxable as salary. (Letter No. 35/1/15 dated 5/11/65)
PROBLEM 3
Ms. Ashi an employee of Reliance Pvt. Ltd retired from company on 01-10-2009 at the time of retirement she received Rs. 1,50,000 as leave salary from her emloyee. (a) (b) (c) (d) (e) (f) (g) Salary at the time of retirement Rs. 10,000 per month. Period of service 25 yrs.6 months. Leave encashment 1,50,000. Leave avail while in service - 15 months. Balance unavail leave at the time of retirement - 20 months. Average monthly salary for the last 10 months prior to retirement Rs. 8,000. Leave entitlement 45 days for every completed year of service.
Compute the amount of taxable leave encashment.
Answer 70,000 Illustration 2 : Determine the amount to be exempted u/s 10(10AA) under following cases. If both the employees are employed in a Public Ltd. Company.
Name of employee Monthly salary at the time of retirement Average salary received during the 10 month ending on Jan. 31, 2010 Duration of service Leave entitlement for every year of service Leave at the credit of the employee at retirement Leave availed in service Leave salary paid at the time of retirement Solution : Computation of Exempt Leave Salary for the Assessment Year 20010-11 Rs. 6,40,000 Rs. 8,80,000 Mr. R Rs. 15,500 Rs. 15,500 26 years 1.5 months 36 months 3 months Rs. 6,40,000 Mr. S Rs. 20,800 Rs. 20,800 30 years 2 months 40 months 20 months Rs. 8,80,000
(a) (b)
Actual Amount received Average Salary Earned leave period 15,500 23 (26 3) = Rs. 3,56,000 20,800 10 (30 20) = Rs. 2,08,000
3,56,500 1,55,000 3,00,000 1,55,000
2,08,000 2,08,000 3,00,000 2,08,000
(c)
Average Salary 10 15,500 10 = Rs. 1,55,000 20,800 10 = Rs. 2,08,000
(d)
Maximum Amount Hence amount exempt u/s 10 (10AA) (i.e. least of (a), (b), (c) or (d)
6.
PROVIDENT FUND OBJECT : Provident fund scheme is a welfare scheme for the benefit of the employees. Under this scheme, certain sum is deducted by the employer from the employees salary as his contribution to the provident fund every month. The employer also contribute a certain percentage of salary of the employees to the P.F. These contribution are deposited or invested. The interest on these investment is also credited to the P.F. account of the employee. The balance thus keeps accumulating year after year. At the time of retirement/ resignation, the accumulated amount is given to the employee. TYPES : (1) Statutory Provident Fund (SPF) : This fund is set up under the provident fund act 1925. The scheme under this act, is mainly meant for Govt. employees/ Semi-Govt. employees/ University/ Educational Institution affiliated to the universities. (2) Recognised Provident Fund (RPF) : RPF scheme is a scheme to which the P.F. Act. 1952 applies. According to P.F. Act. 1952 any person who employs 20 or more employees after three years of its establishment is under an obligation to register himself under the PF Act.1952 and start PF Scheme for the employees in his organisation.
(3) Unrecognised Provident Fund (URPF) : The scheme started by the employer and the employees in an establishment, although approved by commissioner of PF but not approved by the commissioner of Income Tax is called URPF. (4) Public Provident Fund (PPF) : This is a scheme which is covered under public provident fund 1968. Any member of the public, whether in employment or not, may contribute to this fund by opening a provident fund account at any branch of the State Bank of India or its subsidiaries. The basic object of Govt. behind PPF is to mobilize personal saving. The employee can deposit money under PPF. In this scheme there is no employers contribution. The minimum contribution to this fund is Rs. 500/- and maximum Rs. 70,000/ per year. The contribution made to this scheme alongwith interest are repayable after 15 years. (5) Approved Superannuation Fund (ASF) : ASF means Superannuation Fund which has been approved by the Chief Commissioner of Income Tax. It is retirement benefit plan for employees. The basic object is to provide annuities to the employees of the undertaking on their retirement after a specified age. Under this scheme both employer and employee contribute. Treatment of Provident Fund for Income Tax Purpose :
