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UNIT 3: INCOME TAX

HEADS OF INCOME

Every year people submit their Income Declarations form and submit the documents that are

required. But, not so many know how income tax is calculated. A persons income that

exceeds the maximum amount, is charged income tax at the rate set by the Income Tax

department. It is also based on the residential status of the taxpayer.

The Income Tax Department brings in revenue to the Government. Indian income is always

taxable in India. Foreign income is not taxable for a non-resident but is taxable for the

resident.

Income tax is the tax you pay on your income. Income tax is levied on a person who was in

India for 182 days during the previous tax year or the person who was in India for at least 60

days during the previous tax year and for at least 365 days during the preceding 4 years will

be taxed.

A person’s total income is divided into 5 heads of income. They are:

 Income from salaries

 Income from house property

 Profit and gains of business or profession

 Capital gains

 Income from other sources

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The total income is calculated by clubbing all the income categories. The tax on the total

taxable income (after deductions) is then calculated as per the Income Tax slab rates.

Although the tax laws for income are same, there are different rules for computation of

income. The income from that head is determined after applying that specific set of rules.

INCOME FROM SALARY

Salary includes wages, pension, gratuity, fees, commission, perquisites, provident fund

contribution, leave encashment, Central Governments contribution to pension and

compensation received for a service.

Salary is the remuneration paid by the employer to the employee for the services rendered for

a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual

salary. Salary includes:

 Basic Salary or the fixed component of salary as per the terms of employment.

 Fees, Commission and Bonus that the employee gets from the employer

 Allowances that the employer pays the employee to meet his personal expenses.

Allowances are taxed either fully, partially or are exempt.

o Fully taxable allowances are:

 Dearness allowance paid to the employees to meet expenses due to

inflation.

 City Compensatory allowance paid to those who move to big metros

like Mumbai, Delhi, Chennai, where the standard of living is higher.

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 Overtime allowance paid to the employee who works over the

prescribed hours.

 Deputation allowance and servant allowance.

o Partly taxable allowances are:

 House Rent Allowance: If the employee stays in his own house then

the allowance is fully taxable. The allowance exemption is the least of

 The actual house rent allowance

 If he pays additional rent above 10% of his salary

 If the rent is equal to 50% of his salary (metros) or 40% (other

areas).

 Entertainment allowance (except for Central and State Government

employees).

 Special allowances like uniform, travel, research allowance etc.

 Special allowance to meet personal expenses like childrens

education allowance, children hostel allowance etc.

o Fully exempt allowances are:

 Foreign allowance given to employees posted abroad.

 Allowances of High Court and Supreme Court Judges.

 United Nations Organisation employees allowances.

 Perquisites are payments received by employees over their salaries. They are not

reimbursement of expenses. Some perquisites are taxable for all employees, they are:

o Rent free accommodation

o Concession in accommodation rent

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o Interest free loans

o Movable assets

o Club fee payments

o Educational expenses

o Insurance premium paid on behalf of employees

Some are taxable only to specific employees like directors or those who have

substantial interest in the organisation, they are taxed for:

o Free gas, electricity etc. for domestic purpose

o Concessional educational expenses

o Concessional transport facility

o Payment made to gardener, sweeper and attendant.

Some perquisites are exempt from tax. The fringe benefits that are exempt from tax

are:

o Medical benefits

o Leave travel concession

o Health Insurance Premium

o Car, laptop etc. for personal use.

o Staff Welfare Scheme

 Retirement benefits are given to employees during their period of service or during

retirement.

o Pension is given either on a monthly basis or in a lump sum. The tax is treated

depending on the category of the employee.

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o Gratuity is given as appreciation of past performance which is received at the

time of retirement and is exempt to a certain limit.

o Leave salaries tax depends on the category of the employee. The employee

may make use of the leave or encash it.

o Provident fund is contributed by both employee and employer on a monthly

basis. At the retirement, employee gets the amount along with interest. Tax

treatment is based on the type of provident fund maintained by the employer.

Taxes for salaried individuals

The Budget of 2018 has seen some much anticipated changes being ushered in by the

Finance Minister, Arun Jaitley along with the Indian Government. Be that as it may, Arun

Jaitley has not touched the existing Income slabs and rates nor has he affected Section 80C,

with regard to raising the basic exemption limit for taxpayers. People falling into the salaried

category might have been disappointed at the start but new advancements are sure to change

the game for them.

With the proposal to re-establish the Rs.40,000 standard deduction, the Government has

efficiently negated the transport allowance and medical expenses from the earlier tax rules.

This deduction will henceforth act as an extra income exemption of the amount of Rs.5800.

Let us illustrate this with an example:

Gross Income in Rs. Rs.5,00,000 Rs.5,00,000

Transport Allowance Deduction Rs.19,200 N/A

Medical Allowance Deduction Rs.15,000 N/A

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Standard Deduction N/A Rs.40,000

Net Income Rs.4,65,800 Rs.4,60,000

In the above equation, note that the total taxable income amount has significantly gone down

with the introduction of the new standard deduction.

A. What the term ‘’salaried income’’ means?

Dictionary meaning: Usually a form of earning or profit, provided by an employer to his/her

employee. This generally comes in the form of an incentive in addition to the regular pay.

This amount of money, defined as salary is the right of an employee for rendering his/her

services to the employer.

Meaning as per the guidelines of the Income Tax Department: Section 17 (2) of the Income

Tax Act, 1961, defines salary as the worth of an accommodation that is free of rent, from an

employer to an employee.

B. Are allowances fully taxable?

Most often than not, salaried individuals are faced with the dilemma of determining which

allowances will be taxable and which will not be taxable, and also consider the kind of

implications that the tax liability might bring in.

Companies and organisations often provide allowances to their employees that are of a

specified nature or for a specific cause. The primary and the most important thing to do here

is to check the nature of the allowance offered. The mannerisms of allowance disbursement

and its nature are the two most important elements to consider here. Primarily, an individual
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must know the difference between reimbursements offered on expenses such as conveyances

and a basic allowance. It is vital to understand that reimbursements are always tax-free since

it is just a mere amount that is being returned by the employer upon expenses incurred by the

employee for certain services/products. Whereas, if the amount of money offered comes in

the form of an allowance, it will be subject to taxation, unless the company declares it tax-

free.

Other allowances such as leave travel allowance and children’s allowance usually enjoy tax

benefits upto a certain extent, beyond which they are taxed. This is wholly dependent on the

way the individual chooses to spend the amount that is offered as an allowance.

Carefully determine and segregate your allowances in order to ascertain which are taxable

and which aren’t.

C. Salary Income Deductions

There are a handful of deductions that are allowed under salaried income. These vary in

nature from perquisites and profits.

Earlier, under Section 16 of the Income Tax Act, 1961, a standard deduction was allowed to

salaried professionals. However, it was discontinued from the assessment year 2005-06.

D. Allowance for entertainment

A deduction of Rs.5000 is offered as an entertainment allowance while computing the gross

salary of an individual. It is one of the primary elements that is taken into consideration while

gross salary is calculated. However, this provision can only be enjoyed by Government

officials.

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E. Section 16(ii) of the Income Tax Act, 1961

According to Section 16(ii) of the Income Tax Act, if an employee is receiving an

entertainment allowance, the amount will first be dished out along with the basic salary of the

person. Thereafter, will it be considered for deduction. This particular allowance will occupy

one-fifth of the person’s salary and will be totally exclusive of other allowances and benefits.

Payment of Professional Tax by the employer: The Central and State Government levies a

certain tax, known as professional tax, on individuals having salaried incomes, trades,

employment and callings. This professional tax amount does not surpass Rs.2500 in a year.

According to Section 16(ii) of the Income Tax Act, 1961, a taxpayer has complete authority

to claim a tax deduction with respect to the professional tax that he/she is paying to his/her

employer. However, this deduction will only be allowed on the same year as the taxpayer

pays the tax. An overdue professional tax cannot be considered for deduction, whatever the

case may be.

Calculating Employee’s Net Pay

What does the term ‘’net pay’’ mean?

The portion of money received by an employee after the total amount has been withheld for

state and federal tax deduction is fundamentally what ‘’net pay’’ stands for. Therefore, to put

it in layman’s terms, the amount of money that comes in an individual’s paycheck is what net

pay is.

How to calculate an employee’s net pay?

1. Begin with your gross salary: Gross salary is essentially a salaried employee’s total

yearly pay divided by the number of periods.

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2. Federal Income Tax Deduction: The tax bracket under which the employee falls and

his/her status of filing are the two elements that determine the withholding of the

federal income tax of the employee.

3. Local and State withholding deductions: Consider all the sources of your income

because this part is a little tricky. Since each state operates by their own standards and

norms, you may have to deduct income tax for multiple states (according to their

rates), if you have income coming in from multiple states.

4. FICA taxes are to be withheld

5. Take into consideration any other deduction that you may be allowed before

computing your total net salary.

Taxable Income for Salaried Employees

The amount of your income that will be subjected to Income Tax deductions is essentially

what taxable income stands for. Although most of the incomes are taxed according to the tax

bracket that the individual falls under, it is important to note that sometimes certain incomes

are partially taxable or not taxable at all.

Allowances that are wholly taxable - Dearness allowance, city compensatory allowance (only

concerns people moving to or living in metros like Delhi, Mumbai, Chennai and Kolkata),

and OA (overtime allowance)

Allowances that are partially taxable - These include House Rent Allowance (HRA), other

allowances and entertainment allowance.

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Allowances that are tax-free - This category comprises of foreign allowances (concerning

personnels operating from a different country altogether), allowances enjoyed by supreme

and high court judges and so on.

Given below is an example of a structure of a salary to grasp a better understanding of

taxable and non-taxable income.

Yearly Salary that is Taxable Salaried Income Tax exemption Total Taxable Income

Basic Pay Rs.8,00,000 N/A Rs.8,00,000

House Rent Allowance Rs.3,00,000 Rs.1,72,000 Rs.1,28,000

Conveyance Allowance Rs.96,000 Rs.19,200 Rs.76,800

Other Allowances Rs.60,000 N/A Rs.60,000

LTA (leave travel allowance) Rs.20,000 Rs.12,000 Rs.8000

Medical Expenses Rs.15,000 Rs.15,000 N/A

Total Gross Salary Rs.12,91,000 Rs.2,18,200 Rs.10,72,800

Calculate Taxable Income on Salary

It is essential to gather all the details required to file your income tax returns before

computing your taxable income on salary. You will then have to calculate your total taxable

income, followed by the calculation of final tax refundable or payable. To calculate the final

tax, you will have to use the applicable tax rates before subtracting taxes already paid

through advance tax or TCS/ TDS from the tax amount due.

The income tax regulations allow individuals to derive income from five sources, viz.

Income from Salary, Income from Business or Property, Income from Capital Gains, Income

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from House Property, and Income from Other Sources. Each income derived by an individual

must fall under one of the aforementioned categories.

Following is the procedure for the calculation of taxable income on salary:

1. Gather your salary slips along with Form 16 for the current fiscal year and add every

emolument such as basic salary, HRA, TA, DA, DA on TA, and other

reimbursements and allowances that are mentioned in your Form 16 (Part B) and

salary slips.

2. The bonus received during the financial year must be added for the income that is

being calculated.

3. The total is your gross salary, from which you will have to deduct the exempted

portion of House Rent Allowance, Transport Allowance (for which the maximum

exemption is Rs.19,200 per year), Medical reimbursement (for which the maximum

exemption is Rs.15,000), and all other reimbursements provided the actual bills in

respect of the expenses incurred.

4. The result is your net income from salary.

Once your net income has been calculated, the following tax slabs will be applicable:

For individuals who are under 60 years of age:

Education Secondary and Higher

Net Income Income Tax Rate
Cess Education Cess

Up to Rs.2.5
Nil Nil Nil
lakhs

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Education Secondary and Higher

Net Income Income Tax Rate
Cess Education Cess

Rs.2.5 lakhs to 5% of (Total income – Rs.2.5 2% of income

1% of income tax
Rs.5 lakhs lakhs) tax

Rs.5 lakhs to Rs.25,000 + 20% of (Total 2% of income

1% of income tax
Rs.10 lakhs income – Rs.5 lakhs) tax

Above Rs.10 Rs.1,12,500 + 30% of (Total 2% of income

1% of income tax
lakhs income – Rs.10 lakhs) tax

For individuals who are between 60 and 80 years of age:

Education Secondary and Higher

Net Income Income Tax Rates
Cess Education Cess

Up to Rs.3 lakhs NIL Nil Nil

Rs.3 lakhs to 5% of (Total Income – Rs.3 2% of income

1% of income tax
Rs.5 lakhs lakhs) tax

Rs.5 lakhs to Rs.10,000 + 20% of (Total 2% of income

1% of income tax
Rs.10 lakhs income – Rs.5 lakhs) tax

Above Rs.10 Rs.1,10,000 + 30% of (Total 2% of income

1% of income tax
lakhs income – Rs.10 lakhs) tax

For individuals who are above 80 years of age:

Education Secondary and Higher

Net Income Income Tax Rate
Cess Education Cess

Up to Rs.5 lakhs Nil Nil Nil

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Education Secondary and Higher

Net Income Income Tax Rate
Cess Education Cess

Rs.5 lakhs to 20% of (Total Income – Rs.5 2% of income

1% of income tax
Rs.10 lakhs lakhs) tax

Above Rs.10 Rs.1 lakh + 30% of (Total 2% of income

1% of income tax
lakhs income – Rs.10 lakhs) tax

Deductions on Income from Salary:

The following deductions are available on the income from salary:

 Entertainment tax is allowed as deductions for the State and Central Government

employees. The amount is the least of either Rs.5,000, entertainment allowance

received by the employee or 20% of the basic salary.

 Professional Tax is the tax on employment which is deducted from the income every

month. It is imposed at the state level for every salaried individual.

Please note that the standard deduction is not available for salary income from Assessment

Year 2006-2007.

Computation of the Net Salary of an Employee:

Here is how the Net salary of an employee is computed:

Particulars Amount (In Rs.)

Add:

[Link] Salary

[Link], Commission and Bonus

[Link]
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[Link]

[Link] Benefits

-------------------

Gross Salary -------------------

Less: Deductions from Salary

[Link] Allowance

[Link] Tax

-------------------

Net Salary -------------------

For computing Total income from various sources, the incomes are classified into:

A. Salaries

B. Income or loss from property

C. Profit and gain from business

D. Income from capital gains

E. Income from other sources

This gives you an aggregate income. All the eligible deductions, allowance and reliefs are

calculated on each heads.

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

Total Taxable Income= Gross Total Income- Deductions allowed from income

Total Tax Payable= Tax on Total Income- Rebates and relief allowed under Income Tax Act

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The tax rate is based on the salary slab that the person falls under. The entire taxable income

is then divided into the following 4 parts. These are the rates at which tax will be calculated

for the year 2015- 2016:

1. For an individual who is less than 60 years of age; total taxable income:

o Up to Rs.2.5 Lakhs: No Tax is charged.

o Rs.2.5- Rs.5 Lakhs: 10% of the amount exceeding Rs.2.5 Lakhs is charged.

o Rs.5 - Rs.10 Lakhs: Rs.25,000 + 20% of the amount exceeding Rs.5 Lakhs is

charged.

o Above Rs.10 Lakhs: Rs.1,25,000 + 30% of the amount exceeding Rs.10

Lakhs is charged.

2. For an individual above 60 years but less than 80 years; total taxable income:

o Up to Rs.3 Lakhs: Tax is not levied.

o Rs.3 - Rs.5 Lakhs: 10% of the amount exceeding Rs.3 Lakhs is charged.

o Rs.5 - Rs.10 Lakhs: Rs.20,000 + 20% of the amount exceeding Rs.5 Lakhs is

charged.

o Above Rs.10 Lakhs: Rs.1,20,000 + 30% of the amount exceeding Rs.10

Lakhs is charged.

3. For individual above 80 years of age; the taxable income:

o No tax is charged for taxable income up to Rs.5 Lakhs.

o Rs.5 - Rs.10 Lakhs: 20% of the amount exceeding Rs.5 Lakhs is charged.

o Above Rs.10 Lakhs: Rs.1,00,000 + 30% of the amount exceeding Rs.10

Lakhs is charged.

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In addition to these tax rates, you are also charged a surcharge. Also, a 2% education cess is

charged on the total tax and surcharge amount.

FAQs:

1. What is taxable income?

Taxable income or gross income or adjusted gross income includes salaries, wages,

bonuses, etc. along with unearned income and investment income. It is the amount

that will be used to determine your tax liability.

2. What kind of income is subject to income tax?

The Income Tax Act, 1961, has classified income into five heads. They are as

follows:

o Income from salary

o Income from capital gains

o Income from profession or business

o Income from house property

o Income from other sources

3. What does income from salary cover?

The components of salary include dearness allowance, travel allowance, house rent

allowance, and other reimbursements and allowances.

4. Do I have to pay tax on the gifts I receive?

In case you receive a gift that is worth more than Rs.25,000, you will be liable to pay

tax on it unless you get the said gift from a relative, or if you get the gift on the

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occasion of your wedding. Even gifts received under a will or through inheritance are

exempt from tax.

5. What is considered as income from other sources?

Income from other sources includes interest income, taxable gifts, dividend income,

etc.

F. Income from Salary

G. As per Section 15, Salary consists of the following : a) any salary due from

an employer or former employer to an assessee in the previous year, whether

actually paid or not; ( Normal salary ) b) any salary paid to him in the

previous year by an employer or a former employer though not due or before

it became due to him. ( Advance Salary ) c) any arrears of salary paid to him

by employer or former employer, if not charged to income tax for any earlier

previous year. ( Arrears of Salary ) INCOME FROM SALARY Basis of

Charge [Section 15 ]

Relationship between Payer and Payee.

Salary and wages, conceptually not different. Salary from more than one Source. Salary

from former, present or prospective employer. Salary income must be real and not fictitious.

Foregoing of salary. Taxable. Surrender of Salary [ under Voluntary Surrender of Salaries

(Exemption from Taxation) Act,1961. ] Tax free Salary Voluntary payments by Employer.

