Final Course

Study Material
(Modules 1 to 4)

Paper 4
Direct Tax Laws &
International Taxation
[Direct Tax Laws as amended by the Finance Act, 2025]
Assessment Year 2026-27

Module – 1
(Relevant for May 2026, September 2026 and
January 2027 examinations)

BOARD OF STUDIES (ACADEMIC)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 This Study Material has been prepared by the faculty of the Board of Studies (Academic). The
objective of the Study Material is to provide teaching material to the students to enable them to
obtain knowledge in the subject. In case students need any clarification or have any suggestion for
further improvement of the material contained herein, they may write to the Joint Director, Board of
Studies (Academic).
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Edition : September, 2025

Author : CA. (Dr.) Rashmi Goel

Committee/Department : Board of Studies (Academic)

E-mail : bosnoida@[Link]

Website : [Link]

Price : ` /- (For All Modules)

ISBN No. :

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)

Printed by :

© The Institute of Chartered Accountants of India

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BEFORE WE BEGIN …

Direct Tax Laws & International Taxation: Dynamic Subject Area

Direct Tax Laws & International Taxation is one of the dynamic subjects of the chartered
accountancy course. The direct tax laws of the country undergo significant changes every year with
the passing of the annual Finance Act. Apart from these significant amendments ushered in every
year through the Finance Act, notifications and circulars are also issued from time to time by the
Central Board of Direct Taxes (CBDT), the statutory authority in charge with the administration of
direct taxes, to implement the provisions of the Act and clarify issues regarding the meaning and
scope of certain provisions. Further, decisions are pronounced by various Courts interpreting the
provisions of tax laws.
With increased cross border transactions and the whole world virtually becoming one market, there
is a need for chartered accountants to enhance their knowledge base in international taxation.
Countries across the globe are entering into tax treaties to avoid double taxation of a single
transaction. In a highly advanced IT enabled business scenario where an entity operates from many
establishments spread throughout the globe, chartered accountants have to be well versed with the
nuances of international taxation to be able to give an informed and correct advice and ensure
compliance with tax laws. Accordingly, international taxation has been included as an integral part
of this paper.

The contents of the syllabi of this paper is divided into three parts –
1. Chapters based on substantive law of direct taxes including tax planning and tax avoidance;
2. Chapters based on the compliance and procedural law of direct taxes; and

3. Chapters based on international taxation.

The relevant Finance Act and Assessment Year

This Study Material is based on the provisions of direct tax laws, as amended by the
Finance Act, 2025, and the Taxation Laws (Amendment) Act, 2025 and the significant notifications,
circulars issued and other legislative amendments made upto 31st July, 2025. The computational
problems have been solved on the basis of the provisions of direct tax laws applicable for
A.Y.2026-27. The Study Material is, therefore, relevant for May 2026, September, 2026 and January,
2027 examinations. In this Study Material, the amendments made by the Finance Act, 2025 and the

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Taxation Laws (Amendment) Act, 2025 and latest notifications and circulars issued have been
indicated in italics/bold italics.

The significant circulars and notifications issued and other legislative amendments, if any, made
upto 31.10.2025, 28.2.2026 and 30.6.2026 but not covered in this material, relevant for May, 2026,
September, 2026 and January, 2027 examinations, respectively, will be webhosted as Statutory
Update at the BoS Knowledge Portal.
Read the Bare Act & Rules along with Study Material

At the Final level, along with the Study Material, students are also advised to read the Income-tax
Act, 1961 and Income-tax Rules, 1962, available at the website of the income-tax department
[Link]. This will help understand the language of law and sequence of sections
and rules. The circulars and notifications issued by CBDT, the income-tax return forms, important
provisions relating to firms, companies, trusts, FAQs etc. are also available at this website. Students
are advised to visit the income-tax department’s website and enhance their knowledge.
Framework of Chapters: Uniform Structure comprising of specific components