Fund retirement or termination SPF (Statutory Assessee can Provident Fund) U/S 80C -doFully exempt claim rebate Taxable over and above 12% of Salary* Fully exempt U/S 10 Taxable over and above 9.5% p.a. Interest credited Employees Employers contribution Interest on contribution Payment of lump sum provident amount on Fund resignation or Fully exempt U/S 10(ii) U/S 10 Exempt if service for more than 5 years or termination of service because of ill in excess of 9.5% health or p.a. is included in business gross salary employer. - Accumulated employer contribution + interest on employer contribution (till date) is taxable as salary -Accumulated employee contribution is not income but interest on such contribution is taxable in other sources. Fully exempt U/S 10(ii)
RPF (Recognised Provident Fund) discontinuance of or balance
transferred to another URPF (Unrecognised Provident Fund) Assessee can not claim rebate U/S 80C Not taxable in the year of contribution. Not taxable in the year of contribution
PPF (Public Provident Fund)
Assessee can claim rebate U/S 80C
N.A (As only employee contribution and
Fully exempt
employer does not contribute) ASF (Approved Superanmnution Fund) -doFully exempt U/S 10 Fully exempt U/S 10 Generally exempt if payment U/S 10 is on the death of beneficiary to the legal heir or payment is given to employee in lieu of commutation of any annuity on his retirement at or after specified age becoming to such retirement.
or on his incapacitated prior
Notes : 1. 2. 3.
*Salary means Basic Salary + DA. If the term of employment so provide + commission on sales.
Un recognised superannuation fund is treated as point No. 3 URPF. Transferred balance of URPF when it is converted in RPF : URPF will be treated as RPF right from the beginning, contribution by the employer every year in excess of 12 % of his salary (from A.Y.
1998-99) + Interest credited to the provident fund every year in excess of 9.5 % p.a. (from 1.4.2001) shall be aggregated till the date of conversion of the URPF to RPF. This aggregate amount is called Transferredbalance which will be included in the gross salary of the previous year in which conversion took place. Illustration 3 : Mr. Aditya working in ABC Ltd. on a monthly salary of Rs. 15,000. His employer and he both contributed 14.5% of his salary to Recognised Provident Fund. The interest credited to this fund for the previous year @ 13.5% interest amounted to Rs. 6,750. He received following other allowances and a amenities from his employer : (i) Dearness allowance @ Rs. 1,500 per month which is granted to him under the of employment and counted for retirement benefits. (ii) Bonus equal to two months salary. term
(iii) He is entitled to commission @ 1% on sales made by him. Sales effected by him amounting to Rs. 10,00,000. Compute the taxable income from salary of Mr. Aditya for the A.Y. 2010-11. Solution : Computation of Gross Income from Salary of Aditya for the Assessment Year 2010-11 Rs. Basic Salary (15,000 12) Dearness Allowance (1,500 12) Bonus (15,000 2) Commission on sale (10,00,000 1%) Employers contribution to RPF in excess of 12% of salary 2.5% on (1,80,000 + 18,000 + 10,000) Interest credited to RPF in excess of 9.5% (6,750/13.5 4) Gross Income from Salary 5,200 2,000 2,45,200 1,80,000 18,000 30,000 10,000
PROBLEM 4 Calculate gross salary for the A.Y. 2010-11 (a) Basic salary Rs. 4,000 per month. (b) Bonus Rs. 1000 per month. (c) Servant allowance Rs. 500 per month. (d) Education allowance (for two children) Rs. 1000 per month. (e) Employees contribution to provident fund 13% of salary. (f) Employers contribution to provident fund 13% of salary. (g) Interes credited Rs. 10,000 at the rate of 10% Answer: (i) SPF 75600 (ii) RPF 76580 (iii) URPF 75600 7. PERQUISITE SECTION 17(2) : Section 17(2) gives an inclusive definition of perquisite. As per this Section perquisite includes : (i)the value of rent-free accommodation provided (used or not) to the assessee by his employer; (ii) the value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;
(a) (b) (c)