Key Points : Salary Income

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Once salary is taxed on receipt/due basis, it will not be charged again on falling due or

receipt basis, as the case may be. The assessee can claim relief u/s 89(1) for arrears or

advance salary. Loan from employer is not salary & not taxable, as it is advance against

salary & not advance salary. Partner is not an employee of Firm, hence any salary, bonus

commission or remuneration received by him, is not taxable as Salary, but taxable as

Business Income. System of Accounting followed by an employee is irrelevant.

As per Sec 17(1), Salary includes the following : a) Wages, b) Any Annuity or Pension, c)

Any Gratuity, d) Any Fees, commission, perquisites or profits in lieu of or in addition to

salary/wages, e) Any Advance Salary, f) Leave Salary, g) Annual accretion to the Provident

Fund to the extent it is taxable, h) Contribution made by the Central Govt or any other

employer to the account of employee under a pension scheme referred to in Sec.80CCD.

Definition : Salary [Sec 17 (1) ]

Computation of Income From Salary

Particulars Amount (₹) Amount ( ₹)

Basic Salary ..........

Allowances ..........

Profit in lieu of Salary ..........

Perquisites ..........

Gross Salary ..........

Less : Deduction

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u/s 16 a. Entertainment Allowance [ u/s 16(ii) ] .........

b. Professional Tax [ u/s 16 (i) ] .........

TOTAL INCOME FROM SALARY .........

Entertainment Allowance [Sec 16 (ii) ] :

Only Govt employees can claim following deduction :-

a) Actual Entertainment Allowance.

b) 1/5TH of Salary........[ Here, Salary = Basic Pay ]

c) Rs.5000/- Whichever is lower. 2) Professional Tax [Sec 16 (iii) ] : Deduction is available

in the year in which professional tax is actually paid. If employee have paid professional tax

of more than one year then entire [Link] so paid is allowed as deduction. If [Link] is

reimbursed by the employer then it will first added as perquisite ( in case of all employees,

whether specified or not & then allowed as deduction) Deduction from Salary [Sec 16 ]

Specific Exemptions from Salary

1. GRATUITY [ Sec 10 (10) ] Particulars

Exemption:

1. Gratuity Received by Govt & Local Authority employees. Fully Exempt

2. Gratuity in case of employees covered by Payment of Gratuity Act,1972. (Here, Salary

means, = Basic + DA entire ) Lower of following, a. Actual Gratuity b. ₹ 10,00,000/- c.

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Salary last drawn x [15/26] x completed years of service or part thereof in excess of 6

months.

3. Gratuity in respect of other employees. (Here, Salary means, = Basic + DA, if terms of

employment so provide + Commission, if based on fixed % of turnover.) Lower of following,

a. Actual Gratuity b. ₹ 10,00,000/- c. Salary last drawn x [15/30] x completed years of

service. { ignore fraction. Only completed years to be taken, even more than 6 months not to

be considered.}

Gratuity received during continuation of service is Fully Taxable.

Maximum exemption available under this section during life time of the assessee cannot

exceed ₹ 10,00,000/-

Completed year of service include period of service under current employer as well as

previous employer ( if no gratuity has been received from former employer at that time. )

---------- Specific Exemptions.

GRATUITY [ Sec 10 (10) ] key points

Specific Exemptions from Salary

Pension [ Sec 10 (10 A) ] Sr Particulars Exemption

1. Commuted Pension received by Govt employees Fully Exempt

2. Commuted Pension received by Non-Govt employees :

If Such employees receives Gratuity : 1/3rd of Commuted Value of Pension is exempt.

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If Such employees does not receives Gratuity: ½ of Commuted Value of Pension is exempt.

3. Uncommuted Pension received by ALL employees Fully taxable as Salary.

Specific Exemptions from Salary

Leave Encashment [ Sec 10 (10 AA) ]

Exemptions:

1. Leave Encashment received by Govt employees (State + Central Govt )at the time of

retirement. Fully Exempt

2. Leave Encashment received at the time of retirement by Other employees. (Here, Salary

means, = Basic + DA, if terms of employment so provide + Commission, if based on fixed %

of turnover.) Lower of following is Exempt : a. Actual Leave Encashment. b. Maximum ₹

3,00,000/- c. Avg. Monthly Salary x 10 d. Avg. Monthly Salary x earned leave months.

3. Leave Encashment received during continuous of Service. Fully taxable as salary.

Calculation of earned Leave:

a. No. of Years in Actual Service

b. No. of leave entitlement for each completed year of service as per rules of employer

(subject to 30 days)

c. Gross total leave ( in days ) ( a x b )

d. Less Leave encashed & availed ( in days )

e. Period of earned leave ( in days )

f. Period of leave in month ( e/30 days) Last 10 months average salary shall be considered

from the date of immediately before the date of retirement. (for e.g. if employee retired on

15th Sept 2013, then last 10 months will be considered from 15th Nov 2012 )

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Maximum leave of Rs.3,00,000/- will be reduced by amount of leave encashment exempted

under section 10(10AA) from previous employer.

Leave Encashment received by legal heirs of deceased employee also covered for exemption

on compassionate grounds. ( CBDT Ciruclar ) Specific Exemptions..

Leave Encashment key points

Specific Exemptions from Salary

House Rent Allowance [ Sec 10 (13A) ]

Exemptions:

In case of all employees (Here, Salary means, Basic + DA, if terms of employment so

provide + Commission, if based on fixed % of turnover.) Lower of following is Exempt : a.

Actual HRA Received. b. Rent paid in excess of 10% of Salary c. 40% of Salary [ 50% if

house situated at Delhi ,Mumbai, Kolkata & Chennai )

Specific Exemptions from Salary

Retrenchment Compensation [ Sec 10 (10 B) ]

Exemption 1 Compensation received at time of retrenchment is exempt from tax to the extent

(Here, Salary means, Basic + DA, if terms of employment so provide + Commission, if based

on fixed % of turnover.) Lower of following is Exempt : a. Actual Amount Received. b.

Maximum Amount ₹ 5,00,000/- c. 15 days average pay for every completed years of

continuous service or any part in excess of six months.

Compensation under V.R.S. [ Sec 10 (10C) ]

Exemption 1 Compensation received at time of Voluntary Retirement Scheme ( VRS ) is

exempt from tax to the extent Lower of following is Exempt : a. Actual Compensation

Received. b. Maximum Amount ₹ 5,00,000/-

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ALLOWANCES :-

Allowance is generally defined as a fixed quantity of money given regularly in addition to

salary for the purpose of meeting some particular requirement connected with the services

rendered by the employee or as compensation for unusual conditions for that service. It is

fixed, pre- determined and given irrespective of actual expenditure. Under the Act, it is

taxable under Sec 15 on due or receipt basis, whichever is earlier irrespective of the fact that

it is paid in addition to or in lieu of salary. Tax treatment of different allowances is given

below

FULLY TAXABLE IN ALL CASES :- City compensatory Allowance Fixed Medical

Allowance Tiffin/Lunch/Dinner/Refreshment Allowance. Servant Allowance Dearness

Allowance Project Allowance Overtime Allowance. Interim Allowance Any other Cash

Allowance.

OTHER ALLOWANCES WITH EXEMPTION LIMIT :-

Exemption Limit:

1. Children Education Allowance Rs.100/- pm per child. Max 2 Children.

2. Children Hostel Exp Allowance Rs.300/- pm per child. Max 2 Children.

3. Tribal Area Allowance Rs.200/- pm

4. Transport Allowance (between residence & office) Rs.800/- pm; Rs.1600 pm for

blind/handicapped.

5. Transport Allowance for transport employee (During the course of transport ) Least of

70% of Allowance or Rs.10000/- pm

6. Underground Allowance Rs.800 pm

7. Compensatory Field Area Allowance Max Rs.2600 pm

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8. Compensatory modified Hill Area Allowance Max Rs.1000 pm

9. Special Compensatory hill area or high altitude Rs.300 to Rs.700 pm allowance etc.

10. Border Area, Remote Area, Disturbed Area allowance Rs.200 to Rs. 1300 pm

11. High Altitude allowance (Non- Congenial climate ) Rs.1,060 pm ( Altitude for 9000 to

15000 ft ); Rs.1600 pm ( above 15000 ft )

12. Special Compensatory for highly active filed area allowance to member of armed force

Max Rs.4,200 pm

13. Island allowance to member of armed force Max Rs.3250 pm

14. Counter Insurgency allowance Max Rs.3900 pm

PERQUISITES :-

 Perquisites may be defined as benefits attached to an office or position in addition to

Salary or Wages.

 Perquisites may be provided in cash or in kind.

 Perquisites are included in salary only if they are received by an employee from his

employer ( may be former, present or prospective.)

 Perquisites received from a person other than employer, are taxable under the head

“PGBP” or “IOS”. A benefit or advantage would be taxable as perquisites only if it

has legal origin. As unauthorised advantage taken by an employee, without

employer’s authority would create a legal obligation to restore such advantage, it

would not amount to perquisite taxable under the Act.

Specified Employees :- [u/s 17(2)(iii) ]

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Specified employees mean, a) Director employee, or b) Employees having 20% or more

voting rights in employer company, or c) Employee having salary more than Rs.50,000/- p.a.

( Here, salary means all taxable benefit after deduction u/s 16) Notes : 1) Certain Perquisites

are taxable in the hands of ALL employees 2) Certain Perquisites are taxable in the hands of

Specified employees only. 3) Any employee, other than a specified employee, is a “non-

specified employee”. 4) However, now-a-days, this classification does not have much

practical utility, because of Salary norms of Rs.50000/- p.a.

LIST OF PERQUISITES :-

Rent Free Accommodation or Concessional Accommodation. 2. Domestic Servants 3.

Supply of Gas, Electricity & Water 4. Free or Concessional Education Facilities 5. Leave

Travel Concession 6. Interest Free Loans 7. Use of Movable Assets 8. Sale of Movable

Assets 9. Medical Facilities 10. Perquisite of Motor Car 11. Employee Stock Option Plan

(ESOP)

Valuation Unfurnished Rent Free Accommodation : Rent Free Accommodation (Sec 17

(2)(i) ) Central/State Govt Employees Rent as per Govt Rules Other than Govt Employees

Accommodation Owned by Employer Population of City, upto 10 Lacs Taxable Value,

7.50% of Salary Population of City, Between 10 Lacs to 25 Lacs Taxable Value, 10% of

Salary Population of City, above 25 Lacs Taxable Value, 15% of Salary Accommodation is

taken on Lease/Rent by Employer Perquisite is Lower of below a) 15% of Salary b) Rent

paid by employer

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Valuation Furnished House :-

If the furniture is provided then 10% p.a. Cost of furniture or actual hire charges if taken on

rent shall be added with unfurnished house. Here, Salary means Salary = Basic + DA, (if

terms of employment so provide) + Bonus (Current year) + Commission + taxable portion of

all allowances + Any monetary payments which is chargeable [ but not to include perquisites

u/s 17(2) ] Rent Actually paid by employee will be reduced from the perquisite.

Valuation of Hotel Accommodation... :- Valuation in respect of Hotel Accommodation :

Accommodation in a Hotel (other than provided for a period of not exceeding 15 days on

transfer ) Least of the following it taxable, a) Actual Rental Charges or, b) 24% of Salaries.

( if some part is paid by employee, that will be deducted.)

Rent free Accommodation when NOT chargeable.. :- [ Rule 3(1) ]

The value of perquisite shall be NIL in case of * Judges of High Courts. * Judges of Supreme

Courts. * Union Ministers. * Opposition Leader. * Official in Parliaments. * Where the

temporary accommodation is provided to an employee working in mining site or project

execution site or a dam site or power generating site or offshore site.

Domestic Servants :- [ Sec 17(2)(iii) - Rule 3(3) ]

Servant Appointed By Servant’s Salary Paid By Value of Perquisite Taxable in the Hands of

Any one (Employer or Employee) Employer Actual Cost on Servant ALL employees. Any

one Employee Nil --

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Supply of Gas, Electricity & Water :- [ Sec 17 (2) (iii) - Rule 3(4) ]

Valuation Payment by Employer to the Agency Actual Cost Incurred 2 Supply out of Own

Source Manufacturing Cost incurred by an employer ( based on per unit basis )

Valuation of Educational Facilities :-

Facilities Provided to Value of Perquisites Taxable in the Hands of.. Provided in the School

Owned by Employer Provided in Any other School Children Cost of such education in

similar school. (An exemption of Rs.1000/- pm per child is available) Cost of such education.

(An exemption of Rs.1000/- pm per child is available) Specified Employees Other

Household member Cost of such education in similar school. Cost of such education.

Specified Employees

Leave Travel Concession :- [ (Sec 10 (5) ]

Leave Travel Concession received by or due to an employee for himself and his family in

connection with his proceeding on leave or on retirement or termination of service to any

place in India is exempt. ( Subject to condition laid down by CBDT) Amount of Exemption

Journey is by Air Amount of Economy Class Fare of the National carrier by the shortest

route. Journey is by Rail Amount of Air Conditioned First Class Fare by Shortest route.

Other mode of Transport ( Where rail is there ) Amount of Air Conditioned First Class Fare

by Shortest route. Other mode of Transport ( Where rail or public transport is not there ) First

Class or Deluxe Class Fare by the Shortest route of the Public Transport

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Leave Travel Concession :- Key points

The exemption is available twice in block of four Calendar Years. (Relevant blocks :

Jan’2010 to Dec’2013, Jan’2014 to Dec’2017.) In case such travel concession is not availed

by the individual during any such block of four calendar years , he can avail concession in

first year of next block. ( Carry Forward Facility). The exemption is available in respect of

Fare only. Family include, Spouse, Children of Individual. The Parents, brothers & sisters

of Individuals are also included, provided wholly or mainly dependant on him. Exemption

is available for two children born after 1.10.1998. (in other words, exemption will be

available for ALL children born before 1.10.1998) Fixed amount of LTC is fully taxable to

tax.

Interest Free Loan :- In case employer has granted interest free loan or concessional loan

to its employee in such case, Compute interest on the basis of SBI lending rates. Compare

with actual interest paid by employee. The difference will be value of perquisite. Nothing

is taxable if, * Loan in aggregate do not exceed Rs.20,000/- or * Loan is provided for

treatment of specified disease. Note : Interest on maximum outstanding monthly balance of

advance is considered to determine any concession in interest. Maximum monthly balance

means balance of loan on the last day of each month.

Use of Movable assets other than car :-

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Asset Used Value of Benefit a) Use of Laptops & PCs Nil b) Movable Assets (except

Laptop, PCs & Car ) i) 10% of Actual Cost of Such Assets or ii) Hire Charges/Rent paid by

Employer iii) Less : Amount recovered from employee.

Sale of movable asset to Employee Computer & Electronics Motor Car Any other Asset

Original cost (-) Depn. @ 50% p.a. For each completed year (RBM) WDV (-) ARFEe XX

(XX) XX (XX) Particulars Rs. TVOP XX Original cost (-) Depn. @ 20% p.a. For each

completed year (RBM) WDV (-) ARFEe XX (XX) XX (XX) Particulars Rs. TVOP XX

Original cost (-) Depn. @ 10% p.a. For each completed year (FIM) WDV (-) ARFEe XX

(XX) XX (XX) Particulars Rs. TVOP XX RBM-Reducing Balance Method FIM-Fixed

Instalment Method.

Value of Medical Facilities:-

The Following shall NOT be treated as perquisites :- a) Medical treatment of the employee or

his family ( Spouse, children, dependent parent, brothers & sisters) - Provided in any hospital

maintained by the Employer. - Any sum paid by the Employer towards expenditure actually

incurred by the employer in any hospital :- - Maintained by Employer, Govt or Local

Authority or any other approved hospital by CG or Chief Commissioner of ITax b) Premium

paid by an employer by cheque to GIC for medical insurance policy of its employee. c) Any

sum not exceeding Rs.15,000/- paid to any hospital/nursing home/clinic other than a & b

above. Here reimbursement is also allowed upto Rs.15,000/- p.a. d) Amount payable for

treatment outside India :- - Medical Expenses-to the extent permitted by RBI - If Gross Total

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Income (before including the travel expenditure) of the employee does not exceed

Rs.2,00,000/- then travel abroad for patient and attendant- fully deductible.

Value of Perks for Motor Car :-

A] CAR IS OWNED OR HIRED BY EMPLOYER Exclusively for Official Purpose

Exclusively for Private Purpose Both Official & Private Purpose Nil. If specified documents

maintained. Actual Run.& Maint Exp + Remuneration of Driver + Depreciation @10% pa Or

Hire Charges, if car is taken hire charges. Less : Amt Recovered. Running & Maint borne by

Employer Employee Car <=1600cc Rs1800 pm + Rs 900 pm for driver Car <=1600cc

Rs.600 pm + Rs.900 pm for driver Car >1600cc Rs.2400 pm + Rs.900 pm for driver Car

>1600cc Rs.900 pm + Rs.900 pm for driver

Value Perks for Motor Car.. :-

CAR IS OWNED BY EMPLOYEE Exclusively for Official Purpose Exclusively for Private

Purpose Both Official & Private Purpose Nil.

If specified documents maintained. Actual expenditure incurred by employer, Less : amount

recovered from employee Running & Maintenance borne by Employer Employee Actual Exp

Less : Rs.900/- pm. Nil

Employees Stock Option Plan (ESOP ) :-

1. “Sweat equity Shares” mean equity shares issued by a Company to its employee or

directors at a discount or for consideration other than for cash for providing know-how or

making available rights in nature of Intellectual Property Rights.

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2. “Specified Security” means the securities defined in Sec 2 (h) of Securities Contract

(Regulations) Act,1956 and also include securities offered under Employees Stock Option

Plan (ESOP) . 3. Perquisite will be taxable as the difference between the fair market value

( FMV ) of the shares as on the date of exercise of the options less exercise price.

Unrecognised P.F.

Employee’s Contribution Employer’s Contribution Interest on Employee’s Contribution

Interest on Employer’s Contribution Already Taxed Taxable Taxable Taxable Income

from Salary Income from Other Sources Income from Salary.

Dearness Allowances Forming part of salary for calculating retirement benefits

Recognised Not forming part of salary for calculating retirement benefits Ordinary

NOTE :

1) If question is silent, then entire D.A. Will be considered is ordinary D.A.

2) D.A. Is fully taxable allowance. Even if salary is contributed to charity , then also it is

taxable.

INCOME FROM HOUSE PROPERTY

If you own a property which is a building, plot or land attached to such building, then any

rental income from such property will be chargeable to tax under the head “Income from

House Property”.