Efforts have been made to present the complex direct tax laws in a lucid manner. Care has been
taken to present the chapters in a logical sequence to facilitate easy understanding by the students.
The Study Material has been divided into four modules for ease of handling by students. The first
three modules are on direct tax laws and the fourth module is on international taxation.
Each chapter of the Study Material has been structured uniformly and comprises of the following
components:
Components of About the component
each Chapter
1 Learning Learning outcomes which you need to demonstrate after learning each
Outcomes topic have been detailed in the first page of each chapter. Demonstration
of these learning outcomes would help you achieve the desired level of
technical competence
2 Content The concepts and provisions of direct tax laws and international taxation
are explained in a student-friendly manner with the aid of
examples/illustrations/diagrams/flow charts. Diagrams and Flow charts
would help you understand and retain the concept/ provision learnt in a
better manner. Examples and illustrations would help you understand
the application of concepts/provisions. These value additions would,
thus, help you develop conceptual clarity and get a good grasp of the
topic.

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3 Significant The summary of recent significant select Supreme Court and High Court
Select Cases rulings have been tabulated at the end of each chapter capturing the gist
of the Court decisions interpreting the provisions of tax laws.
In addition, case laws (including recent case laws) also form part of the
discussion of topics in the content as well as in the questions and
answers in “Test Your Knowledge” component.
Questions on “Significant Select Cases” in direct tax laws have been
given at the end of Module 3 to enable you to apply the rationale of court
rulings in addressing issues.
4 Test Your The questions and answers at the end of each chapter would help you to
Knowledge analyse the provisions of direct tax laws and international taxation and
apply the same in problem solving, thus, sharpening your application
skills. In effect, these questions would test your ability to analyse and
apply the concepts/provisions learnt in solving problems and addressing
issues.

We hope that these student-friendly features in the Study Material improves your learning curve and
sharpens your analytical and interpretational skills.

Happy Reading and Best Wishes!

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PAPER – 4 : DIRECT TAX LAWS & INTERNATIONAL TAXATION

(One paper ─ Three hours –100 Marks)

Objective:

(a) To acquire the ability to analyse and interpret the provisions of direct tax laws and recommend
optimal solutions to practical problems in a tax efficient manner; and

(b) To apply the provisions of direct tax laws and the concepts, principles and provisions of
international taxation to recommend solutions to issues involved in cross border transactions.
Contents:

I. (i) Comprehensive computation of income-tax liabilities of companies and other entities

under the alternative tax regimes under the Income-tax Act, 1961 to optimise tax
liability

- General provisions under the Act for computation of total income and tax liability
for companies and other entities

- Special tax regimes under the Act for companies and other entities

- Optimisation of tax liability of companies and other entities through tax planning

(ii) Special Provisions relating to charitable and religious trust and institutions, political
parties and electoral trusts, business trusts, securitisation trusts, investment funds and
other funds/trusts

(iii) Anti-avoidance provisions under the Act

(iv) Provisions to address tax challenges on digitalization

II. Tax Administration and Appellate Mechanism

Deduction, Collection and Recovery of Tax

Income-tax Authorities

Assessment Procedures

Appeals and Revision; and Dispute Resolution

Provisions to counteract unethical tax practices

- Taxation of undisclosed income under the Income-tax Act, 1961

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- Taxation of undisclosed foreign income and assets

- Penalties and offences and prosecution

Miscellaneous Provisions

Tax Audit and Ethical Compliances

III. International Taxation

(i) Taxation of cross border transactions and Non-resident taxation under the Income-tax
Act, 1961, including

- Transfer Pricing

- Non-resident Taxation

- Double Taxation Relief

- Advance Ruling

(ii) Other Aspects of International Taxation, namely,

- Significant articles of OECD and UN Model Tax Conventions

- Fundamentals of BEPS

- Application and Interpretation of Tax Treaties

- Latest developments in international taxation

Note: If any new legislation(s) are enacted in place of an existing legislation(s), the syllabus will
accordingly include the corresponding provisions of such new legislation(s) in the place of the
existing legislation(s) with effect from the date to be notified by the Institute. Similarly, if any existing
legislation(s) on direct tax laws ceases to be in force, the syllabus will accordingly exclude such
legislation(s) with effect from the date to be notified by the Institute.