(iii) the value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee): by a company to an employee, who is a director thereof; by a company to an employee being a person who has a substantial interest in the company; by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from, or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000 (Rs. 24,000 upto assessment year 200102). (iv) any sum actually paid by the employer in respect of any obligation on behalf of the employee; (v) any sum payable (not necessarily paid) by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity; (vi) the value of any other fringe benefit or amenity as may be prescribed (Inserted w.e.f. assessment year 2002-03).
Except employee stock option plan proviso to (iii) above;
Note : (a) Definition of Substantial Interest : In relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power. Substantial interest need not be held throughout the previous year. To be specified as a director in the company, the person should also be an employee of the company. However, it is sufficient even if he is the director for just a day. Further it does not matter whether he is a full time or part time or nominal director. For calculation of ceiling of Rs. 50,000, deduction is made for Monetary payments exempt from income tax Entertainment allowance Professional Tax The ceiling is computed with reference to aggregate monetary payments received from all the employers during the previous year.
(b) (c)
(d)
Valuation of Perquisites
1. Rent free accommodation (note-1) 1. 2.Concessional rent accommodation 3. Gas, Light & Water group of employee (not being for Life Assurance & Annuity (other than RPF, ASF and Deposit Linked Insurance Fund) 5. Fringe Benefits as prescribed 4. (note-2) (a)
Perquisites taxable in caseof Specified employee only. (S)
Always Taxable Tax Free Perquisites for (Specified & Non-specified) all employees
Medical facility (note-3) 1. Motor Car facility(note-6) 2. Refreshment (if meals upto Rs.50) 2. Servant facility (note-7) Obligation payments 3. Recreational facility provided to a 3. 4. Employer contribution to employees facility (note-8) restricted to a selected few 4.Education facility(note-9) employees) by employer is 5. Free transport facility not taxable. (note-10) Loan to employee 6. Others 5. Perquisites outside India 6. Training to employees Traveling, Touring, 7. Rent free house & Accommodation, Expenses for any Holidays. (c) Free
(if less than Rs. 20,000) Interest free loan (if more than Rs. 20,000). (b)
conveyance to judge 8. Rent free house to officials meal, tea & snack (if meal above Rs. 50).
to parliament 9. Rent free house in remote area
(d)
Gift voucher or token (if more than Rs. 5,000).
11.Laptops & Computer facility Club membership & expenses. (g) 12.Mobile and Telephone Facility Any other benefit or amenity
10.Educational facility if Less than 1000 p.m. per children (e) Expenses on credit cards (f) by employee or his family members. (h) Transfer of moveable asset (i) deferred annuity scheme and staff group
owned by employer and used Use of movable assets
13.Employers contribution to pension
insurance 14. LTC (note-4) 15.Accident policy taken by employer 16.Employee stock option plan (As per guidelines of CG) 17.TAx on perquisites paid by employer.
Notes : Specified employee means : (i) Director employee (ii) Substantial interest employee (iii) Employee whose income from salary is greater than Rs. 50,000 [Salary means Basic + D.A.+ Bonus + Comm. + Taxable Allowances / Perquisites (excluding benefits of non monetary nature) Standard Deduction Entertainment Allowance Employment Tax.] Obligation payment v/s Perquisites v/s Allowances : Some examples Obligation Payment (Cash & Not Fixed) Entirely taxable U/S 10 Perquisites (in Kind) Valued as per rule 3 Allowance (Cash & Fixed) Exemptions are provided
Reimbursement of house by employer. Gas, Light & Water allowance name of employer. expenses are reimbursed Servant are employed by
House facility provided
House rent allowance rent paid by employee. For Gas, Light & Water connection in the of employee and
Gas, Light & Water connection in the name
Servant are engaged by employee and his salary
Servant allowance. employer & rendering reimbursed.
service to employee. Note - 1 : Valuation of Rent Free Accommodation Valuation
Central/State Govt. Employees
Accommodation not in Hotel
Accommodation in Hotel
In accordance with the When House in rule framed by the Govt.