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One important point to be kept in mind is that such a property should not have been used for

personal business or profession. So even if you own a shop (which is a building) and given it

on rent, than income from such shop will be taxed as “Income from House Property”.

What is considered as House Property?

Let’s understand what exactly house property means in order to understand the income from

house property.

 House property consists of any building or land attached to that building. The land

may be in the form of a courtyard or compound forming part of the building.

 An open plot of land is not considered as House property

 House property includes flats, shops, office space, factory sheds & farm houses.

 Further, house property includes all type of house properties, i.e., residential houses,

godowns, cinema building, workshop building, hotel building, etc.

What conditions need to be met?

Now the income will be taxed as income from house property only if following conditions

are satisfied:

 Assessee has to be the owner of the property

 The property is being used for any purpose other than for carrying out business &

profession.

Income from House Property & Scenarios

Now there are two scenarios of income from house property:

1. Income from self-occupied house property is the property which you are using as

your own residence throughout the year without letting it out or using it for another

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purpose and since you are using the property for your own purpose, there will not be

any income from the same property. Thus your income from self-occupied house

property will always be NIL.

2. Income from let out house property: In case if your property is let out, you will

receive rent from your tenant(s). This rent income will be taxed as your income from

house property. In short rental income received by the owner from letting out the

house property will be taxed under income from house property.

Rental income from subletting is not taxed as income from house property since in that

case person receiving the rent income from subletting is not the owner of the property.

How to calculate Income from House property?

First we determine the Gross Annual Value. The gross annual value of a self-occupied house

is zero. Whereas in case of Let out house, it is the rent collected.

GROSS ANNUAL VALUE OF THE PROPERTY

Less: Municipal Taxes paid by owner

= Net Annual Value (Gross Annual Value – Property Tax)

Less: 30% standard deduction on NAV ( under Section 24(a) of the Income Tax Act)

Less: Interest on home loan (allowed under Section 24(b))

= Income from house property

Since the gross annual value of a self-occupied house is zero, claiming the deduction on

home loan interest will result in a loss from house property. This loss can be adjusted against

income from other heads in the current Assessment Year. Losses that cannot be set off, shall

be carried forward up to 8 assessment years.

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Income Tax Benefits on home loan

Tax benefit u/s 80C

You can claim home loan interest on any number of homes you own. The home loan benefits

can be categorised into two parts, principal repayment and interest payment. Benefits for

principal repayment are available u/s 80C and since the maximum deduction limit u/s 80C is

Rs. 1,50,000 for AY 2018-19, you can not avail the benefits for more than Rs. 1,50,000.

Tax deduction u/s 24

The benefits for home loan interest payments are available u/s 24B and 80EE of the income

tax act. As per income tax act, you can have only one home as self-occupied and for that,

you can claim the home loan interest benefits u/s 24B up to Rs. 2,00,000.

 Tax benefit on loan repayment of second house / Let-out property will be

restricted to Rs 2 lakh per annum only (even if you have multiple house the limit is

still going to be Rs 2 Lakh only and the ceiling limit is not per house property).

 The unclaimed loss if any will be carried forward to be set off against house property

income of subsequent 8 years. In most of the cases, this can be treated as ‘dead loss‘.

 I believe that this is a major blow to the investors who have bought multiple houses

on home loan(s) with an intention to save taxes alone.

 As of now (till FY 2016-17), interest paid on your housing loan is eligible for the

following tax benefits ;

o Municipal taxes paid, 30% of the net annual income (standard deduction) and

interest paid on the loan taken for that house are allowed as deductions.

o After these deductions, your rental income can be NIL or NEGATIVE and is

called ‘loss from house property’ in the latter case.

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o Such loss is currently allowed to be set off against other heads of income like

Income from

Salary or Business etc. which helps you to lower you tax liability substantially.

Section 80EE

This was a new proposal which had been made in Budget 2016-17. The same will be

continued in FY 2017-18 / AY 2018-19 too. First time Home Buyers can claim an additional

Tax deduction of up to Rs 50,000 on home loan interest payments u/s 80EE. The below

criteria has to be met for claiming tax deduction under section 80EE.

 The home loan should have been sanctioned during / after FY 2016-17.

 Loan amount should be less than Rs 35 Lakh.

 The value of the house should not be more than Rs 50 Lakh &

 The home buyer should not have any other existing residential house in his name.

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INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION

Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to

taxation. The term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d)

any adventure or concern in the nature of trade, commerce or manufacture. The term

"profession" implies professed attainments in special knowledge as distinguished from mere

skill; "special knowledge" which is "to be acquired only after patient study and application".

The words 'profits and gains' are defined as the surplus by which the receipts from the

business or profession exceed the expenditure necessary for the purpose of earning those

receipts. These words should be understood to include losses also, so that in one sense 'profit

and gains' represent plus income while 'losses' represent minus income.

The following types of income are chargeable to tax under the heads profits and gains of

business or profession:-

 Profits and gains of any business or profession

 Any compensation or other payments due to or received by any person specified in

section 28 of the Act

 Income derived by a trade, profession or similar association from specific services

performed for its members

 Profit on sale of import entitlement licences, incentives by way of cash compensatory

support and drawback of duty

 The value of any benefit or perquisite, whether converted into money or not, arising
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from business

 Any interest, salary, bonus, commission, or remuneration received by a partner of a

firm, from such a firm

 Any sum whether received or receivable in cash or kind, under an agreement for not

carrying out any activity in relation to any business or not to share any know-how,

patent, copyright, franchise, or any other business or commercial right of similar

nature or technique likely to assist in the manufacture or processing of good

 Any sum received under a keyman insurance policy

 Income from speculative transactions.

In the following cases, income from trading or business is not taxable under the head "profits

and gains of business or profession":-

 Rent of house property is taxable under the head " Income from house property".

Even if the property constitutes stock in trade of recipient of rent or the recipient of

rent is engaged in the business of letting properties on rent.

 Deemed dividends on shares are taxable under the head "Income from other sources".

 Winnings from lotteries, races etc. are taxable under the head "Income from other

sources".

Profits and gains of any other business are taxable, unless such profits are subjected to

exemption.

General principals governing the computation of taxable income under the head

"profits and gains of business or profession:-

 Business or profession should be carried on by the assessee. It is not the ownership of

business which is important , but it is the person carrying on a business or profession,

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who is chargeable to tax.

 Income from business or profession is chargeable to tax under this head only if the

business or profession is carried on by the assessee at any time during the previous

year. This income is taxable during the following assessment year.

 Profits and gains of different business or profession carried on by the assessee are not

separately chargeable to tax i.e. tax incidence arises on aggregate income from all

businesses or professions carried on by the assessee. But, profits and loss of a

speculative business are kept separately.

 It is not only the legal ownership but also the beneficial ownership that has to be

considered.

 Profits made by an assessee in winding up of a business or profession are not taxable,

as no business is carried on in that case. However, such profits may be taxable as

capital gains or as business income, if the process of winding up is such as to involve

the carrying on of a trade.

 Taxable profit is the profit accrued or arising in the accounting year. Anticipated or

potential profits or losses, which may occur in future, are not considered for arriving

at taxable income. Also, the profits, which are taxable, are the real profits and not

notional profits. Real profits from the commercial point of view, mean a gain to the

person carrying on the business and not profits from narrow, technical or legalistic

point of view.

 The yield of income by a commercial asset is the profit of the business irrespective of

the manner in which that asset is exploited by the owner of the business.

 Any sum recovered by the assessee during the previous year, in respect of an amount

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or expenditure which was earlier allowed as deduction, is taxable as business income

of the year in which it is recovered.

 Modes of book entries are generally not determinative of the question whether the

assessee has earned any profit or loss.

 The Income tax act is not concerned with the legality or illegality of business or

profession. Hence, income of illegal business or profession is not exempt from tax.

Meaning of Business : [ Sec 2(13) ]

Business Includes, a)Trade, b) Commerce c) Manufacture d) Any adventure or concern in

the nature of trade, commerce or manufacture.

Meaning of Profession : [ Sec 2(36) ]

Profession includes vocation. Profession requires purely intellectual skill or manual skill on

the basis of some special learning.

Key Points:

Must be carried on by Assessee. Must be carried on during the previous year. Only profit of

the previous year are to be taxed. Income includes negative income i.e. Loss. Relevance of

method of accounting ( Cash or Mercantile ) A Person Cannot do business with one self.

Hence, notional profit is not taxable. If a proprietor withdraws goods casting Rs.50000 for

personal use at an agreed value of Rs.60000 then profit of Rs.10000 shall not be taxable.

There is no difference between legal & illegal business for taxation purpose. Even income

from illegal business shall be taxable.

Basis of Charge : [ Sec 28 ]

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The following income shall be chargeable to income tax under the head “ Profit & Gains of

Business or Profession:

(i) The profit or gains of any business or profession. [ Sec 28 (i) ]

(ii) Income derived by a trade, professional or similar association from

specified services performed for its members. [ Sec 28 (ii) ]

(iii) Export Incentive. [ Sec 28 (iiia), Sec 28 (iiib), Sec 28 (iiic), Sec 28 (iiid) ]

- Profit on sale of import license or duty entitlement pass book. - Cash

Assistant received or receivable by an exporter under any scheme of the

Govt. - Export Duty draw back.

(iv) The Value of any benefit or perquisite, whether convertible into money or

not, arising from business or the exercise of profession. [ Sec 28 (iv) ]

(v) Any interest, Salary, bonus, commission or remuneration due to or

received by a partner from a firm. [ Sec 28 (v) ]

(vi) Any Sum received for not carrying out any activity in relation to any

business or not to share any know-how, patent, copyright, trademark etc.

[ Sec 28(va) ] Income from speculative transaction Any sum received

under Keyman Insurance Policy including Bonus on such policy.

COMPUTATION OF INCOME FROM BUSINESS [ Sec 29 ]

The profit and gains of business or profession shall be computed in accordance with the

provisions contained in Sec 30 to 44 DB. It must however be noted that the allowances and

deductions are not exhaustively listed. Admissibility of deduction will depend upon the

method of accounting followed by assessee, subject to deeming provisions of the Act.

SPECIFIC DEDUCTIONS [ Sec.30 to Sec 37 ]

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1. Rent, Rates ,Taxes & Insurance for Building [ Sec 30 ]

2. Repairs & Insurance of Plant & Machinery , Furniture [ Sec 31 ]

3. Depreciation [ Sec 32 ]

4. Investment Allowance [ Sec 32 AC ]

5. Tea/Coffee/Rubber Development A/c [ Sec 33 AB ]

6. Site Restoration Fund [ Sec 33 ABA ]

7. Reserve for Shipping Business [ Sec 33 AC ]

8. Scientific Research Exp [ Sec 35 ]

9. Amortisation of telecom licence fees [ Sec 35 ABB ]

10. Expenditure on eligible projects or scheme [ Sec 35 AC ]

11. Deduction in respect of exp on specific business [ Sec 35 AD ]

12. Payment to Association and institution for carrying out rural development program [ Sec

35 CCA]

13. Weighted deduction for expenditure incurred on Agricultural Extension Project [ Sec 35

CCC ] 14. Weighted deduction for expenditure for skill development [ Sec 35CCD ]

15. Amortisation of Preliminary Expenses [ Sec 35 D]

16. Amortisation of Expenditure on development of certain minerals [ Sec 35 E ]

Income from Business & Profession -: Deduction U/s 36 :-

1. Insurance Premium [ Sec 36 (1) (i) ]

2. Insurance premium paid by a Federal Milk Co-op Society [ Sec 36 (1)(ia ]

3. Insurance premium on health of employees [ Sec 36(1) (ib) ]

4. Bonus or Commission to employees [ Sec 36 (1) (ii )

5. Interest on Borrowed Capital [ Sec 36 (1) (iii ) ]

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6. Discount on Zero Coupon Bond [ Sec 36(1) (iiia) ]

7. Employer’s Contribution to Recognised PF & Superannuation Fund [ Sec 36(1)(iv)]

8. Employer’s Contribution to Notified Pension Scheme (NPS) [ Sec 36(1)(iva)]

9. Provision for bad & doubtful debts relating to rural branches of scheduled commercial

Bank. [ Sec 36(1)(viia) ]

10. Transfer to Special Reserve [ Sec 36 (1) (viii) ]

11. Family Planning Expenditure [ Sec 36(1) (ix) ]

12. Revenue Expenditure incurred by entities established under any Central, State or

Provincial Act. [ Sec 36 (1) (xii ) ]

13. Banking Cash Transaction Tax & Securities Transaction Tax.

14. Contribution to Credit Guarantee Trust Fund [ Sec 36(1) (xiv) ]

15. Commodities transaction tax [ Sec 36(1) (xvi) ]

16. Advertisement Expenses [ Sec 37 (2B) ]

Income from Business & Profession -: General Deduction U/s 37 (1):

Sec 37(1) is a residuary section. In order to claim deduction under this section, the following

condition should be satisfied :- The expenditure should be other than covered u/s 30 to 36.

It should not be in the nature of Capital Expenditure. It should not be Personal Expenditure

of the Assessee. It should have been incurred in the previous year. It should be in respect

of business carried on by the assessee. It should have been spent wholly & exclusively for

the purpose of business. It should not have been incurred for any purpose which is an

offence or is prohibited by any law.

Depreciation Chart (Important Block of Assets)

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 Block of Asset Asset Rate of Depreciation (%)

 Building Residential Building, Factory Building, Office Building, Godown, Stock

yard, borewell, well, Wall compound, Temple, road etc.,

 Temporary Erections) Furniture Office Furniture & Appliances) Plant & Machinery,

Car, Two Wheeler, Mobile, Computer, laptop and software, books ( other than

covered under 100% ) Books used by Professionals, Air Pollution Control

Equipment.

 Intangible Assets Patents, Copyrights, Trademarks, know-how.

Depreciation: Key Points

Depreciation is available whether or not the assessee has claimed deduction in books of

account. If a part of the assets is used for business purpose and part is used for personal

purpose ( e.g. Resi-cum-office ) ,depreciation should be allowed only for the portion for

which the asset is used for business purpose. Usage during the previous year is important :

a) if asset was acquired during any Preceding Previous Years (PPY) and put to use in current

P.Y. ( even for 1 day ), it is eligible for full depreciation. b) Further, asset acquired during the

PY ( Current year) and usage : i) No usage - No Depreciation. ii) Used for more than 180

days – full normal depreciation. iii) Used for less than 180 days – 50% of normal

depreciation.

Block is formed for Common Asset with common rate of depreciation. And accordingly,

depreciation is calculated based on Block Concept and not on individual asset. Any

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expenditure incurred till date , asset is put to use is to be capitalised i.e. Added to the Cost of

Assets. Depreciation is calculated only as per WDV method. SLM method is not allowed.

(except in case of Power Units ,where prescribed rate on actual cost of asset, and NOT block

value of assets ) In case of Company Assessee, depreciation is recorded as per Company

Law, in such case, depreciation as per Books is added back while depreciation as per Income

Tax Act is allowed, while computing the income of such company. Whether asset is eligible

for depreciation or not, it depends on nature of asset and purpose of holding asset. Land is

never to be depreciated.

Amount Not Deductible [ Sec 40 ]

Sec 40 (a) (i) { TDS Compliance related } No deduction is allowed in respect of interest,

royalty, fees for technical service or other sum payable to : a) Any person outside India OR

b) In India to a Non-resident (not being Company or Foreign Company) on which TDS under

chapter XVII B has not been deducted or paid. Sec 40 (a) (ia) No deduction is allowed in

respect of payment to resident towards interest, commission, brokrage, fees for professional

service or technical service, amount payable to Contractor or sub contractor, rent or royalty

in which provisions of TDS under chapter XVII-B has not been complied with.

Sec 40 (b ) { Related to Partnership Firm }

According to Scheme of assessee of Firms, Salary, Bonus, commission or remuneration to

partners of firms is allowable as deduction in the hands of the firm, as under :- *

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Remuneration to Partners : Maximum Permissible limit * Interest on Capital to Partners :

Conditions to be satisfied : i) Rate of interest should not exceed 12% p.a. Simple interset. ii)

Payment of interest on capital should be authorised by partnership deed. iii) Payment of int

should be pertained to the period after partnership Deed. Book Profit Limit On the First

Rs.300000 of Book profit or in case of LOSS Rs.150000 or 90% of Book profit whichever is

more On the balance of Book Profit 60% of Book Profit.

Sec 40 A (2 ) : Excessive or Unreasonable Payments to Relatives/Associates

Any Expenditure in respect of which payments have been or is made to a relative or

associate concern, so much of the expenditure as is concerned to be excessive or

unreasonable shall be disallowed by the Income Tax Officer.

Sec 40 A (3) : Payment in excess of Rs.20000/- in cash.

As per Income Tax Act,1961, any expenditure incurred in respect of which payment is

made in a sum exceeding Rs.20000/- in CASH, shall not be allowed as deduction.

Explanation : In case payment is made to same party on one day and the total of payment in a

day crosses Rs.20000 , then this section is attracted. ( Note : In case of payment is made to

plying , hiring or leasing goods carrier the limit of payment is increased to Rs.35000 )

INCOME FROM CAPITAL GAINS

Basis of Charge

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Profit or gain arising from the transfer of capital assets during previous year is chargeable

under the head capital gains if following conditions are fulfilled; Their should be capital

Assets. Their should be transfer of capital assets. Transfer should take place in previous

year. Their should be profit or gains. Any Income derived from a Capital asset movable or

immovable is taxable under the head Capital Gains under Income Tax Act 1961.

Capital Asset u/s. 2(14)

"capital asset" means property of any kind held by an assessee, whether or not connected

with his business or profession, but does not include following –

1. Any stock-in-trade, consumable stores or raw materials held for the purposes of his

business or profession;

2. Personal effects, that is to say, movable property (including wearing apparel and

furniture) held for personal use by the assessee or any member of his family dependent on

him, but excludes— a. jewellery b. archaeological collections c. drawings d. paintings e.

sculptures or f. Any work of art.

3. Agriculture land in India provided that it is not situated a) in any area within the territorial

jurisdiction of a municipality or a cantonment board, having a population of 10,000 or more ;

or b) in any notified area.