Further, the specific inclusions/exclusions in any topic covered in the syllabus will be effected by
way of Study Guidelines every year, if required. Specific inclusions/exclusions in a topic may also
arise due to additions/deletions made every year by the Annual Finance Act.

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Overview of selected key amendments made by the Finance Act, 2025

and the Taxation Laws (Amendment) Act, 2025
This edition of the study material on Direct Tax Laws and International Taxation has been
meticulously updated in line with the Direct tax Laws, as amended by the Finance Act, 2025 and the
Taxation Laws (Amendment) Act, 2025 along with significant Notifications and Circulars issued upto
31.07.2025. It is specifically designed for A.Y. 2026-27 and is applicable for May 2026, September
2026 and January 2027 examinations.

The amendments made by the Finance Act, 2025, the Taxation Laws (Amendment) Act, 2025 and
significant Notifications and Circulars issued upto 31.7.2025 have been incorporated in this material.
Accordingly,

 the content including tabular presentations, diagrams, flow charts etc. have been added,
deleted, modified on the basis of provisions of direct tax laws applicable for A.Y. 2026-27.

 Additionally, examples, illustrations given during the discussion, significant select cases of
Supreme Court and High Court rulings forming part of the discussion or contained in the
questions and tabulated at the end of each chapter and "Test Your Knowledge" questions
have been updated, deleted or modified in accordance with these amendments.

While the amended provisions are distinctly highlighted in italics/bold and italics throughout the
material for easy access and quick reference, the concise summary of some of the key amendments
introduced by the Finance Act, 2025 and the Taxation Laws (Amendment) Act, 2025 are given here
below:

Default Tax Regime [Section 115BAC] - The tax slabs under the Default Tax Regime have
been restructured as follows:
Total income Rate of tax
Upto ` 4,00,000 Nil
From ` 4,00,001 to ` 8,00,000 5%
From ` 8,00,001 to ` 12,00,000 10%
From ` 12,00,001 to ` 16,00,000 15%
From ` 16,00,001 to ` 20,00,000 20%
From ` 20,00,001 to ` 24,00,000 25%
Above ` 24,00,000 30%

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Increase in limit of rebate under section 87A: The limit of total income for claiming rebate
under section 87A is increased from ` 7 lakhs to ` 12 lakhs and corresponding, the limit of
rebate from ` 25,000 to ` 60,000. It implies that the tax liability of a resident individual who
is paying tax under default tax regime having total income upto ` 12 lakhs excluding income
taxable at special rates u/s 111A, 112, 112A etc. will be Nil. Marginal relief will still be
applicable for income marginally higher than ` 12 lakhs.

Income on redemption of Unit Linked Insurance Policy: To rationalise the provisions for
unit-linked insurance policies, ULIPs to which exemption under clause (10D) of section 10
does not apply, is classified as capital assets under section 2(14) and the profit and gains
from the redemption of such ULIPs shall be charged to tax as capital gains under section
45(1B). Definition of equity-oriented fund is also amended to include all ULIPs to which
exemption under clause (10D) of section 10 does not apply.

Revamping of Capital Gain - The provisions of period of holding for classifying capital asset
as long term or short term, indexation benefit, tax rates for capital gains taxable u/s 112, 111A
and 112A etc. have been amended by the Finance (No. 2) Act, 2024. Certain amendments
were applicable with effect from certain date like 23.7.2024. Accordingly, both pre and post
amended provisions were discussed in this unit. However, for May 2026, September 2026
and January 2027 examinations, the relevant previous year is P.Y. 2025-26. Therefore, this
chapter has been revamped to reflect only post amended provisions.