lower
When House is For Private purpose taken on Lease/ owned by Rent employer
For office purpose 24% of Salary or Fully exempted Actual Hotel Charges Whichever is

15% of Salary or actual amount of lease/rent which ever is lower is valuation
If City Polulation > 25 Lacs 15% of Salary is valuation Other Cities If population 10-25 lacs population - 10% of salary. If population upto10 lacs population - 7.5% of salary.
Points : (i) Salary means = Basic Salary + D.A. (If included for retirement benefits) + Commission based on sales + Bonus, Fees, Commission + Taxable Entertainment Allowance + All Other Taxable Allowance. (ii) (iii) (iv) Accommodation includes House, Flat, Farm House, Hotel, Guest House, Ship, Mobile Home. If employee received salary from more than one employer, the aggregate of the salary received from both employer has to be taken even accommodation has been provided by one employer. The above rule is not applicable in following cases
House in remote area located Off Shore Area House provided at new place of 40k.m. away from town of posting with retaining old house population < 20,000 values
upto 90 days One House
(v)
If furnished house facility First of all valuation of unfurnished house facility will be done as discussed above Add : If employer is owner of furniture 10% p.a. cost of furniture. (Including T.V., Radio, Refrigerator, A.C.) or If such furniture is hired from third party actual hire charges Value of benefit from furnished house facility
Furnished /
(vi)
If concessional house facility Unfurnished valuation as discussed above Less : Concessional amount rent charges Value of benefit from concessional house facility
(vii)
Hotel Accomodation If accommodation is provided for a period not exceeding 15 days at the time of transfer from one place to another. It will not perquisite hence not valued. Otherwise 24% of salary or rent paid.
(viii) If two accommodation are provided at the time of transfer then value of benefit from accommodation will be as follows (a) (b) Till 90 days More than 90 days one accommodations value (accomodation of lower value) of benefit as perquisites
both accommodations value of benefit as perquisites
Illustration 4 : Shri Pramod Batra is the principal of college in Mumbai. He is in the grade of Rs. 12,000 1,000 18,000 since 1st January, 2007. He has been provided with a furnished house by the college, owned by it, of the estimated rental value of Rs. 2,000 per month. Furniture costing Rs. 30,000 has also been provided by the college. He has been given a car of below 1.6 ltr. rating with driver which is used by him for his personal purpose also. The drivers remuneration and all the expenses relating to the official use of the car are borne by the college. Determine his gross taxable salary for the A.Y. 20010-11. Solution :
Computation of Gross Income from Salary of Shri Pramod Batra for the Assessment Year 2009-10 Rs. Basic Salary Rent free house facility 15% of 1,71,000 Add : Cost of furniture (30,000 10/100) Car Facility (400 + 600) 12 Gross Salary Note (1) : Computation of Gross Salary : 1 Jan., 2007 31 Dec., 2007 1 Jan., 2008 31 Dec., 2008 1 Jan., 2009 31 Dec., 2009 1 Jan., 20010 1 Dec., 2010 PROBLEM 5 Calculate taxable value of house facility from the following informationi) ii) iii) iv) Basic salary 10,000 per month Bonus 1,000 per month Commissin 1,000 per month Medical allowance Rs. 1500 per month 12,000 13,000 14,000 9 (month) 15,000 3 (month) = 1,26,000 = 45,000 1,71,000 Rs. 25,650 3,000 28,650 12,000 2,11,650 1,71,000
Employees provided rent free housing facility for which employer pays rent Rs. 2500 p.m. Answer : Rs. 24300
Note - 2 : (a) Interest Free Loans The value of benefit to employee or any member of his household during the previous year shall be determined accordance with rate charged by the State Bank of India as on the first day of the relevant previous year. The different rates of interest charged by the State Bank of India as on 1.4.2009 were as below : Nature of Loan Housing Loan Rate of Interest (per annum) Upto 5 years 9.75%, 10.25% Above 5 years 10%, 10.5% Above 15 years but upto 25yrs 10.25%, 10.75%, 11% Upto 3 years (<7.5 lacs) 11.50% Above 3 years 11.75% Above 5 years 12.00% Upto 4 lacs 11.75% Above 4 lacs but upto 7.5Lacs 13.25% Loan amount above Rs. 7.5 Lacs 12.50% 16.50%
Car Loan
Education Loan
Personal Loan
Exemption if : Loans are petty not exceeding Rs. 20,000/ Loans is for medical treatment in respect of specified disease. (b) Value of traveling, stay and other expenses borne by the employer for holiday availed. Circumstances (i) Where such facility is maintained by the employer employee. (ii) Where the employee is on official tour Value of benefits Value at which such facilities are offered by and it is not available uniformly to all other agencies to the public. Amount of actual expenses incurred. and expenses are incurred in respect of any Expenses incurred for such extended as a vacation. period of vacation. A sum equal to the amount of the expenditure incurred by the employer
member accompanying him. (iii) Where any official tour is extended
(iv) In any other case where such facility given to the employee or any member of his household. Less : Amount paid / Recovered from the employee for such benefit or amenity. (c) Value of free meals, tea and snacks [Rule 3 (7)(iii)] Circumstances Value of Benefit
(i) Tea or snacks provided during office hours. Nil (ii) Free meals during working hours provided in a : Nil (a) Remote area; or (b) an offishore installation. (iii) Fee meals provided by the employer during office hours : (a) at office or business premises; or Nil, If value thereof in either case is (b) through paid vouchers which are not upto Rs. 50 per meal transferable and usable only at eating joints. (iv) In any other case Actual cost to the employer Less : Amount paid or recovered from the employee for such benefit or amenity. (d) Value of any gift, voucher or token [Rule 3 (7)(iv)] Gift voucher or token in lieu of which such gift may be received by employee or by any member of his house hold on ceremonial occasion (like Deepawali, New Year, Anniversary of any organisation) is exempted below Rs. 5,000 p.a. IMPORTANT : Gifts made in cash or convertible into money like gift cheques etc. are taxable. (As per CBDT circular) (e) Expenses on credit card [Rule 3(7)(v)] Circumstance (i) Expenses including membership fees and annual fees charged to a credit card or add on card provided by the employer. Paid or reimbursed by the employer for expenses other than Value of Benefit Amount paid for or reimbursed by the employer Less : amount paid or recovered from the employee
official purpose. (ii) Official purpose Nil
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for official purposes : (a) complete details in respect of such expenditure is maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure; (b) it is certified by the employer that such expenditure was incurred wholly and exclusively for the performance of official duty; (c) the supervising authority of the employee gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties; (d) where an employee incurs expenditure on entertainment and claims the same to have been incurred wholly and exclusively in the performance of his duties, details of such entertainment expenses, inter alia, include the nature and purpose of entertainment and persons entertained. (f) Club membership and expenses incurred in a club Circumstance (i) The payment for reimbursement by the employer of any expenditure incurred (including the amount of annual or periodical pay) in a club by the employee or by any member of his household for any purpose (ii) Where the expenses are incurred wholly and exclusively for official purposes and the conditions specified below are fulfilled. Value of Benefit The actual amount of expenditure incurred or reimbursed by the employer. Less amount paid or recovered from employee.other than official purpose.
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Biyani's Think Tank