There must be a Capital Asset [S.2(14)] Capital assets is defined to mean propety of any

kind, held by the assesse, whether or not connected with his business or profession.

Property may be tangible or intangible. 4

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Capital Assets must be transferred [S.2(47)] The sale, exchange or relinquishment of the

asset; The extinguishment of any rights therein; The compulsory acquisition of any capital

assets by the government; Conversion of capital assets into stock in trade. 5

 6. Transactions which do not constitute transfer (sec 47) 1. Distribution of capital asset on

total or partial partition of HUF 2. Transfer of capital asset under a gift or will or an

irrevocable trust 3. Transfer of capital asset by a company to its 100 percent subsidiary

company. 4. Transfer of capital asset by a company to its 100 percent holding company. 5.

Transfer of capital asset in a scheme of amalgamation 6. Transfer of capital asset by a

demerged company to the resulting company 6

Not to be considered as transfer Transfer of any work of art, archaeological, scientific or art

collection, book, manuscript, drawing, painting, photograph or print, to

Government/University/National museum/National Art Gallery/National Archives or any

other notified public institution/museum Conversion of bonds or debentures, debenture-

stock or deposit certificates in any form, of a company into shares or debentures of that

company. 7

Types of Capital Assets

There are two types of capital assets:

Short Term Capital Gains: It means a capital assets held by an assesse for not more than 36

months immediately prior to its date of transfer. Tax is calculated as per Income Tax Act.

Long Term Capital Gains : Asset is not a short term capital gain is long term capital gain. 20

% is taxable.

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Computation of STCG Full value of Consideration XXX Less: Cost of acquisition XXX

Less: Cost of improvement XXX Short Term Capital Gain XXX Less: Exemption U/S 52(B),

54(D) & 54(G) XXX Net Short Term Capital Gain XXX 9

Computation of LTCG Full value of Consideration XXX Less: Cost of acquisition XXX

Less: Cost of improvement XXX Short Term Capital Gain XXX Less: Exemption U/S 54 –

54(H) XXX Net Short Term Capital Gain XXX 10

Full Value Consideration :

It means what the transferor or is entitled to receive as consideration for the sale of

property/Asset. This Value may be in cash or in kind i.e. in exchange for an asset. Cost of

Acquisition : It is the price which the assesse has paid or the amount which the assesse has

incurred for acquiring the property/Asset. Cost of Improvement : It is capital expenditure

incurred by am assesse in making any addition/Improvements to the capital asset.

Indexed Cost of Acquisition ICOA :

Cost of Acquisition*Cost of the year in which asset is transferred. Cost inflation index of the

first year in which asset was first hold by the assesse or Cost inflation index of the year

beginning on 1st april,1981.(which Every is later)

Indexed cost of Investment ICOI :

Cost of Acquisition* Cost Inflation Index of the year in which asset is transferred. Cost

inflation index of the year in which improvement took place.

Capital gains exempt from tax

1. Section 54 Capital gains arising from transfer of residential house.

2. Section 54B capital gains arising from the transfer of land used for agriculture purpose.

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3. Section 54D Capital gains on compulsory acquisition of land and building forming part of

industrial undertaking .

4. Section 54 EC Capital gains not to be charged on investment in certain bonds.

5. Section 54ED Capital gains on transfer of certain listed securities / units not to be charged

to tax in certain cases.(up to assessment year 2007-08).

6. Section 54 F Capital gains on transfer of a long term capital asset other than a house

property .

7. Section 54G capital gains on transfer of assets in case of shifting of industrial undertaking

from urban area.

8. Section 54GA Capital gains on transfer of assets in cases of shifting of industrial

undertaking from urban area to any special economic zones .

INCOME FROM OTHER SOURCES:

Income from other sources is one of the five heads of income that the Income Tax Act, 1961

broadly classifies income under. This category includes earnings which can't be accounted

for under any of the other heads of income viz. Income from Salary, Income from House

Property, Profits and Gains from Business or Profession and Income from Capital Gains.

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All taxable income under this head is calculated according to the accounting method the

assessee follows viz. accrual or cash basis. The exceptions to this are dividend and interest

income i.e. whatever the accounting method, assessees will have to declare and pay tax on

dividend and interest earned during the previous year.

The nature of income earned will decide whether income has to be shown under this head.

However, there are some standard inclusions as outlined below.

1. Dividends: Income by way of dividend is shown under this head. Deemed dividend

as under section 2(22)(e) is fully taxable as is dividend from co-operative societies

and foreign companies.

Dividend not chargeable to tax includes dividends exempt U/S 10(34) i.e. dividend

from Indian companies, dividend liable to corporate dividend tax, income on mutual

fund units or income from UTI unit holder.

2. Winnings: This includes winnings over Rs.10,000 from lotteries, puzzles, races,

games and all forms of gambling and betting. E.g. card games, horse races, game

shows etc.

3. Interest received: All interest income earned in the previous year (on

compensation/enhanced compensation) is taxable. However, 50% of this income can

be claimed as deduction.

4. Incomes not declared under the head ‘Profits and Gains of Business or

Profession': This includes contributions made to an employer's employee welfare

fund, interest earned on securities, rental income from furniture, plant and machinery

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(including building where it cannot be let out separately), keyman insurance policy

proceeds.

5. Gifts: Taxable gifts are declared under this head by individuals and HUFs. This

includes monetary or non-monetary items received without any consideration or

without adequate consideration. Non-monetary gifts include all immovable property

and certain movable property.

Gifts are taxed only if the total amount received during the previous year is more than

Rs.50,000 and applies only to those gifts individuals or HUFs received after Oct.1st 2009.

This doesn't apply if the assessee receives money

 from relatives or a local authority or a trust, fund, educational/medical institution,

body or any such institution outlined under section 10(23C) and section 12AA

 as a wedding gift

 by way of being named in a Will or as inheritance

 from a dying donor

Gifts include monetary gifts, immovable property and specified property.

Monetary gifts - sums of money received without any consideration or without adequate

consideration.

Immovable property as gifts - Property value will be the stamp duty value. Inadequate

consideration will be if the property value is lower than stamp duty value.

Specific movable property - Property here are shares, jewellery, securities, paintings,

archaeological collections, sculptures and drawings and other artwork. As of 1st June 2010,

bullion also forms a part of this list. Property value will be the fair market value. Inadequate

consideration is when property value is below fair market value.

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Gifts from relatives means gifts from the assessee's

 parents, parents' brothers or sisters (i.e. aunts, uncles)

 any lineal predecessor/successor

 brother, sister; brothers' or sisters' spouses (i.e. brothers or sisters- in-law)

 spouse, spouse's parents (i.e. in-laws), spouse's brothers or sisters (i.e. brothers or

sisters- in-law), spouse's lineal predecessor/successor and their brothers or sisters.

Calculating IT Tax on Income from Other Sources with Example:

 Mr. Shah earned Rs.50,000 in dividends from trading in shares during the previous

year. He asked his son-in-law Kabir how to include it in his tax returns. Kabir asks for

a list of the companies whose shares Mr. Shah has bought. When he goes through this

list, he finds that his father-in-law has invested in shares of Indian companies only.

He finds favour with his father-in-law by telling him that the dividends he earned are

not chargeable to tax, being dividends from a domestic company.

 Mr. Shah also earned Rs.1 lakh as interest from fixed deposits held at various banks.

Kabir tells him he will have to show the amount under "income from other sources"

which will add to his taxable income.

 Kabir's wife asks him whether she will have to pay tax on money given to her during

the previous year from guests at their wedding. Kabir tells her not to worry since

monetary gifts received during weddings are exempt from tax. Even gifts received

from relatives after the wedding on various occasions are exempt.

 However, a generous neighbour and long-time family friend presented them a cheque

of Rs.60,000 on the birth of their first son. This would be chargeable to tax.

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 Kabir's wife then enquires about the jewellery set her neighbour had presented to her

on successful completion of her medical degree. It cost her close to Rs.1 lakh. He

calms her worried nerves by reminding her that she graduated in the year 2008 and

tax on gifts only apply to those received after Oct.1st 2009.

 Similarly, they didn't have to be worried about the money left to them by Kabir's

favourite uncle who passed away the previous year since it came to them by way of

their uncle's Will.

INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL

INCOME

(Clubbing of Income)

(Section 60 to 65)

Section Particulars

60 Transfer of income where there is no transfer of assets

61 Revocable transfer of assets

62 Irrevocable transfer for a specified period

63 Definition of Transfer & Revocable Transfer

64 Income of an individual to include income of spouse, minor child, etc.

65 Liability of person in respect of income included in the income of another

person

Income of other persons included in an assessee’ s total income [Section 60 to 63]

 Transfer of income without transfer of assets

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 Revocable transfer of assets

 Irrevocable transfer for a specified period

Income of other person included only in the individual’s total income [Section 64]

 Spouse

 Son’s wife

 Minor child

 HUF

 Income of other person included in the Assessee’ s total income

Transfer of income without transfer of assets – Sec 60:

Where there is a transfer of an income by a person to another person, without the transfer of

the asset from which the income arises, such income shall be included in the total income of

the transferor, whether such transfer is revocable or not and whether the transfer is effected

before or after the commencement of the Income tax Act 1961.

For e.g., X who owns a house which fetches a rent of Rs.10,000 per month, declares that

henceforth the rent shall belong to his friend Y but the house shall remain the property of X.

In this case, because there is only a transfer of income without the transfer of the asset, the

rental income shall be included in the income of X for the purpose of computing his total

income.

Revocable transfer of assets – Sec 61:

Where there is a revocable transfer of an asset by a person to another person, any income

arising or derived from such asset shall be included in the total income of the transferor.

Irrevocable transfer for a specified period – Sec 62:

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As per Sec 62, the provisions of revocable transfer shall not apply in the following

circumstances

[Link] the case of transfer by way of trust, the transfer is not revocable during the life time of

the beneficiary.

b. In the case of any other transfer, the transfer is not revocable during the life time of the

transferee.

c. In the case of the transfer made before 1.4.1961, the transfer is not revocable for a period

exceeding 6 years.

Definition of Transfer & Revocable Transfer – Sec63:

Transfer for Sec 60, 61 and 62 includes any settlement, trust, covenant, agreement or

arrangement.

A transfer shall be deemed to be revocable if:

a. It contains any provision for the re- transfer, directly or indirectly of the whole or any

part of the income or assets to the transferor, during the life time of the beneficiary or the

transferee as the case may be, or

b. It gives the transferor a right to re- assume power directly or in directly over the whole or

any part of the income or assets during the life time of the beneficiary or the transferee as the

case may be.

Additional points:

1. If there is provision to reassume power, the transfer will be revocable, Actual exercise of

power is not necessary - CIT v. [Link] Singh [1965] 57 ITR 408(SC).

2. Where the assessee can at any time reassume power over the assets or the income by just

cancelling or altering the terms of deed, trust was revocable – C.T. Senthilnathan

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Chettiar V. State of Madras [1968] 67 ITR 102 (SC).

3. Where no absolute right is given to transferee and the asset can revert back to transferor in

certain circumstances, transfer is revocable. – V. Venugopala Varma Rajah v. CIT [1972]

84 ITR 466 (SC)

Income of other persons included only in the Individual’s total income- Sec 64

Income of individuals to include income of -

a. Spouse & Son’s wife

b. Minor child

c. HUF

Income of Individual to include income of spouse and sons wife –Sec 64(1)

Remuneration of spouse from a concern in which the other spouse has substantial interest

Sec.64 (1)(ii)

In computing the total income of an individual, there shall be included all such sums as arises

directly or indirectly to the spouse of such individual by way of Salary, commission, fees or

any

other form of remuneration whether in cash or in kind from a concern in which

theindividual has substantial interest.

1. However, the remuneration arises to the spouse is solely attributable to the application

of technical or professional qualification, knowledge and experience of the spouse, such

remuneration will not be clubbed – Yashwant Chhajta v. CIT [2013] 214 Taxman 280 (HP)

2. Where both husband and wife have substantial interest in a concern and both are in

receipt of income by way of salary etc., from the said concern, such income shall be

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included in the case of the husband or wife, whose total income excluding such income

is greater.

3. For the purpose of this clause, An individual shall be deemed to have substantial interest

in a concern –

 If the concern is a company, he by himself or together with his relatives beneficially

holds equity shares carrying not less than 20% of voting power at any time during the

previous year.

 In any other case, he by himself or together with his relatives is entitled to at least

20% of the profits of such concern at any time during the previous year.

Relative means the husband, wife, brother or sister or any lineal ascendant or descendent of

the

individual.

4. “Professional qualification” means fitness to do job or undertake an occupation or vocation

requiring intellectual skill or requiring manual skill as controlled by intellectual skill and

which is such that a person should be able to take out a living therefrom independently,

though the salary does not cease to be product of professional skill merely because particular

employment is accepted.

It is not necessary to confine the word “technical” to qualifications having technical subjects.

Technical qualification may take within its fold everything connected with specialisation in

particular subject, be it science, technology or commerce or business management.

The word “technical or professional qualification” do not necessarily relate to technical or

professional qualifications acquired by obtaining a certificate, diploma or a degree or in any

other form from a recognised body like a university or an institute. –Batta Kalyani v. CIT

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[1985]20 taxman 378 (AP). However , contrary opinion expressed by some other courts, it is

respectfully submitted , requires reconsideration.

The words “ technical or professional” must receive a liberal construction as that term is not

defined in the section itself or elsewhere in the Act. The word “technical” is a term of wide

import. Any task required to be performed on an orderly and methodical manner which

require some skill and knowledge for performance and which also involves some degree of

complexity, can be regarded as “technical”. The fact that ordinarily the term “technical” is

used in relation to things mechanical or electrical or anything associated with machinery does

not warrant limiting the scope of the term in

Section 64. Similarly, the word “profession” is again a term of wide import. The varieties of

profession are endless.

It is therefore, necessary to consider the term “technical and professional qualifications and

experience” in the context of the facts which are required to be considered in a given case.

Regard must , therefore, be had to the nature of the business carried on by the concern and

the mind of technical or professional qualifications, knowledge and experience possessed by

the spouse to whom the payment is made from the concern for the services rendered by that

person - CIT v. R. Jayalakshmi [1998]101 Taxman 350(Mad.).

Income accruing or arising from the assets transferred by one spouse to another

without

adequate consideration – Sec 64(1)(iv) In computing the total income of an individual,

there shall be included all such income as arises directly or indirectly , subject to the

provisions of Section 27(i), to the spouse of such individual from assets transferred directly

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or indirectly to the spouse of such individual otherwise than for adequate consideration or

in connection with an agreement to live apart.

1. Natural love and affection: Natural love and affection may be a good consideration but

that would not be adequate consideration for the purpose of this section 64 (1) - Tulsidas

Kilachand v. CIT [1961]42 ITR 1 (SC)

2. The relationship of husband and wife should subsist both at the time of transfer of asset

and at the time when income is accrued in order to attract clubbing provision. It means that

transfer of asset before marriage is outside the scope of this section. Similarly , if transferor–

spouse dies, the income , though continued to be enjoyed by the transferee, cannot be

included in the income of deceased transferor, heir, administrator orexecutor , as widow or

widower is not a spouse – Vinodkumar Ratilal v. CIT [1975] 100 ITR 564 (Guj).

The word “spouse “ does not include illegal wife - Executors of will of T.V. Krishna Iyer v.

CIT [1966] 38 ITR 144(Ker).

Wife , in these provisions , means a lawfully wedded wife and child, a legitimate child.

Income of a prospective wife or an illegitimate child is not affected by these provisions –

Thomas (P.J.P)v. Cit [1962] 44ITR 897 (Cal).

3. Pin money: If any property is acquired by the wife out of an allowance given by her

husband for her personal expenses ( called pin money), the clubbing provisions shall not

apply - R. Dalmia v. CIT {1982} 133 ITR 169 (Del).

4. Where the assessee made payments of premium on policy taken in the name of his wife,

the maturity proceeds were invested and income earned thereon in the name of his wife. The

assessing officer clubbed such income in the hands of the assessee. The Gujarat high court

upheld such action. The court held that proximity between asset and income had to be

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considered irrespective of time lag between transfer of asset and actual income derived -

Damodar [Link] v. CIT [2001] 119 Taxman 882 (Guj).

5. Transfer by Non-resident: Income from assets transferred by a non resident individual to

his wife is subject to clubbing provisions of Section 64 only if income from such asset

accrues and is received in India - CIT v. F.Y. Khambaty [1986] 159 ITR 203 ( Bom).

6. Deemed owner u/s 27 (i) : Where a house property is transferred without an adequate

consideration by an individual to his or her spouse, the transferor shall be deemed owner of

the house property and shall be subject to tax under the head Income from house property.

Capital gains: If there is any capital gain on the transfer of such house property, such capital

gain shall, first be computed in the hands of the transferee and thereafter the same will be

clubbed with the income of the transferor as per the provisions of this section 64(1)(iv).

Income from assets transferred to son’s wife without adequate consideration - Sec64(1)

(vi):

In computing the total income of an individual, there shall be included any income which

arises from assets transferred directly or indirectly by an individual to the son’s wife after 1st

June 1973, otherwise than for adequate consideration.

Common issues in Sec 64(1) (iv) and (vi):

1. Pre – marital transfers: The relationship of Husband and wife / Father in law, mother in

law and daughter in law for the purpose of Sec 64 should subsist both at the time of transfer

and at the time of accrual of income – Philip John Plasket Thomas v. CIT {1963}49 ITR

97(SC).

As per Section 56(2)(vi), any sum of money , the aggregate value of which exceeds

Rs.50000, received without consideration by an individual or HUF in any previous year from

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any person or persons on or after 01-04-2006, subject to certain exceptions is taxable under

the head Income from other sources. In this case transferee spouse is taxable.

As per Section 56(2)(vii), Any sum of money, the aggregate value of which exceeds

Rs.50000 is received without consideration or property (whether movable or immovable) is

received without consideration or movable property is received for an inadequate

consideration by an individual or HUF on or after 01-10-2009, if the amount of such gift or

inadequate consideration exceeds Rs.50000 subject to certain exceptions is taxable under the

head Income from other sources. In this case transferee spouse is taxable.

2. When asset transferred without adequate consideration is invested in business by the

transferee:

Where the assets transferred by an individual to the spouse or son’s wife are invested by the

transferee-

 In any business , ( not being as capital contribution in a firm), proportionate income arising

to the transferee attributable to the investment ; and

 In the nature of capital contribution in a firm, any interest receivable by the transferee

attributable to such investment.