Exemption from withdrawals from National Savings Scheme (NSS): Section 80CCA
provides for a deduction for any amount deposited in the NSS. No deduction would be allowed
in relation to such amount deposited on or after 1.4.1992.

The NSS 1987 accounts are still operational, however due to the notification G.S.R.538E
dated 29.8.2024 issued by Ministry of Finance through National Savings Scheme
(Amendment) Rules, 2024, the balances at the credit of the subscribers of the National
Savings Scheme on or after 1st October, 2024, would not earn any interest.

Consequent to this notification, depositors who had intended to leave their NSS balances
untouched for future use will lose interest benefit and be compelled to withdraw the balances,
making these amounts taxable.

Section 80CCA has been amended to provide exemption to the withdrawals made from
National Savings Scheme (NSS) on or after 29th August, 2024, for any amount deposited

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under the scheme and the interest accrued thereon in respect of which a deduction has been
allowed.

Parity in provisions related to carry forward of losses in case of amalgamation: In order

to bring parity with the provisions of carry forward of business losses, section 72A and section
72AA has been amended to provide that any loss forming part of the accumulated loss of the
predecessor entity, to be carried forward for not more than eight assessment years
immediately succeeding the assessment year for which such loss was first computed for
original predecessor entity.

Deduction u/s 80CCD for contributions made to the NPS Vatsalya: Section 80CCD(1B)
provides for an additional deduction of upto ` 50,000 in respect of contributions made by an
individual to the National Pension System (NPS). The scope of this sub-section has been
extended to include contributions made to NPS Vatsalya accounts. The NPS Vatsalya
Scheme, enables parents and guardians to start a National Pension Scheme (NPS) account
for their children. However, the aggregate deduction under section 80CCD(1B), including
contributions to both regular NPS and NPS Vatsalya accounts, shall not exceed ` 50,000 in
a financial year.

Clause (12BA) is inserted in section 10 to provide that any income received on partial
withdrawal made out of the minor’s account, would not be included in the total income of the
parent/guardian to the extent it does not exceed 25% of the amount of contributions made by
him.

Deduction u/s 80CCD for Unified Pension Scheme: The Unified Pension Scheme (UPS)
has been introduced as an option under the National Pension System (NPS) by the Central
Government for the Central Government employees covered under NPS so that they may
receive an assured payout after their retirement. It is a ‘fund-based’ payout system which
relies on the regular and timely accumulation and investment of applicable contributions (from
both the employee and the employer (the Central Government) for grant of monthly payout
to the retiree.

To align the tax treatment of the UPS with the NPS, sub-section (3A) and (6) in section 80CCD
and clause (12AA) and (12AB) in section 10 has been inserted by the Taxation Law
(Amendment) Act, 2025.

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Extension of terminal date for setting up of start-ups eligible for claiming deduction
under section 80-IAC: The eligible start-up is required to be incorporated between 1.4.2016
and 31.3.2025 in order to be eligible for deduction under section 80-IAC. The outer time limit
for incorporation is extended from 31.3.2025 to 31.3.2030.

Expansion of Tonnage Tax Scheme Benefits to Inland Vessels: To promote inland water
transportation in the country and to attract investments in the sector, the benefits of tonnage
tax scheme is extended to Inland Vessels registered under Inland Vessels Act, 2021.

Increase in period of registration for smaller trusts or institutions: The validity of

registration of trust or institution was 5 years. To reduce the compliance burden for the smaller
trusts or institutions, the period of validity of registration of trust or institution has been
increased from 5 years to 10 years. Smaller trusts or institutions would mean such trusts or
institutions whose total income, without giving effect to the provisions of sections 11 and 12,
does not exceed ` 5 crores during each of the two previous year, preceding to the previous
year in which such application is made.