Concept based notes

Dr. Sanjay Biyani

Biyani Girls College, Jaipur

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INTRODUCTION, SCHEME AND DEFINITIONS

Net Income Range Up to Rs. 1,90,000 Rs. 1,90,000 - Rs. 3,00,000

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Rs. 3,00,000 - Rs. 5,00,000 Above Rs. 5,00,000

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15,000 Gross Total Income 5,100 5,128

16,000 Total Income Total Income (Round off)

26,228 1,68,772 1,68,770 4,000 3,000

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SCOPE OF TOTAL INCOME AND RESIDENTIAL STATUS

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Taxable Taxable Not Taxable

Taxable Not Taxable Not Taxable

Not Taxable Not Taxable Not Taxable

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do do respect of any rights or property information do do

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18,000 38,000 4,000 10,000

Answer: (i)71,000 Q.2 2010.

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INCOME WHICH DO NOT FORM PART OF TOTAL INCOME

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Rs. 60,00,000 50,00,000 10,00,000 40,00,000 8,00,000

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CHAITABLE OR RELIGIOUS TRUST

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2,40,000 8,00,000 3,60,000 14,00,000 2,00,000

INCOME UNDER THE HEAD

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Exemption U/S 10(10)

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Case (1) Govt. & Local Authority Employee Sec. 10 (10)(i)

Case (3) Other Employees Sec. 10(10)(iii)

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Gatuity (taxable) Gross Income from Salary