Shall be included in the total income of the individual.

For this purpose, the proportion shall be with reference to the value of investment aforesaid

as on the first day of the previous year to the total investment in the business by the

transferee as on that day..

3. Income for clubbing purpose includes losses.

4. Whether income from accretion to asset be clubbed : Income on the asset transferred is

clubbed but not the income on the accretion to the asset.

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For e.g, If debentures are gifted by the husband to the wife, interest income on those

debentures shall be clubbed. If the interest on debenture is deposited , the interest on deposit

shall not be clubbed in the hands of the husband. It is taxable in the hands of the wife.

5. When asset transferred without adequate consideration has changed the shape and

identification : Where an asset transferred by spouse is converted in to another form, income

derived from such converted asset shall be clubbed.

For e.g., Mr.A gifts a sum of Rs.50,00,000 to Mrs.A on the occasion of wedding

anniversary . Mrs.A invest this sum in a fixed deposit , which derives interest income of

Rs.25,000 p.m. The interest income so derived shall be clubbed in the hands of Mr.A, despite

the fact that it is the income from converted asset.

Income from assets transferred to any person / persons or AOP for the immediate or

deferred

benefit of spouse /son’s wife without adequate consideration – Section 64(1)(vii) / 64(1)

(viii):

In computing the total income of an individual, there shall be included all such income

arising directly or indirectly to any person or association of persons from the assets

transferred by that individual otherwise than for adequate consideration to the extent to

which the income from such asset is for the immediate or deferred benefit of his/her spouse

or son’s wife.

Income of Individual to include income of Minor child – Sec 64(1A)

1. In computing the total income of an individual, there shall be included all such income

arises or accrues to his minor child.

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2. However, income shall not be included if it arises or accrues to a Minor child on account

of any:

 Manual work done by him ; or

 Activity involving application of his skill, talent or specialized knowledge and experience.

3. If the minor child is suffering from any disability of the nature specified in Sec 80 U , the

income of such child shall not be included in the hands of the parent but shall be assessed in

the hands of the child.

4. The income of the minor child shall be included-

 Where the marriage of his parent subsists, in the income of that parent whose total income

(excluding this income) is greater.

 Where the marriage of his parent does not subsist, in the income of that parent who

maintains the minor child in the previous year.

5. Child includes a step child and an adopted child of that individual.

6. Income of the minor married daughter is clubbed in the hands of the parent. However,

where Sec 27 applies, clubbing of income from property gifted by the parent does not arise.

7. Even though income derived by the minor from the manual work or from activity

involving skill and talent can not be clubbed, there is no provision to avoid clubbing of

income earned on investment made out of such income.

8. Where any such income is once included in the total income of either parent, any such

income arising in any succeeding year shall not be included in the total income of the other

parent , unless the assessing officer is satisfied, after giving that parent an opportunity of

being heard, that it is necessary to do so.

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9. Exemption u/s 10(32) : If the income is included in the hands of the parent under

Sec64(1A), then the assessee is entitled to claim exemption under Sec 10(32) to the extent of

Rs.1500 per child.

Income of Individual to include income of HUF – Sec 64(2)

1. Where a member of a Hindu undivided Family has converted or transferred self acquired

property in to Joint family property without any adequate consideration, the income arising

there from is taxable as the income of the transferor member.

2. If the converted property is subsequently partitioned among the members of the family, the

income derived from such converted property as is received by the spouse of the transferor

will be taxable as the income of the transferor.

Property for this purpose includes any interest in property, movable or immovable.

Liability of person in respect of income included in the income of another person – Sec

64(5)

1. According to Sec 65, wherever clubbing provision is attracted, the person in whose name

assets stands shall be liable , on the service of a notice of demand by the assessing officer, to

pay that portion of the tax levied on the assessee which is attributable to the income so

clubbed.

2. Where any such asset is held jointly by more than one person, they shall be jointly and

severally liable to pay the tax on the income from such assets.

PROCEDURE FOR ASSESSMENT

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Income tax assessment is estimation for an amount assessed while paying Income Tax by

assessee himself or by income tax officer. Following types of assessment are carried out

under Income tax act. We will discuss each type of assessment in detailed in this article.

(i) Self assessment u/s 140A.

(ii) Summary Assessment u/s 143(1)

(iii) Scrutiny assessment u/s 143(3).

(iv) Best judgment assessment u/s 144.

(v) Protective Assessment.

(vi) Income escaping assessment u/s 147.

(vii) Assessment in case of search u/s 153A

For making assessment under these various provisions of the act, some compliance is

mandatory to assessing officer:

Particulars Mandatory Requirements

Self assessment u/s 140A. –

Scrutiny assessment u/s 143(3). Section 143(2) Notice

Best judgment assessment u/s 144. Show cause notice u/s 144

Protective Assessment –

Income escaping assessment u/s 147. Section 148 Notice

Assessment in case of search u/s 153A Section 153A

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Self Assessment u/s 140A

 Self Assessment u/s 140A

 Summary Assessment u/s 143(1)

 Scrutiny assessment u/s 143(3).

 Best judgment assessment u/s 144.

 Protective Assessment.

Before submitting returns assessee is supposed to find whether he is liable for any tax or

interest. For this purpose this section has been introduced in Income tax act.

Where any tax is payable on the basis of any return required to be furnished under section

139 or section 142 or section 148 or section 153A, after deducting:

1. Advance tax Paid, if any

2. TDS/TCS

3. Relief under section 90, 91 & 90A

4. MAT credit under 115JAA or 115JD

Then assessee shall pay tax & interest and fee before furnishing return and proof of such

payment will be accompanied with return of income.

Self assessment calculation Summary:

Particulars Amount

Income tax + Edu. Cess +Surcharge if any Xxx

Add Interest u/s 234A, 234B, 234C Xxx

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Less TDS/TCS Xxx

Less Advance tax Paid, if any Xxx

Less Relief under section 90, 91 & 90A Xxx

Less MAT credit under 115JAA or 115JD Xxx

Amount Payable by way of Self Assessment u/s 140A xxx

If any amount is payable under section 140A then amount so paid shall be adjusted against

interest payable first and then balance amount to be adjusted toward tax payable.

Summary Assessment u/s 143(1)

“Summary Assessment”, it is not an actual assessment. Under this section, the Return of

Income filed by assessee will not be scrutinized, however whatever, is claimed by assessee in

his ROI will be accepted by assessing officer after only confirming arithmetical accuracy.

1. the total income or loss shall be computed after making the following adjustments,

namely:—

(i) any arithmetical error in the return; or

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is

claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv) disallowance of expenditure indicated in the audit report but not taken into account in

computing the total income in the return;

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(v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-

IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-

section (1) of section 139; or

(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not

been included in computing the total income in the return. However no adjustment shall be

made under this in relation to a return furnished for the assessment year commencing on or

after the 1st day of April, 2018

However no such adjustments shall be made unless an intimation is given to the assessee of

such adjustments either in writing or in electronic mode:

The response received from the assessee, if any, shall be considered before making any

adjustment, and in a case where no response is received within thirty days of the issue of

such intimation, such adjustments shall be made.

2 .the tax and interest, if any, shall be computed on the basis of the total income computed

under clause (a);

3. the sum payable by, or the amount of refund due to, the assessee shall be determined after

adjustment of the tax and interest and fee, if any, computed under clause (b) by any tax

deducted at source, any tax collected at source, any advance tax paid, any relief allowable

under an agreement under section 90 or section 90A, or any relief allowable under section

91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and

any amount paid otherwise by way of tax or interest and fee;

4. an intimation shall be prepared or generated and sent to the assessee specifying the sum

determined to be payable by, or the amount of refund due to, the assessee under clause (c);

and

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5. the amount of refund due to the assessee in pursuance of the determination under clause

(c) shall be granted to the assessee:

Scrutiny assessment u/s 143(3).

Scrutiny assessments are popularly known as regular assessment.

1. On the day specified in the notice issued under] sub-section (2), or as soon afterwards as

may be, after hearing such evidence as the assessee may produce and such other evidence as

the Assessing Officer may require on specified points, and after taking into account all

relevant material which he has gathered, the Assessing Officer shall, by an order in writing,

make an assessment of the total income or loss of the assessee, and determine the sum

payable by him or refund of any amount due to him on the basis of such assessment.

2. No order of assessment/ reassessment under section 143(3) shall be made after the expiry

of 21 months(18 months for A.y 2018-19 and 12 months wef wef A.y 2019-20) from the end

of relevant Assessment Year.

[Link] a reference has been made to Transfer Pricing Officer to determine Arm’s Length

Price, then no order of assessment/ reassessment under section 143(3) shall be made after the

expiry of 33 months(30 months for A.y 2018-19 and 24 months wef wef A.y 2019-20) from

the end of relevant Assessment Year.

What if Analysis of Section 143(2) and 143(3)?

What if – Answer

What if assessee has not filed Return ofNotice under section 143(2) can not issue

Income? therefore assessment under 143(3) not

possible.

What if notice under section 143(2) notAssessment is Void

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issued?

What if Notice is served after the expiry Assessment is Void

of six months from the end of the

financial year in which the return is

furnished.

What if, Assessing officer reduce income Yes AO can reduced below returned income,

below returned income? as per CBDT clarification

What if assessee claims certain deductionNo request will be entertain unless return has

through letter to Assessing officer during been revised

assessment?

Best judgment assessment u/s 144.

If any person—

(a) fails to make the return required under sub-section (1) of section 139 and has not made a

return or a revised return under sub-section (4) or sub-section (5) of that section, or

(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142

or fails to comply with a direction issued under sub-section (2A) of that section], or

(c) having made a return, fails to comply with all the terms of a notice issued under sub-

section (2) of section 143,

the Assessing Officer, after taking into account all relevant material which the Assessing

Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the

assessment of the total income or loss to the best of his judgment and determine the sum

payable by the assessee on the basis of such assessment :

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Provided that such opportunity shall be given by the Assessing Officer by serving a notice

calling upon the assessee to show cause, on a date and time to be specified in the notice, why

the assessment should not be completed to the best of his judgment :

Provided further that it shall not be necessary to give such opportunity in a case where a

notice under sub-section (1) of section 142 has been issued prior to the making of an

assessment under this section.

(2) The provisions of this section as they stood immediately before their amendment by the

Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any

assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier

assessment year and references in this section to the other provisions of this Act shall be

construed as references to those provisions as for the time being in force and applicable to the

relevant assessment year.

(3) No order of assessment/ reassessment under section 144 shall be made after the expiry of

21 months(18 months for A.y 2018-19 and 12 months wef A.y 2019-20) from the end of

relevant Assessment Year

(4) Where a reference has been made to Transfer Pricing Officer to determine Arm’s Length

Price, then no order of assessment/reassessment under section 144 shall be made after the

expiry of 33 months(30 months for A.y 2018-19 and 24 months wef wef A.y 2019-20) from

the end of relevant Assessment Year.

What if Analysis of Section 144 –

What if – Answer

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What if Assessing Officer has not provided opportunity of Assessment is Void

being heard by servicing notice?

What if Assessing Officer has not provided opportunity of Assessment is Valid

being heard by servicing notice but notice under 142(1) (i) is

already issued?

What if, Assessing officer (AO) reduces income below AO can not reduce income.

returned income?

What if, assessment is done in an arbitrary manner? Assessment is Void. Assessment

should be based on material which

AO collects.

What if, assessment carried out after 2 years of completion of Assessment is Void

assessment year

Protective Assessment.

There appears to be no provision in the Act providing for the manner in which a protective

assessment has to be done. But traditionally wherever the department has been in doubt on

account of a pending litigation as to how exactly an assessment had been framed against the

assessee, the Assessing Officer has been making an assessment in a manner in which he

thought the assessment should be done and apprehending that such assessment may be set

aside in the pending litigation, he would make another assessment as per the stand of the

assessee for the purpose of protecting the interest of the revenue. There is no provision

anywhere in the Act stipulating that such protective assessment has also to be made along

with the original assessment – Bhatia Motor Stores v. CIT [2006] 152 Taxman 89 (MP).

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Certain case laws based on protective assessments are Supreme Court in Lalji Haridas v.

ITO, (43 ITR 387) also G. Topi Saheb vs Commissioner of Income-Tax (170 ITR 181 AP).

Assessment/Re-assessment is a procedure adopted to determine the correctness of the

income disclosed by the assessee and tax payable thereon. Than what is reassessment and

why there is need of reassessment? Section 147 and 148 of Income Tax Act is a well

designed weapon for the Income Tax Department empowering it to assess, re-assess or re-

compute income, turnover etc, which has escaped assessment.

Section 147 and Section 148 of the Act contain the per-requisite conditions to be fulfilled

for invoking the jurisdiction to reopen the assessment. This article is concentrated on

procedure to be followed in case of re-assessment.

Powers of the Assessing Officer to re-open a completed assessment are not un-abundant or

luxuriant. I will discuss the marked phrase in my next article analyzing the nuts and bolts of

section 147 of Income Tax Act, since there are many cases with the help of which we will be

able to understand it in detail. The procedure is laid down below:-

 The AO must have reasons to believe. The existence of reasons is mandatory. On the

basis of such reasons, the AO must form a belief that there is a situation of actual or

deemed escapement of Income and therefore action is required u/s 147. AO must

record such reasons in writing. No reassessment notice can be served just to make an

enquiry or verification.

 AO must obtain sanctions from higher authority u/s 151, wherever necessary. Section

151 put condition on AO to take the prior approval from appropriate authority. If the

AO obtain the approval from any other authority, even from higher authority, then

also proceeding u/s 148 is invalid.

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 AO must issue notice u/s 148 within prescribed time limit. A formal notice must be

served upon the assessee.

1) Normally time limit for issue of Notice period is 4 or 6 years.

4 years if the escaped Income less than Rs. 1,00,000/-

6 years if the escaped income is Rs. 1,00,000/-

2) This time limit shall be 16 years if it is related to Asset located outside India

Further first proviso to section 147 provides that if the assessment has been completed u/s

143(3) or u/s 147 no action can be taken u/s 147 after the expiry of 4 years from the end of

relevant assessment year unless any income chargeable to tax has escaped assessment for

such assessment year by reason of the failure on the part of the assessee to make a return

under section 139 or in response to a notice issued under sub-section (1) of section

142 or section 148 or to disclose fully and truly all material facts necessary for his

assessment, for that assessment year.

Second proviso to section 147 states that nothing mentioned in first proviso shall apply in a

case where the income which has escaped assessment is related to assets ( including financial

interest in entity) is located outside [Link] Limits for Issuance of Notices, Orders under

Different Sections of Income Tax Act, 1961

3) But, if there is any specific direction contained in an order passed by the authority in any

proceeding under act by way of appeal/ revision or by a court, in that situation there shall not

be any time limit and the time limit shall be indefinite period. But, if at the time when the

order which was subject matter of appeal or revision was passed, the time-limit for issuance

of Notice u/s 148 had already expired, the time limit of indefinite period will not apply.

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 Assessee shall submit return within time period prescribed in the Notice. Assessee

may demand reasons of proceeding u/s 147 from AO. If the assessee does not demand

reasons, the AO can proceed to complete assessment. If the assessee demands

reasons, the AO must provide reasons to the assessee. Assessing officer is duty bound

to provide the copy of reason recorded within reasonable time as per guidelines of

Hon’ble Supreme Court in case of GKN Driveshafts (India) Ltd. v/s D.C.I.T. (2003)

259 ITR 19 (SC). Reopening u/s 148 can be challenged based on facts.

 After this the AO shall issue Notice u/s 143(2). Such notice u/s 143(2) is mandatory.

 Assessee instead of filing fresh return, can request for considering the return filed u/s

139(1) or 139(1)/(4)/(5) in response to Notice u/s 148. The specimen of the letter to

AO is depicted below:

Specimen of letter to AO Date:-To,………………….,

…………………..

SUB: – REPLY TO NOTICE US 148 OF INCOME TAX ACT

1961 FOR A.Y. …….. DATED ………

PAN:-………………….

Respected Madam / Sir,

We are in receipt of the above quoted notice dated ………

received on ……….. In connection with the aforesaid subject

matter we would like to state that—

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We has filed the return of income for the Assessment Year

………. on ………. Vide acknowledgement number

……………. The Original return filed on …………. should be

considered as return Us 148.

We request your good self to kindly provide us the reasons

recorded for re-opening the assessment which would enable us

to file proper objection/ details in this respect.

Thanking You

……………………..

……………………..

 Assessee can submit the objections. During the reassessment proceedings the assessee

advance all the argument and provide all the details for proving that Income had not

escape the assessment.

 AO must pass the speaking order on objection raised by assessee. The hon’ble

Supreme Court Decided the Ratio of Re-assessment In case of GKN DRIVESHAFT

(INDIA) LTD. V/S ITO. AO has under obligation to first dispose of the objections

raise by assessee and thereafter frame the reassessment order.

 Assessee can file Writ Petition before High Court if aggrieved by the order of

objection and re-assessment proceeding. File details and advance all the arguments.

 Assessment/re-assessment shall be completed by passing order within prescribed time

limit. Assessment order should be passed within the prescribed Time limit of 9

months from the end of the Financial Year in which notice u/s 148 is served upon the

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assessee. However if the notice is issued on or after 01.04.2019 the time limit will be

12 months

 After re-assessment order, if the Assessee is aggrieved by the order of the AO, he can

file appeal before CIT(A).

 It is the general policy of Income Tax Officers to initiate penalty for every addition

made during assessment. Against the initiation of penalty first assessee can request

AO to keep penalty proceeding in abeyance u/s 275till the order of the appellate

authorities, if any appeal is filed.

 Where the assessee makes a bonafide claim and no malafide intensions can be

attributed, then penalty cannot be levied./ Certain amounts claimed by assessee and

disallowed does not mean that the assessee is guilty of fraud or willful neglect.

Further, the assessee may also challenge the levy of penalty based on strong grounds.

It is well settled law that findings in the assessment proceedings are relevant but not

conclusive in penalty proceedings because the considerations that arise in penalty

proceedings are different from those that arise in the assessment proceedings.