List of persons specified under section 13(3) rationalised– Section 13 provides that the
provisions of sections 11 and 12 will not apply inter alia if the income or property of a trust or
institution applied for the benefit of certain specified persons. These specified persons include
any person who has made substantial contribution to the trust or institution i.e., any person
whose total contribution upto the end of the relevant previous year exceeds
` 50,000 and his relative and any concern in which such person has a substantial interest.

To address difficulties in reporting details of contributors other than founders, trustees, or

managers, section 13(3) is amended to provide that the specified person would include a
person whose contribution during the relevant previous year exceeds ` 1 lakh or in aggregate
up to the end of the relevant previous year exceeds ` 10 lakhs. Further, the relatives of such
contributors will no longer be considered as specified persons and concerns in which these
contributors have a substantial interest is also excluded from meaning of specified persons.

Registration not be cancelled for minor default – Explanation to section 12AB(4) inter alia
provides that where registration or provisional registration of a trust or an institution has been
granted and subsequently, the Principal Commissioner or Commissioner has noticed
occurrence of one or more specified violations including incomplete application or it contains
false or incorrect information, then, registration of such trust or institution can be cancelled.

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Explanation to section 12AB(4) has been amended to provide that the situations where the
application for registration of trust or institution is not complete, shall not be treated as
specified violation and hence, registration would not be cancelled for such a minor default.

Abolishment of equalization levy – W.e.f. 1.4.2025, the 6% equalization levy on online

advertisement has been abolished.

Reduction in tax deduction at source (TDS) and tax collection at source (TCS) rates:
The TDS and TCS rates in the following sections have been brought down:
S. Section Existing TDS/TCS Revised
No Rate TDS/TCS Rate
1. 194D - Insurance Commission 5% 2%
2. Section 194LBC - Income in respect of 25% if payee is 10%
investment in securitization trust Individual or HUF
and 30% otherwise
3. 206C(1) - TCS on timber or any other 2.5% 2%
forest produce (not being tendu leaves)
obtained under a forest lease and
- TCS on timber obtained by any mode
other than under a forest lease
4. Section 206C(1G) – TCS on remittance 0.5% after ` 7 lakhs Nil
under LRS for purpose of education,
financed by loan from financial
institution referred to in section 80E

Increase in threshold limit for deduction or collection of tax at source: The threshold
limit for requirement to deduct tax at source or collect tax at source under the following
sections have been increased:

S. Section Existing Threshold Revised Threshold

No limit (`) limit
(`)
1. 193 - Interest on securities Nil 10,000
2. 194 – Dividend for an 5,000 10,000
individual shareholder
3. 194A - Interest other than (i) ` 50,000 for (i) ` 1,00,000 for
Interest on securities senior citizen; senior citizen
(ii) ` 40,000 in case (ii) ` 50,000 in case
of others of others

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when payer is when payer is

bank, cooperative bank, co-
society and post operative society
office and post office
(iii) ` 5,000 in other (iii) ` 10,000 in other
cases cases
4. 194B - Winnings from lottery, Aggregate of amounts ` 10,000 in respect of
crossword puzzle etc. exceeding ` 10,000 a single transaction
during the financial
year
5. 194BB - Winnings from horse Aggregate of amounts ` 10,000 in respect of
race exceeding ` 10,000 a single transaction
during the financial
year
6. 194D - Insurance commission 15,000 20,000
7. 194G - Income by way of 15,000 20,000
commission, prize etc. on
lottery tickets
8. 194H - Commission or 15,000 20,000
brokerage
9. 194-I Rent ` 2,40,000 during the ` 50,000 per month or
financial year part of a month
10. 194J - Fee for professional or 30,000 50,000
technical services
11. 194K - Income in respect of 5,000 10,000
units of a mutual fund or
specified company or
undertaking
12. 194LA - Income by way of 2,50,000 5,00,000
enhanced compensation
13. 206C(1G) – Remittance under 7,00,000 10,00,000
LRS and overseas tour
program package

No TCS on sale of goods: TCS provisions under section 206C(1H) were applicable if
conditions specified thereunder are satisfied and where the provisions of section 194Q
(relating to tax deduction at source by the buyer) were not attracted. However, with effect
from April 1, 2025, the provisions of section 206C(1H), which required the collection of tax at
source (TCS) on the sale of goods, has been abolished. Consequently, only section 194Q
will now be relevant.