1. Notice for assessment or reassessment under section 148 of Income Tax Act, 1961

 1. Notice for assessment or reassessment under section 148 of Income Tax Act, 1961

 2. What is reason to believe for issue of notice under section 148

 3. Who can issue notice under Section 148:

 4. Time Limit for Issuing of notice under section 148:

 5. What to do when notice u/s 148 is received:

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The power of assessment or reassessment of any income chargeable to tax that have escaped

assessment has been provided under section 147 r w s 148 of Income Tax Act of 1961. If the

assessing officer has the reason to believe that any income chargeable to tax has escaped

assessment then the assessing officer may subject to the provisions of section 147 to 153

assess or reassess such income.

2. What is reason to believe for issue of notice under section 148

Before issuing any notice under section 148 the assessing officer must have reason to

believe that any income chargeable to tax has escaped assessment. Reason to believe can not

be a reason to suspect merely. There must be a direct nexus between the material coming to

the notice of the assessing officer and the formation of the belief that there has been

escapement of income of the assessee from assessment in a particular year. The material for

formation of belief must be relevant and not vague. The assessing officer must record reasons

in writing before issuing notice under section 148. Mere a reason recorded that “there is a

huge concealment of income’ or ‘For further investigation’ without any specific instance of

entries or material relevant to the assessee will not constitute a valid reason as it is vague and

general in nature.

To constitute a valid reason to believe there must be some new material coming into light

with the assessing officer, merely a change of opinion cannot constitute a reason to believe.

If the assessee has disclosed basic and all the true facts during the course of assessment and

the assessment is completed. Later on notice u/s 148 can not be issued merely because there

is another inference possible from the same documents and the facts placed before the

assessing officer during the course of assessment as it will amount to change of opinion.

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There must be some new material coming into light for action u/s 147/148. But if the

assessee has suppressed some relevant facts which leads to concealment of income and later

those facts come before the assessing officer the notice u/s 147/48 can be issued validly.

3. Who can issue notice under Section 148:

Section 151(1) provides for sanction of issue of notice:

(i) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a

period of four years from the end of the relevant assessment year, unless the Principal Chief

Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is

satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of

such notice.

(ii) In a case other than a case falling under part (i), no notice shall be issued under section

148 by an Assessing Officer, who is below the rank of Joint Commissioner, unless the Joint

Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit

case for the issue of such notice.

(iii) For the purposes of part (i) and (ii) ,, the Principal Chief Commissioner or the Chief

Commissioner or the Principal Commissioner or the Commissioner or the Joint

Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing

Officer about fitness of a case for the issue of notice under section 148, need not issue such

notice himself.

4. Time Limit for Issuing of notice under section 148:

Section 149 provides that notice u/s 148 can be issued within 4 years from the end of relevant

assessment year if the income escaped does not exceed one lac Rs. If the income escaped is

Rs. one lac or more the notice u/s 148 can be issued within 6 years from the end of relevant

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assessment year subject to the provisions of section [Link] notice u/s 148 can be issued

within 16 years from the end of the relevant assessment year if the income which has escaped

assessment is related to assets( including financial interest in entity) is located outside India.

Further first proviso to section 147 provides that if the assessment has been completed u/s

143(3) or u/s 147 no action can be taken u/s 147 after the expiry of 4 years from the end of

relevant assessment year unless any income chargeable to tax has escaped assessment for

such assessment year by reason of the failure on the part of the assessee to make a return

under section 139 or in response to a notice issued under sub-section (1) of section 142 or

section 148 or to disclose fully and truly all material facts necessary for his assessment, for

that assessment year.

Second proviso to section 147 states that nothing mentioned in first proviso shall apply in a

case where the income which has escaped assessment is related to assets ( including financial

interest in entity) is located outside [Link] Limits for Issuance of Notices, Orders under

Different Sections of Income Tax Act, 1961

5. What to do when notice u/s 148 is received:

when a notice u/s 148 is received the assessee is asked to file a return of the relevant

assessment year. After filling the return the assessee should ask for the copy of reasons

recorded for issue of notice u/s 148 and can file objection to the issuance of notice. The

assessee should ask specifically assessing officer to pass a speaking order by disposing off

the objections giving reference of the Judgment of Honorable Supreme Court in GKN

Driveshafts (India) Ltd vs ITO (2003) 259 ITR 19 (SC). The objections should be filled

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giving reasons for challenging the legality of the notice u/s 148. All this procedure has been

laid down by the Honorable Supreme court in GKN Driveshafts (India) Ltd case. This

procedure has been provided by the Honorable Supreme court to enable the assessee to file

writ petition before the respective High court challenging the legality of the notice u/s 148

before the assessment is completed.

Even if the assessment order has been passed and the matter is in appeal the assessee can still

file writ petition in the high court challenging the legality of notice u/s 148 and the

consequent assessment if the above said procedure as laid down by the Supreme court in

GKN Driveshafts (India) Ltd case is not followed. But for that assessee off course will have

to show that he asked for the copy of reasons for issue of notice u/s 148 and filled objections

to that and asked the assessing officer to pass a separate reasoned order disposing off the

objections filled and deciding on the legality of the notice issued u/s. 148.

CHAPTER VI A: Income Tax Act, 1961.

DEDUCTIONS U/S80C TO 80U

Indian tax laws contain certain provisions, which are intended to act as an incentive

forachieving certain desirable socio-economic objectives. These provisions are contained in

Chapter VIA and are in the form of deductions (80C TO 80U) from the Gross Income. By

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reducing the chargeable income, these provisions reduce the tax liability, increase the post-

tax income and thus induce the tax-payers to act in the desired manner. This unit is intended

to give a broad idea of such deductions.

To compute the net income of the assesses, first of all we compute the income under the five

head. The provisions for the same have been already discussed in the previous units. The

aggregate of income under each head is known as “gross total income”. Certain deductions

which are not deductible under any particular head of income are allowed out of gross total

income to arrive at the total income liable to tax.

Total income is accordingly computed as under:

1. Income from salaries ______

2. Income from House property ______

3. Profits and Gains of Business and Profession ______

4. Income from capital gains ______

5. Income from other sources ______

Gross Total Income = _________________

Less deduction under Chapter VI-A(80C TO 80U)(-) ------

Total income_______________________

Following are the basic rules for [Link] aggregate amount of deductions under

sections80C to 80U cannot exceed gross total income (grosstotal income after excluding long

term capital gains, short term capital gain under section 111A, winnings from lottery,

crossword puzzles etc.)[Link] deductions are to be allowed only if the assessee claims these

and gives the proof of such investments/ expenditure/ income.

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There are various kinds of deductions. Some ofthem are to encourage savings, some are for

certain personal expenditure, a few are for socially desirable activities, and some are for

economic growth. For the sake of better understanding we have categorized them into four

kinds. They are:

For certain personal expenditure

For socially desirable activities

For physically disabled persons

DEDUCTIONS TO ENCOURAGE SAVINGS:

The government wants to encourage the habit of people to save for the rainy day. To give

impetus to savings these deductions are given on certain investments or certain expenditure

made by the assessee. Deduction is allowed when the saving is invested but normally any

withdrawal is treated as income in the year of withdrawal.

SECTION 80C – QUALIFIEDSAVINGS

DEDUCTION IN RESPECT OF LIFE INSURANCEPREMIA, ETC. (SEC. 80C)

The following payments/investments qualify for deduction under this section. The total

amount of investments made during the P.Y. under these below mentioned schemes is known

as Gross Qualifying Amount ( GQA ):

1. Life Insurance premium paid on a policy taken on his own life, life of the spouse or any

child (child may be dependent/ independent). In the case of a Hindu undivided family, policy

may be taken on the life of any member of the family. The premium paid should be

maximum of 20% of sum assured.

2. Any sum deducted from salary payable to a Government employee for the purpose of

securing him a deferred annuity (subject to a maximum of 20% of salary)

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3. Contribution towards statutory provident fund and recognized provident fund.

4. Contribution towards 15 year public provident fund (maximum of Rs 70,000).

5. Contribution towards an approved superannuation fund

6. Subscription to National Savings Certificates, VIII Issue.

7. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of

India.

8. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual

Fund (i.e. Dhanraksha plan of LIC Mutual Fund)

[Link] for notified annuity plan of LIC (i.e. Jeevan Dhara,Jeevan Akshay New Jeevan

Dhara ,etc ) or any other insurer.

10. Subscription towards notified units of Mutual Fund or UTI

11. Contribution to notified pension fund set up by MutualFund or UTI.

12. Any sum paid (including accrued interest) as subscriptionto Home Loan Account Scheme

of the National Housing Bank

13. Any sum paid as tuition fees to any university / college/educational institution in India

for full time education.

Amount of deduction: We add the amounts invested / spent in abovementioned schemes and

this amount is known as Gross qualifying amount. The amount deductible is a) Gross

qualifyingamount; orb) Rs 1,50,000 Whichever is lessNote:-The maximum deduction under

sections80C, 80CCC and 80CCDis Rs 1,50,000.

SECTION 80CCC – PAYMENT INRESPECT OF PENSION FUND

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DEDUCTION IN RESPECT OF PENSION FUND(SEC. 80CCC)If the following conditions

are fulfilled an assessee may claim deduction under this section• The taxpayer is an

individual• During the previous year, he has paid/deposited a sum under an annuity plan of

the Life Insurance Corporation of India or any other insurer for receiving pension.• If

deduction has not been claimed under section 80C.

Amount of deduction. If the aforesaid conditions are satisfied, then the amount deposited) or

Rs. 150000 whichever is lower, is deductible. Tax treatment of pension received. The

pension amount received by the assessee or his nominee as pension will be taxable in the

year of the receipt. Note;-The aggregate deduction under sections 80C, 80CCC and 80CCD

cannot exceed Rs.1, 00,000.

SECTION 80CCD – PAYMENT TONEW PENSION SCHEME

DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSIONSCHEME OF CENTRAL

GOVERNMENT (SEC. 80CCD)This section is for allowing deduction to new central

Government employees, if the following conditions are satisfied:• The taxpayer is an

individual• He is employed by the Central Government on or after January 1, 2004.• He has

in the previous year paid or deposited any amount in his account under a pension scheme

notified by the Central Government.

Amount of Deduction: The amount deductible is:

a) The total employee’s contribution and employer’s contribution to the notified pension

scheme during the year b) Or 10% of salary of the employee, Whichever is less NOTE:

Salary means basic salary including dearness allowance if under the terms of employment.

The aggregate amount of deduction under sections80C, 80CC and 80CCD cannot exceed

Rs.1,00,000.

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SECTION 80CCE – LIMIT ON DEDUCTIONS

If an assessee is having / claiming deduction u/s 80C, 80CCC, and 80CCD, then the

provisions of Sec80E is to be applied. According to this section the deduction is least of the

following two amounts: Aggregates of the gross qualifying amount u/s 80C,80CCC, and

[Link] 1,00,000

Illustration 1: Mr. Vikram is working in a limited company. From the following particulars

calculate Qualified savings u/s 80 C. Income from salary Rs 2,20,000; Contribution to

[Link]. 20,700. Life insurance premium paid Rs. 6,000; Policy amount Rs. 1, 50,000,

Purchase of [Link] issue Rs. 30,000. Fixed deposit in Scheduled Bank for 5 years

Rs.20,000.

SOLUTION: Calculating qualifying amount for each saving. Contribution to R.P.F. -+ Fully

qualifies =20,700Life Insurance premium—* Least of the following two qualifies Actual

premium paid 6,00020% of Policy (20% X 1,50,000) = 30,000 = 6,000Purchase of

[Link] issue —* Fully qualifies =30,000Fixed deposit in Scheduled Bank — Fully

qualifies =20,000Total _____________ 76,700Calculating gross qualifying amount =

76,700Calculating deduction amount: If assessee is not having/claiming deduction u/s

8OCCC,8OCCD, then the deduction u/s 80C is least of the following two amounts Gross

qualifying amount a) 76,700 b) 1, 00,000Qualified Savings u/s 80 C is Rs. 76,700.

SECTION 80CCF – INVESTMENT ININFRASTRUCTURE BONDS

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From the assessment year 2011-2012, a special deduction as allowed towards interest on

investment bonds that is IDBI infra bonds L&T infra bonds deduction is as follows: Least of

the following two amounts is allowed as deduction: Actual amount invested Rs 20,000

Under Section 80-D, 80-DD , 80-DDB 80-E and 80-GG of IT Act 1961 some deductions are

allowed in respect of personal expenditure such as Medical Insurance, Medical treatment of

handicapped dependent, etc. These deductions are allowed to give impetus to threshold areas

like education ,health & housing. Let us now discuss them one by one.

If the following conditions are satisfied then an assessee may claim deduction under this

section.• The taxpayer is an individual or a Hindu undivided family .• Insurance premium is

paid by the taxpayer in accordance with the scheme framed in this behalf by the General

Insurance Corporation of India and approved by the Central Government. The scheme is

known as “mediclaim” insurance policy.( The amount deposited in a similar scheme of any

other insurer who is approved by the Insurance Regulatory and Development Authority shall

also be eligible for deduction.). The aforesaid premium is paid by cheque. Mediclaim policy

is taken on the health of the taxpayer, on thehealth of spouse, dependent parents or dependent

children of the taxpayer. In case of HUF on the health of any member of the family

Own / spouse / dependent children(a) Actualamount paid(b) 15,000Parents of the assessee

(dependent or not)(a) Actual amount paid(b) 15,000For senior or super senior citizen (a)

Actual amount paid(b) 20,000Note: If the mode of the payment is not given, then make an

assumption that premium is paid by cheque out of taxable income

Sri ramana reddy submitted the following particulars under section 80(d)Medical Insurance

premium: Self: 10,000________Father(age 69 years):24000SolutionFor self: Least of the two

amounts: 10,000For father: Least of the two amounts: 20,000TOTAL: 30,000

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Following are the provisions under this section: This deduction is available to only

Individuals and HUF, who isresident in India. This deduction is given to the assessee if a

person with disability is dependent upon him. A person with disability means disabilities like

autism, cerebral palsy, mental retardation, etc. as specified in Persons with Disabilities Act

1995. The assessee has incurred expenditure by way of medical treatment (including

nursing), training and rehabilitation of a disabled dependent: or/and• He has paid or

deposited any amount under any scheme framed by the LIC of India or any other insurer for

the payment of an annuity or a lump sum amount for the benefit of such dependent in the

event of the death of the assessee. For claiming the deduction the assessee shall have to

furnish a certificate by the prescribed medical authority with the return of income.

If the above mentioned conditions are satisfied the amount of deduction is fixed at Rs. 50,000

irrespective of actual expenditure. In case of a person with severe disability (over 80 %) a

higher deduction of Rs.1,00,000/- shall be allowed irrespective of actual expenditure.

Explanation: Dependent means: In case of an individual, the spouse children, parents,

brothers, sisters of the individual or any of them. ii) In case of HUF, a member of the HUF

wholly or mainly dependent on such individual or HUF for support and maintenance.

During the P.Y. 2005-06, the gross total income of Mr. X is Rs 4,00,000. During the P.Y. he

pays the following premiums on Medical claim insurance policy by cheque. Calculate the

amount of tax benefit under section80D.

Amount (in Rs):1. Mr. X 6,000; 2. Mrs. X 4,0003. Son (not dependent) 3,000; 4. Daughter

(dependent) 2,000; 5. Father (not dependent) 1,500; 6. Mother (dependent) (age 68 years &

resident in India) 2,000.

Amounts qualifying for deduction are:-Amount (in Rs): Mr. X 6,000

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Mrs. X 4,000

Daughter 2,000

Total 12,000

Additional deduction for mother: 2,000 and father 1,500

Hence total deduction under section 80 D isRs (12,000 + 2,000+1,500) = Rs 15,500

Deduction is available if following are satisfied Assessee is an individual or HUF resident in

India. The assessee has actually paid for the medical treatment of specified disease or

ailment, for himself or any dependent* or incase of HUF any member of the family. The

assessee furnishes a certificate, in the prescribed form from prescribed authority, along with

the return of income.

i) a) The amount paid b)or Rs. 40,000 whichever is less;

ii) Where the amount is paid in relation to a senior citizen the deduction shall be allowed for

the amount paid or Rs. 60,000 whichever is less.

iii) The deduction shall be reduced by the amount received, if any, under an insurance from

an insurer for the medical treatment of person mentioned in this section or reimbursed by the

employer. The definition of “Dependent” is the same as in the above section.

Deduction is available if:- Assessee is an individual. He has taken a loan from any financial

institution (bank) or an approved charitable institution. The loan is taken is for the purpose of

pursuing his higher education. During the previous year he has repaid some amount as

interest on such loan. Such amount is paid out of his income chargeable to tax.

The entire amount paid by way of interest on such Period of Deduction Further, the

deduction shall be allowed for the previous year in which the assessee starts repaying the

loan or interest thereon and seven previous years immediately succeeding it or until the loan

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together with interest thereon is paid by the assessee in full ,whichever is earlier. NOTE

Higher education means full-time studies for any graduate or post-graduate course in

engineering, medicine, management or for post-graduate course in applied science or pure

sciences including mathematics and statistics.

This deduction is allowed to an individual assessee in respect of rent paid by him for an

accommodation used for his residential purposes provided the following conditions are

fulfilled: The assessee is either a self-employed person or such a salaried employee who is

not in receipt of house-rent allowance from any source. The actual rent paid by him is in

excess of 10% of his total income. He or his spouse or minor children or the HUF, of which

he is a member, do not own any residential accommodation at the place where the assessee

resides, performs the duties of his office or employment or carries on his business or

profession. Where, however, the assessee owns any residential accommodation at any other

place and claims the concessions of self-occupied house property for the same, he will not be

entitled to any deduction u/s 80GG even if he does not own any residential accommodation

at the place where he ordinarily resides, performs the duties of his office or employment or

carries on his business or profession. The assessee files a declaration in Form No. 10BA

regarding the payment of rent. Note: Deduction under this section can be claimed even if

accommodation at concessional rent is provided by the employer. In such a case the

deduction will be given if the actual rent paid by the employee exceeds 10% of his total

income. Where a rent-free house is provided to the employee, no deduction will be allowed

under this section.