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As per section 194Q, the buyer is required to deduct tax at source at the rate of 0.1% on
value of goods exceeding ` 50 lakhs in a financial year for the purchase of goods from a
resident seller, provided the buyer's turnover exceeds ` 10 crores in the preceding financial
year.
Removal of higher TDS/TCS for non-filers of return of income: Section 206AB and
206CCA which requires deduction/ collection of tax at higher rate when the deductee
specified therein is a non-filer of income-tax return have been omitted.
Extending the time-limit to file the updated return: Earlier, an updated return can be filed
under section 139(8A) upto 24 months from the end of the relevant assessment year. The
time limit for filing updated return has been extended to 48 months from the end of the
relevant assessment year.
Rate of additional tax payable in the above case
Updated return filed after expiry of 24 months and upto 60% of the aggregate of tax
36 months from the end of relevant assessment year and interest payable
Updated return filed after expiry of 36 months and upto 70% of the aggregate of tax
48 months from the end of relevant assessment year and interest payable

Non applicability of section 271AAB of the Act: The existing section 271AAB(1A) relates
to penalty in respect of searches initiated after 15.12.2016. After introduction of ‘Block
Assessment’ (Chapter XIV-B) for searches initiated under section 132 on or after
1st September, 2024, the provisions of the section 271AAB(1A) shall not to applicable to a
case where search has been initiated under section 132 on or after 1st September, 2024.
Amendments in provisions of Block assessment for search and requisition cases
under Chapter XIV-B: Vide Finance (No. 2) Act, 2024, the concept of block assessment was
introduced by amending provisions of Chapter XIV-B (Sections 158B to 158BI) to be made
applicable where a search under section 132 is initiated or requisition under section 132A is
made, on or after 1st September, 2024.
The term “virtual digital asset” has been added to the definition of undisclosed income of the
block period which is defined under section 158B. The time-limit for completion of block
assessment is changed from twelve months from end of the month to twelve months from
end of the quarter in which the last of the authorisations for search or requisition has been
executed.
Time limit to impose penalties rationalized: The existing provisions of section 275, inter-
alia, provide for the bar of limitation for imposing penalties. It is amended to provide that any
order imposing a penalty shall not be passed after the expiry of six months from the end of

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the quarter in which the connected proceedings are completed, or the order of appeal is
received, or the order of revision is passed.
Exemption from prosecution for delayed payment of TCS: Section 276BB provides for
prosecution in case of failure to pay the tax collected at source to the credit of Central
Government. Section 276BB is amended to provide exemption from prosecution to a person
who has failed to pay tax collected at source (TCS) to the credit of the Central Government,
if such payment is made at any time on or before the time prescribed for filing the quarterly
TCS statement.
Obligation to furnish information on transaction of crypto-asset: New section 285BAA
has been inserted to provide that a reporting entity is required to furnish information with
respect to transaction of crypto asset in a statement within such time and in such form as
may be prescribed.
Parity in rates of long-term capital gain on transfer of securities by FIIs: At present, FIIs
are liable to tax @10% on long-term capital gains on transfer of securities (other than referred
to in section 112A). To bring parity between the taxation of capital gains on transfer of capital
assets between residents and non-residents, being Foreign Institutional investors, section
115AD has been amended to provide tax rate of 12.5% on such long-term capital gains.
Rationalization of transfer pricing provisions for carrying out multi-year arm’s length
price determination: Transfer pricing provisions enable computation of income arising from
an international transaction or a specified domestic transaction with regard to an arm’s length
price. It is amended to provide that the ALP determined in relation to an international
transaction or a specified domestic transaction for any previous year to apply to the similar
transaction for the two consecutive previous years immediately following such previous year.
Introduction of presumptive taxation scheme for non-resident providing services for
electronics manufacturing facility: A new section 44BBD has been inserted to provide
presumptive taxation regime @25% for non-resident engaged in the business of providing
services or technology in India, for the purposes of setting up an electronics manufacturing
facility or in connection with manufacturing or producing electronic goods, article or thing in
India.
The above coverage provides only a concise overview of the significant select amendments made
by the Finance Act, 2025. To fully grasp the scope and application of the amendments introduced
by the Finance Act, 2025, the Taxation Laws (Amendment) Act, 2025 along with Notification and
Circulars, it is imperative to refer to the detailed discussions including tabular presentations, flow
charts, examples, illustrations, significant select cases, test your knowledge questions provided in
the respective chapters. Therefore, students are advised to refer the chapters thoroughly for
comprehensive study and effective preparation for their examinations.