The assessee , who fulfils the above mentioned conditions, is allowed a deduction equal to

least of the following three: excess of actual rent paid over 10% of adjusted gross total

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income:• 25% of his adjusted gross total income; and Rs. 2,000 p.m or 24,000 per annum

Adjusted Gross Total income( [Link]) for this purpose means his gross total income minus

long-term capitalgain, short term capital gain taxable u/s 111A, and all deductions u/s

80CCC to 80U except any deduction under this section.

Illustration: A‟s gross total income is Rs. 1,80,000/-. Deductions allowed u/s 80D and 80C

are Rs. 9,000 and Rs. 12,000 respectively. He pays a rent of Rs. 3,500 p.m. for a three-

roomed set. He does not own any residential accommodation. Compute his total income for

the assessment year 2006-2007.

Solution: Rs. Gross total income 1,80,000

Less: Deduction u/s 80D - MIP etc. 9,000

80C – Insurance etc. 12,000

80GG - Rent Paid 24,000

Total 1,35,000

Note: Adj. GTI = Rs [1,80,000 ( GTI) – 9,000 (80D) -12,000(80C) ] = Rs. 1,59,000

Deductions u/s 80GG will be the least of the following :

i)Rs. 2,000 p.m.:Rs.24,000

ii)Rent paid (Rs 42,000) - 10% of [Link] ( Rs. 1,59,000)Rs.26,100

iii)25% of Adj. GTI (Rs, 1,59,000)Rs 39,750

Rs. 24,000 is the least, hence, deductible.

DEDUCTIONS FOR SOCIALLY DESIRABLE ACTIVITIES.

There are various funds created by Governments totake care of natural calamities like

earthquake, floods, etc. Similarly certain funds have been created to promote social &

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economic welfare, &education. To promote these funds and so that people contribute

liberally to these funds, deduction has been provided in Section 80G for donations given by

assessee to these funds.

SECTION 80G – DONATIONS

DONATION TO CERTAIN FUNDS, CHARITABLE INSTITUTION ETC.(SECTION

80G)A. Donations made to following are eligible for 100% deduction without any qualifying

limit.

1. Prime Minister’s National Relief Fund

2. National Defense Fund

3. Prime Minister’s Armenia Earthquake Relief Fund

4. The Africa (Public Contribution - India) Fund

5. The National Foundation for Communal Harmony

6. Approved university or educational institution of national eminence

7. The Chief Minister’s Earthquake Relief Fund, Maharashtra

8. Donations made to Zila Saksharta Samitis.

9. The National Blood Transfusion Council or a State Blood Transfusion Council.

10. The Army Central Welfare Fund or the Indian Naval Benevolent Fund or The Air Force

Central Welfare Fund.

Donations made to the following are eligible for 50% deduction without any qualifying limit:

.1. Jawaharlal Nehru Memorial Fund;

2. Prime Minister’s Drought Relief Fund;

3. National Children’s Fund

4. Indira Gandhi Memorial Trust;

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5. The Rajiv Gandhi Foundation.

Donations to the following are eligible for 100% deduction subject to qualifying limit (i.e.

10% of adjusted gross total income):

1. Donations to the Government or a local authority for the purpose of promoting family

planning;

2. Sums paid by a company to Indian Olympic Association;

Donations to the following are eligible for 50% deduction subject to the qualifying limit (i.e.

10% of adjusted gross total income). Donation to the Government or any local authority to be

utilized by them for any charitable purposes other than the purpose of promoting family

planning. Any authority set up for providing housing accommodation or for town planning.

Any notifies temple, mosque, gurudwara, church or other place for renovation and repairs.

Any other fund constituted under this section.

Amount of deduction: The quantum of deduction is as follows :-Category A- 100 % of

amount donated Category B -50 % of the amount donated in the funds Category C – 100% of

the amount donated in the funds subject to maximum limit of 10% of Adjusted GTI.

Category D – 50% of the amount donated in the funds subject to maximum limit of 10% of

Adjusted GTI. The total of these deductions under categories A, B, C, & D is the quantum of

deduction under this section without any maximum amount. Adjusted gross Total income for

this purpose means his gross totalincome minus long-term capital gain, short term capital

gain taxable u/s 111A, and all deductions u/s 80CCC to 80U except any deduction under this

section.

ILLUSTRATION: Calculate the gross deductions:

1. Prime minister’s National Relief fund Rs 15,000

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2. Central Welfare Fund of the Air Force Rs 20,000

3. Donation to temple Rs 11,000
4. GROSS TOTAL ADJUSTED INCOMERS Rs. 2, 48, 500/-
SOLUTION:Donations u/s Sec(80G)Prime minister’s National Relief fund = 15,000

Central Welfare Fund of the Air Force = 20,000

Total = 35,000With limit donation

Temple donation 11,000

Least of the two:(a) 10% of GTAI = 24,850

(b) 11,000

TOTAL = 11000+35000 = 46000

RATE OF DEDUCTION

100% deduction = 35,000

10% deduction = 50% of 11,000 = 5,500

Total = 40,500

SECTION 80GGC – DONATION TO POLITICAL PARTIES

DONATIONS TO POLITICALPARTIES u/s 80GGCIf donation is given to registered

political party in India or donation to electoral trust is eligible then it is allowed as a

deduction @ 100%Deduction = Actual amount donated

SECTION 80QQB – ROYALTYINCOME OF AUTHORS OFBOOKS

Under this section a deduction shall be allowed in the case of an individual resident in India

who has received income by way of royalty as an author or co-author or for granting a

copyright of a book to the publisher.

As per section 80QQB of the Act, where an author (including joint authors), being an

individual resident in India, earns in exercise of his/her profession, any lump sum
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consideration for the assignment or grant of any of his/her interests in the copyright of any

book being a work of literary, artistic or scientific nature, or of royalty or copyright fees

(whether receivable in lump sum or otherwise) in respect of such book, a deduction shall be

allowed in computing such royalty income. For this purpose, “books” have been defined not

to include brochures, commentaries, diaries, guides, journals, magazines, newspapers,

pamphlets, text-books for schools, tracts and other publications of similar nature, by

whatever name called. Additionally, in regard to royalties or copyright fees, the words “lump

sum” have been defined to include advance payment on account of such royalties or

copyright fees which is not returnable. Further, the book may be written in any language and

there is no restriction thereon for claiming the deduction under section 80QQBof the Act as

was present in the then prevailing section 80QQA of the Act.

Amount Of Deduction: The deduction under section 80QQB of the Act shall be equal to the

whole amount of such income or Rs 3,00,000/-,whichever is less. Since, the deduction is not

limited to be a one time deduction; the deduction can be claimed for each assessment year

subject to the continuation of this section in the future and fulfillment of the conditions

thereof. However, where the royalty income or copyright fee, is not a lump sum

consideration in lieu of all rights of the author in the book, so much of the income, before

allowing expenses attributable to such income, as is in excess of fifteen per cent of the value

of such books sold during the accounting year shall be ignored. In other words, where a lump

sum amount is not receivable by the author, then the deduction will be limited to 15 per cent

of the value of the books sold during the accounting year.

Royalty Income Earned From Outside India. In cases, where the author has earned royalty or

copyright fee from any source outside India, the deduction under section 80QQB of the Act

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shall be allowed to the extent the income is brought into India by, or on behalf of, the author

in convertible foreign exchange within a period of six months from the end of the accounting

year in which suchincome is earned or within such further period as the Reserve Bank of

India(RBI) allows in this behalf.

SECTION 80U –HANDICAPPED RESIDENT PERSONS

To help a disabled person by reducing his tax burden, this section has been incorporated.

Following are the provisions. The assessee is an individual being a resident. He is a person

with disability. He is certified by the medical authority to be a person with disability, at any

time during the previous year. He furnishes a certificate issued by the medical authority in

the prescribed form along the return of income

A fixed deduction of Rs. 50,000 in case of a person with disability Rs. 1,00,000 in case of a

person with severe disability.( having any disability over 80%)

Tax deductions are one of the few tax topics that generate some excitement. While nobody

likes to pay taxes, everybody loves to use deductions to lower their taxes. To put it plainly, a

tax deduction lowers your taxable income, which therefore lowers your taxliability. Some

people mistakenly think a tax eduction is a direct reduction of taxes owed. That is actually a

tax credit, which does directly reduce the amount of taxes owed instead of simply reducing

your taxable income.

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VARIOUS TAX AUTHORITIES AND THEIR POWERS UNDER THE INCOME TAX

ACT, 1961

INTRODUCTION:

In India, the Central Government has been empowered by Entry 82 of the Union List of

Schedule VII of the Constitution of India to levy tax on all income other than agricultural

income. The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules

1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual

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Finance Acts and Judicial pronouncements by Supreme Court and High Courts. The

Government of India imposes an income tax on taxable income of all persons including

individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons,

body of individuals, local authority and any other artificial judicial person. Levy of tax is

separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961.

The Indian Income Tax Department is governed by CBDT and is part of the Department of

Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds

that the government uses to fund its activities and serve the public. The Income Tax

Department is the biggest revenue mobilizer for the Government.

The Income Tax authorities are required to exercise their powers and perform their functions

so as to prevent harassment of assesses, tax-evasion, unnecessary discrimination in collection

of tax. However, there have been a number of instances of misuse of these rule- making

powers which have the effect of contradicting statutory provisions that have been given

binding effect, displacing the authoritative pronouncements of the Higher Judiciary and

causing an erosion of the constitutionally-mandated effect of Supreme Court declarations

under Article 141. In this scenario, for the purpose of effective financial management it

becomes imperative to understand the functioning, the powers and the limitation on the

powers of these tax authorities. This paper talks about various tax authorities under the

Income Tax Act, appointment of income tax authorities, the Central Board of Direct Taxes

and it’s powers, powers of other Income Tax authorities, jurisdiction of the Income-Tax

Authorities, and a conclusive analysis of the same.

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VARIOUS TAX AUTHORITIES UNDER THE INCOME TAX:

The Government of India has constituted a number of authorities to execute the Income Tax

Act and to control the Income Tax Department efficiently. There shall be the following

classes of income-tax authorities for the purposes of the Act as given under Section 116,

namely:

 The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act,

1963 (54 of 1963),

 Directors-General of Income-tax or Chief Commissioners of Income-tax,

 Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax

(Appeals),

 Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional

Commissioners of Income-tax (Appeals),

 Joint Directors of Income-tax or Joint Commissioners of Income-tax.

 Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy

Commissioners of Income-tax (Appeals),

 Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,

 Income-tax Officers,

 Tax Recovery Officers,

 Inspectors of Income-tax.

In this connection, it may be noted that under section 2(7A), the term ‘Assessing Officer’

means –

(a) The Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy

Director; or (b) The Income-tax Officer who is vested with the relevant jurisdiction by virtue

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of directions or orders issued under section 120(1) or (2) or any other provision of the Act;

and

(c) The Additional Commissioner or Additional Director or Joint Commissioner or Joint

Director who is directed under section 120(4)(b) to exercise or perform all or any of the

powers and functions conferred on, or assigned to, an Assessing Officer.

APPOINTMENT OF INCOME TAX AUTHORITIES:

The Central Government can appoint those persons whom it thinks are fit to become Income

Tax Authorities. The Central Government can authorize the Board or a Director-General, a

Chief Commissioner or a Commissioner or a Director to appoint income tax authorities

below the ranks of a Deputy Commissioner or Assistant Commissioner, According to the

rules and regulations of the Central Government controlling the conditions of such posts.

THE CENTRAL BOARD OF DIRECT TAXES AND IT’S POWERS:

The Central Board of Direct Taxes is a statutory body constituted under the Central Board of

Revenue Act, 1963. It consists of a number of members appointed by the Central

Government for the performance of such duties, as may be entrusted to the Board from time

to time. It is functioning under the jurisdiction of the Ministry of Finance. The Central Board

of Direct Taxes, besides being the highest executive authority, exercises control and

supervision over all officers of the Income-tax Department and is authorised to exercise

certain powers conferred upon it by the Income-tax Act, 1961. In particular, it has the

powers, subject to the control and approval of the Central Government to make any rules,

from time to time for the proper administration of the provisions of the Income-tax Act,

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1961. All the rules under the Act are framed by the Board under section 295 of the ITA, 1961

and placed before the Parliament. In addition to the general power of making rules and of

superintendence, the Board has been given specific powers on several matters.

The important powers of the Board and the relevant sections granting them have been

detailed below.

Powers of the Board:

The Board has been empowered under Section 119 to issue instructions and circulars to it’s

subordinates for the proper administration of the Act. Under Section 118, CBDT shall control

all the Income Tax Authorities subject to an overall framework of Central Government. It is,

in addition, obligatory for the various authorities and all other persons employed in the

execution of the Act to observe and follow such orders, instructions and directions of the

Board. However, the Board is not empowered to issue orders, instructions or directions in

such a way as to –

1. Require any income-tax authority to make the assessment of a particular case in a

particular manner, or

2. Interfere with the discretion of the Commissioner (Appeals) in the exercise of his

appellate functions.

Further, the Board may, if it considers necessary or expedient to do so, for the purpose of

proper and effective management of the work of assessment and collection of revenue, issue

general or special orders from time to time in respect of any class of incomes or class of

cases setting the Board may relax the provisions of Section 115P, 115S, 139, 143, 144, 147,

148, 154, 155, 234A, 234B, 271 and 273. Such order etc., may be issued by general or

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special orders in respect of any class of incomes or fringe benefit or class of cases. Such

orders are the guidelines, principles or procedures to be followed by other income-tax

authorities in the work relating to assessment or collection of revenue or the initiation of

proceedings for the imposition of penalties. If the Board thinks it is necessary for public

interest to do so the Board can publish and circulate the document in the prescribed manner.

Also, the Board, to avoid genuine hardship in any case or classes of cases, may by general or

specific order authorise any income tax authority, to admit an application or claim for any

exemption, deduction, refund or any other relief under the Act after the expiry of the period

specified under the Act and deal with the same on merits in accordance with law. However,

such order cannot be issued to a Commissioner (Appeals).

The Board, in addition, can relax any requirement contained in Sections 14 to 59 and 80A to

80U where the assessee has failed to comply with any requirement. However, such default in

the requirement was due to circumstances beyond their control or if the assessee has

complied with such a requirement before the completion of assessment in relation to the

previous year in which such deduction is claimed. Every such order is to be laid before each

House of Parliament.

Moreover, the Board can exercise its powers to remove difficulties in the matter of Sections

201(1A), 210, 211, and 234C.

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The Scope of the Rule- Making Powers of the Board Under Section 119 of the Income

Tax Act:

The scope of the rule-making powers of the Board have been discussed below with respect to

their binding value on the Revenue Department, the assesses, the Courts/ Tribunals and the

nature of the circulars.

With Respect to Binding Value of Circulars on the Revenue:

The present view is that all circulars issued by the CBDT under Section 119 of ITA, 1961

would be binding upon the department even if they deviate from the provisions of the Parent

Act. An earlier case decided by the Supreme Court which dealt with the binding value of

circulars on the Revenue was that of K.P. Varghese. The assessee had entered into a bona

fide transaction for the sale of a house, earning no profit, as it was a related party transaction.

Despite the fact that there had been no underestimation of its value, the Revenue sought to

tax the assessee on the basis of the fair market value of the house. The assessee argued on the

basis of a circular issued by the CBDT, stating that the purpose of using fair market value in

certain circumstances was to prevent tax evasion through the understatement of the full value

of consideration on the transfer of a capital asset. It came to the notice of the CBDT that

several Income Tax Officers were, in violation of Section 119 of the Income Tax Act, 1961,

taxing bona fide transactions based on their fair market value. Thus, it became necessary for

the Board to issue another circular, clarifying that Board circulars shall be binding on all

Officers in view of the decisions of the Supreme Court in Navnitlal Javeri and Ellerman

Lines. In view of these decisions, the Division Bench in this case held the circulars to be

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binding on the Revenue, even if they deviate from the statute, holding that fair market value

must only be used in cases where consideration has been understated.

Other cases have also reiterated that it is not open to the Revenue to argue against circulars

issued by it: 'It cannot but urge the point of view made binding by the...circular'. Similarly, in

Mahavir Aluminium, the Supreme Court held the CBEC circular exempting agricultural

mechanical appliances from the payment of duty to be binding on the Board. The most recent

case that deals with the question of whether circulars issued by the CBEC shall be binding on

the Department is India Cements. The Supreme Court, in 2011, held that circulars issued for

the purpose of providing sales tax deferral (to increase the production levels of industries in

the State of Tamil Nadu) that are not contrary to the provisions of the Tamil Nadu General

Sales Tax Act, 1959 would be binding on the Department. In the instant case, the circular did

not conflict with either the statute or the scheme contemplated thereunder, and the question

of whether they shall be binding was thus inconsequential.

While the relevant provisions of various taxing statutes all suggest that circulars issued by

taxing authorities shall be binding on Department authorities, arguments are made that the

extent to which these instructions and directions shall be binding must be restricted in certain

circumstances. Thus, the assessee can challenge the issuance of circulars, and adjudicatory

authorities are also afforded the flexibility to use their independent interpretations which may

deviate from Department circulars.

With Respect to Binding Nature of Circulars on Assesses:

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While the position regarding the binding nature of circulars upon the Revenue is well-settled,

a related question that arises for consideration is whether circulars shall be binding on

assessees. It is well-established that circulars issued by the CBDT do not bind assessees.

Thus, the assessee has the right to challenge the correctness of a circular before a quasi-

judicial authority constituted under the relevant statute if it confers greater burden than the

statue permits.

A Full Bench in Uco Bank considered the effect of a certain circular issued under Section

119 of the Income Tax Act, 1961 exempting from income the interest payable on ‘sticky

loans’, whose recovery is doubtful and has not been included in the profit and loss account of

the assessee. It stated: ‘Such instructions may be by way of relaxation of any of the

provisions of the sections specified there or otherwise. The Board thus has power, inter alia,

to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing

circulars in exercise of its statutory powers under Section 119 of the Income-tax Act which

are binding on the authorities in the administration of the Act. Under Section 119(2)(a),

however, the circulars as contemplated therein cannot be adverse to the assesses.’ Therefore,

the settled position of law with regard to assesses is that they can challenge the circular if it

has an adverse impact on them that deviates from the statutory position.

With Respect to Binding Effect of on Courts and Tribunals:

According to the present position taken by the Courts, CBEC circulars shall be binding on

the Courts as the interpretation of the statue will supersede the interpretation given by Courts.

According to the earlier point of view held by the Courts, notifications issued by the

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Government are, in the opinion of the Court, mere understandings of statutory provisions,

and cannot be used to usurp the jurisdiction of the courts in interpreting statutory provisions.

Thus, Bengal Iron suggests that quasi-judicial authorities shall be bound only by ‘law’, which

does not include administrative instructions, opinions, clarifications and circulars.

Nevertheless, the same Court in Kirloskar Oil Engines held that while trade notices issued by

the CBEC generally have no binding value, in the absence of other evidence, the court must

consider trade notices in deciding disputes. The argument that CBEC circulars shall not bind

adjudicatory authorities was raised in Paper Products, wherein the orders of the Customs

Excise and Gold (Control) Appellate Tribunal (CEGAT) were challenged by an assessee who

argued that the circulars exempting certain products of the printing industry include his

products of manufacture. The Revenue argued that the impugned circulars, though binding

on the Department, would not bind the CEGAT. The Supreme Court, in deciding that the

circulars were binding on the Department, ultimately held that the Department does not have

the option of making arguments contrary to the impugned circulars. Unfortunately, it did not

actually address this validity of the Revenue’s contention. In Hindustan Aeronautics Ltd.,

however, a conclusive decision on this point was made. A government-owned company

aggrieved by the Revenue’s disallowance of certain deductions for its manufacture of

aeroplanes filed a revision petition before the Commissioner of Income Tax. Since the order

disallowing the deduction had been made the subject of a separate appeal before the

Appellate Tribunal, the Commissioner dismissed the petition. This decision was challenged

by the assessee, who used Navnitlal Javeri and Ellerman Lines to argue that the circular

requiring the Commissioner to examine the revision of the assessee on merits would bind

him. The Revenue, on the other hand, argued that while it is unquestionable that circulars

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shall be binding on the Revenue, the Judiciary cannot direct that a circular shall be given

effect to rather than the Supreme Court or High Courts’ interpretation of the law in question.

The Division Bench agreed with the Revenue’s contention that a circular shall not bind

adjudicatory bodies.

In 2002, this decision was effectively overruled by a Constitution Bench requested in Dhiren

Chemicals. Here, a notification had been issued by the CBEC exempting certain products

from excise duty, where duty was ‘already paid’ on the raw materials used in their

manufacture, thus preventing the payment of double duty. The construction of this exemption

had, for some time, been the subject of controversy, raising the question of whether imported

raw materials which are either not liable to excise duty, or have the benefit of nil duty

payable, shall be included within the ambit of this notification. The CBEC had, consequently,

issued a number of circulars clarifying that the benefit shall not apply unless excise duty

had actually been paid on the raw materials utilised. On the other hand, a Full Bench of the

Supreme Court had already, in Usha Martin, decided that the notification would apply even

when a nil rate of duty was applicable. Thus, the Court in Dhiren Chemicals was required to

choose whether to follow the precedent set by its Full Bench earlier, or the interpretation

rendered by the CBEC circular issued in this regard. The Court ultimately held: 'We need to

make it clear that, regardless of the interpretation that we have placed on the said phrase, if

there are circulars which have been issued by the Central Board of Excise and Customs

which place a different interpretation upon the said phrase, that interpretation will be binding

on the revenue.” This decision was the first to reflect a marked shift in the Judiciary’s

perspective on the extent to which circulars issued by the CBEC shall be binding. In effect,

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by holding the Department strictly to the position adopted by it in the circulars it issues, the

Court unwittingly weakened the impact of its own decisions by disregarding the

interpretation of the Full Bench in Usha Martin in favour of the interpretation rendered by the

CBEC in the impugned order. This precedent-setting statement, negating the impact of the

decision rendered by a weaker bench earlier in Hindustan Aeronautics Ltd., was subsequently

followed in 2004 in Maruti Foam, when the Supreme Court reaffirmed that CBEC circulars

shall be binding notwithstanding their conflict with the judgment rendered in Usha Martin.

With Respect to Benevolent Circulars:

Benevolent circulars issued by the Board even if they deviate from the legal position are

required to be followed by the department since such circulars would go to the assistance of

the assessee. Apart from the fact that the circulars issued by the Board are binding on the

department, the department is precluded from challenging the correctness of the said

circulars even on the ground of the same being inconsistent with the statutory provision.

In Navnitlal Javeri, a Constitution Bench of the Supreme Court addressed the question of

whether a circular issued by the Board of Revenue, granting an exemption from income tax

on genuine loans advanced by companies to their shareholders, would be binding on the

Board, notwithstanding that its contents violated the parent statute. Section 2(6A) of the

Income Tax Act, 1961 made no distinction between bona fide transactions and devices used

for tax avoidance (by providing shareholders tax-free loans instead of taxable dividends).

The Court held that since the circular was conferring a benefit upon assessees and diluting

the stringent requirements of the Act, the Board was required to comply with its own

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instructions, and could not itself contend that the circular could not be enforced. The decision

in Navnitlal Javeri was affirmed by the Division Bench in Ellerman Lines, in which the

impugned notification laid down the principles to be followed in assessing the Indian income

of foreign shipping companies. Accordingly, Ellerman Lines, a British shipping company,

was by the said notification assessed by way of a certificate issued by U.K. authorities

(declaring the income of the company), allowing an investment allowance which had been

recognised by the Revenue in India as equivalent to the development rebate made available

under the Income Tax Act, 1922. Interestingly, the Court recognised the difficulties faced by

shipping companies in complying strictly with the income tax provisions of various countries

in which they operate, and, as a result, considered the notification, waiving strict compliance

with the requirements of the Act, to be valid and binding on the Revenue

With Respect to Aid to Construction:

Further a circular provides extraneous aid to construction being contemporanea exposito.

With respect to Earlier Orders:

Where a circular is issued after the date on which the particular order is passed, the later

issued circular can have no application to the earlier passed order unless there is something in

the circular making itself applicable even retrospectively.

With Respect to Withdrawn Circulars:

Sometimes a circular is withdrawn or the section concerned is amended. In the case of

Ellerman

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Lines Ltd. vs CIT, the Supreme Court held that instructions issued by the Board prior to the

amendment of a section will hold good even if they are not strictly in accordance with the

related

section but merely lay down certain just and fair methods of approach to a difficult problem.

In

Tata Iron and Steel Co. Ltd. vs Upadhyaya, it was made clear that the withdrawal of a

circular,

subsequent to an assessment or any other action in pursuance of the same, will not affect the

legal position.

POWERS OF OTHER INCOME TAX AUTHORITIES:

Powers of the Income Tax Authorities vary with the nature of the position acquired. Given

below are the various tax authorities along with the powers they hold under that position.

Director General/ Director:

The Director General/ Director, appointed by the Central Government, are required to

perform such functions as maybe assigned by the Central Government, are required to

perform such functions as may be assigned by the Central Board of Direct Taxes. This

position enjoys the following powers under different provisions of the Act:

a. To give instructions to the Income-Tax officers

b. To enquire or investigate into concealment

c. To search and seizure

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d. To requisite books of account

e. To survey

f. To make any enquiry

Commissioners of Income Tax:

Commissioners are appointed by the Central Government. Generally, they are appointed to

head income-tax administration of a specified area. As the head of administration, a

Commissioner of income-tax enjoys certain administrative as well as judicial powers. A

commissioner may exercise powers of an assessing officer. It has the power to transfer any

case from one or more assessing officers to any other assessing officer. It can grant approval

for an order issued by the assessing officer. Prior approval is required for reopening of an

assessment. Its, also, has the power to revise an order passed by an assessing officer in

addition to many other powers as given in the Income Tax Act, 1961.

Commissioner (Appeals):

Commissioners of Income-Tax (Appeals) are appointed by the Central Government. It is an

appellate authority vested with the following judicial powers:

a. Power regarding discovery, production of evidence etc.

b. Power to call information.

c. Power to inspect registers of companies.

d. Power to set off refunds against tax remaining payable.

e. Power to dispose of appeals.

f. Power to impose penalty.

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Joint Commissioners:

Joint Commissioners are appointed by the Central Government. The main function of the

authority is to detect tax- evasion and supervise subordinate officers. Under the different

provisions of the Act, the Joint Commissioner enjoys the power to accord approval to adopt

fair market value as full consideration, instruct income tax officers, exercise powers of

income tax officers, the power to call information, to inspect registers of companies, to make

any enquiry among other powers.

Income-Tax Officers:

While Income-Tax officers of Class I services are appointed by the Central Government,

Income-tax Officers of Class II services are appointed by the Commissioner of Income-Tax.

Powers, functions and duties of Income-Tax officers are provided in many sections, some of

which are Power of search and seizure, Power of assessment, Power to call for information,

Power of Survey etc.

Inspectors of Income-Tax:

They are appointed by the Commissioner of Income-Tax. Inspectors of Income-Tax have to

perform such functions as are assigned to them by the Commissioner or any other authority

under whom they are appointed to work.

THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX

AUTHORITIES:

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The Income Tax Act, 1961 specifies the scope of the powers handed to the income-tax

authorities. Given below are some of the important powers of the Income Tax Authorities

and their scope as given in the Sections provided under the Income Tax Act, 1961:

· Power to Transfer Cases [Section 127]:

CBDT can transfer the case from Assessing Officer to another A.O. subordinate to him after

giving a reasonable opportunity of being heard to the concerned assessee. However, no

opportunity of being heard shall be required if the case is to be transferred from one A.O. to

another A.O. within the same city, town or locality. Disputes regarding jurisdiction shall be

resolved by the concerned CCIT or CIT on mutual understanding. However, for any

disagreement, the matter shall be referred to CBDT and CBDT shall resolve the dispute by

way of issuing a notification in the Official Gazette of India.

· Opportunity of Being Reheard [Section 129]:

Whenever, an Income Tax Authority ceases to exercise jurisdiction over a particular case and

is being succeeded by another Income Tax Authority, then the successor Income Tax

Authority shall continue the pending proceeding from the same stage at which it was left

over by the predecessor Income Tax Authority. There shall be no requirement on the part of

the successor Income Tax Authority to reissue any notice already issued by his predecessor.

However, if the concerned assessee demands that before the successor Income Tax Authority

continues the proceeding, he shall be given an opportunity of being reheard to explain his

case to the successor Income Tax Authority, then in such case, an opportunity of being

reheard has to be given to the assessee. (However, such an opportunity of being reheard is

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required to be given only if the concerned assessee demands for it and not otherwise).The

time of A.O. lost in giving such opportunity of being reheard to the assessee, shall be

excluded while calculating time limit to complete the assessment.

· Discovery, Production of Evidence etc. [Section 131]:

The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner,

Commissioner (Appeals), the Chief Commissioner and the Dispute Resolution Panel referred

to in section 144C have the powers vested in a Civil Court under the Code of Civil

Procedure, 1908 while dealing with the following matters:

(i) discovery and inspection;

(ii) enforcing the attendance of any person, including any officer of a banking company and

examining him on oath;

(iii) compelling the production of books of account and documents; and

(iv)issuing commissions

· Search and Seizure [Section 132]:

Today it is not hidden from income tax authorities that people evade tax and keep

unaccounted assets. When the prosecution fails to prevent tax evasion, the department has to

take actions like search and seizure. Under this section, wide powers of search and seizure

are conferred on the income-tax authorities. The provisions of the Criminal Procedure Code

relating to searches and seizure would, as far as possible, apply to the searches and seizures

under this Act. Contravention of the orders issued under this section would be punishable

with imprisonment and fine under section 275A.

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· Power to Requisition Books of Account etc. [Section 132A]:

Where the Director or the Director-General or Commissioner or the Chief Commissioner in

consequence of information in his possession, has reason to believe that (a), (b), or (c) as

mentioned under section 132(1) and the book of accounts or other documents or the assets

have been taken under custody by any authority or officer under any other law, then the

Chief Commissioner or the Director General or Director or Commissioner can authorize any

Joint Director, Deputy Director, Joint Commissioner, Assistant Commissioner, Assistant

Director, or Income tax Officer to require the authority to provide sue books of account,

assets or any documents to the requisitioning officer, when such officer is of the opinion that

it is no longer necessary to retain the same in his custody.

· Application of Retained Assets [Section 132B]:

This section provides that the seized assets can be appropriated against all tax liabilities of

the assessee. However, if the nature of source of acquisition of seized assets is explained

satisfactorily by the assessee, then, such assets are required to be released within a period of

120 days from the date on which last of the authorisations for search under section 132 is

executed after meeting any existing liabilities. For this purpose, it has been provided that the

assessee should make an application to the Assessing Officer within a period of 30 days from

the end of the month in which the asset was seized. The assessee shall be entitled to simple

interest at ½% per month or part of a month, if the amount of assets seized exceeds the

liabilities eventually, for the period immediately following the expiry of 120 days from the

date on which the last of the authorisations for search under section 132 or requisition under

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section 132A was executed to the date of completion of the assessment under section 153A

or under Chapter XIV-B.

· Power to call for information [Sections 133]:

The Commissioner The Assessing Officer or the Joint

Commissioner may for the purpose of this Act:

(a) Can call any firm to provide him with a return of the addresses and names of partners of

the firm and their shares;

(b) Can ask any Hindu Undivided Family to provide him with return of the addresses and

names of members of the family and the manager;

(c) Can ask any person who is a trustee, guardian or an agent to deliver him with return of the

names of persons for or of whom he is an agent, trustee or guardian and their addresses;

(d) Can ask any person, dealer, agent or broker concerned in the management of stock or any

commodity exchange to provide a statement of the addresses and names of all the persons to

whom the Exchange or he has paid any sum related with the transfer of assets or the

exchange has received any such sum with the particulars of all such payments and receipts;

· Power of Survey [Section 133A]:

The term 'survey' is not defined by the Income Tax Act. According to the meaning of

dictionary 'survey' means casting of eyes or mind over something, inspection of something,

etc. An Income Tax authority can have a survey for the purpose of this Act. The objectives of

conducting Income Tax surveys are:

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(a)To discover new assessees;

(b)To collect useful information for the purpose of assessment;

(c)To verify that the assessee who claims not to maintain any books of accounts is in-fact

maintaining the books; (d)To check whether the books are maintained, reflect the correct

state of affairs.

· Power to Collect Certain Information [Section 133B]:

For the purpose of collection of information which may be useful for any purpose, the

Income tax authority can enter any building or place within the limits of the area assigned to

such authority, or any place or building occupied by any person in respect of whom he

exercises jurisdiction.

· Power to Inspect Registers of Companies [Section 134]:

The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), or any

person subordinate to him authorised in writing in this behalf by the Assessing Officer, the

Joint Commissioner or the Commissioner (Appeals), as the case may be, may inspect and if

necessary, take copies, or cause copies to be taken, of any register of the members, debenture

holders or mortgagees of any company or of any entry in such register.

Other Powers [Sections 135 and 136]:

The Director General or Director, the Chief Commissioner or Commissioner and the Joint

Commissioner are competent to make any enquiry under this act and for all purposes they

shall have the powers vested in an Assessing Officer in relation to the making of enquiries. If

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the Investigating officer is denied entry into the premises, the Assessing Officer shall have all

the powers vested in him under sections 131(1) and (2). All the proceedings before Income

tax authorities are judicial proceedings for purposes of section 196 of the Indian Penal Code,

1860, and fall within the meaning of sections 193 and 228 of the Code. An income-tax

authority shall be deemed to be a Civil Court for the purposes of section 195 of the Criminal

Procedure Code, 1973.

JURISDICTION OF INCOME-TAX AUTHORITIES:

Income Tax authorities are required to exercise their powers and perform their functions in

accordance with directions given by the Board. Tax authority higher in rank, if directed by

Board, shall exercise the powers and perform tie functions of the Income- Tax authority

lower in rank. The directions of CBDT include direction to authorize any Income Tax

authority to issue instructions to their subordinates. In issuing instruction or orders, the Board

or the Income-Tax authority may adopt any one or more of the following criteria -

(a) Territorial area

(b) Person or classes of persons

(c) Incomes or classes of incomes

(d) Cases or classes of cases

The Board can also authorize Director General or Chief Commissioner or Commissioner to

issue orders in writing to the effect that the functions conferred or assigned to the Assessing

Officer in respect of the above four criteria shall be exercised or performed by Joint

Commissioner or Joint Director.

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Also, the Assessing Officer has been vested with jurisdiction over any area or limits of such

area -

1. If a person carries on business or profession only in that area. In respect of that person; or

2. If a person carries on business or profession in more than one place, then the principal

place of business or profession situated in that area; or

3. In respect of any other person residing within that area.

Any dispute relating to jurisdiction to assess any person by an Assessing Officer shall be

determined by Director General /Chief Commissioner/Commissioner of Income Tax If the

dispute is relating to areas within the jurisdiction of different Director General /Chief

Commissioner/ Commissioner, then such issue is to be solved mutually among themselves. If

the above authorities are not in agreement among themselves such matter has to be decided

by the Board or Director General/ Chief Commissioner/ Commissioner authorized by the

Board.

CONCLUSION:

It is believed that tax-authorities are independent judicial officers who are required to pass

reasoned orders based on their own reasoning un-influenced by instructions or advice from

their superior officers. The Central Excise adjudication manual published in 1988 (that was

its last publication), in para 39 directed that Board Orders and reference numbers should not

be quoted in the Adjudication Orders. It was further advised that Law Ministry’s opinion is

confidential and should never be communicated in the same language to even sub-ordinate

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officers. There are several Assistant Commissioners who boast “I am an adjudicating

authority and not bound by the Board orders”.

This has resulted in a considerable degree of uncertainty in financial management with

respect to taxes. For example it is hard to determine for the assesses, the binding value of

circulars issued by CBDT under Section 119 of the Income Tax Act, 1961. Also, these

circulars blatantly contradict statutory provisions that have been given binding effect,

displace the authoritative pronouncements of the Higher Judiciary and cause an erosion of

the constitutionally-mandated effect of Supreme Court declarations under Article 141.

In recent times the catena of judicial pronouncements and statue provisions are creating quite

a stir. However, there is still a need to further define and redefine and implement the

extent to which Income Tax authorities are required to exercise their powers and perform

their functions so as to prevent harassment of assesses, tax-evasion, unnecessary

discrimination in collection of tax and to help assesses effectively manage taxes.

Faculty name: [Link]

Signature:

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