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CONTENTS

MODULE – 1
Chapter 1 : Basic Concepts
Chapter 2 : Incomes which do not form part of Total Income
Chapter 3 : Profits and Gains of Business or Profession
Chapter 4 : Capital Gains
Chapter 5 : Income from Other Sources
Chapter 6 : Income of Other Persons included in assessee’s Total Income
Chapter 7 : Aggregation of income, set-off or carry forward of Losses
Chapter 8 : Deductions from Gross Total Income

MODULE – 2
Chapter 9 : Assessment of Various Entities
Chapter 10: Assessment of Trusts and Institutions, Political Parties and Other Special Entities

Chapter 11 : Tax Planning, Tax Avoidance & Tax Evasion

Chapter 12 : Taxation of Digital Transactions
MODULE – 3
Chapter 13 : Deduction, Collection and Recovery of tax
Chapter 14 : Income-tax Authorities

Chapter 15 : Assessment Procedure

Chapter 16 : Appeals and Revision
Chapter 17 : Dispute Resolution

Chapter 18 : Miscellaneous Provisions

Chapter 19 : Provisions to Counteract Unethical Tax Practices
Chapter 20 : Tax Audit and Ethical Compliances

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MODULE – 4
Chapter 21 : Non-resident Taxation
Chapter 22 : Double Taxation Relief
Chapter 23 : Advance Rulings

Chapter 24 : Transfer Pricing

Chapter 25 : Fundamentals of BEPS
Chapter 26 : Application and Interpretation of Tax Treaties

Chapter 27 : Overview of Model Tax Conventions

Chapter 28 : Latest Developments in International Taxation

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DETAILED CONTENTS: MODULE - 1

CHAPTER 1 – BASIC CONCEPTS

Learning Outcomes ............................................................................................................................ 1.1

Contents:
1.1 Overview of Income-tax law in India ....................................................................................... 1.2
1.2 Important definitions ............................................................................................................. 1.10

1.3 Previous year and Assessment year .................................................................................... 1.33

1.4 Charge of Income-tax ........................................................................................................... 1.39
1.5 Rates of Tax, Surcharge & Cess ......................................................................................... 1.39

1.6 Rebate for resident individuals [Section 87A] ....................................................................... 1.64

Significant Select Cases ....................................................................................................... 1.67
Test Your Knowledge ............................................................................................................ 1.70

CHAPTER 2 - INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Learning Outcomes................................................................................................................. 2.1

Contents:

2.1 Introduction ................................................................................................................. 2.2

2.2 Incomes not included in total income [Section 10] ......................................................... 2.5
2.3 Restrictions on allowability of expenditure [Section 14A] ............................................. 2.39

Significant Select Cases ....................................................................................................... 2.41

Test Your Knowledge ............................................................................................................ 2.42

CHAPTER 3 – PROFITS AND GAINS OF BUSINESS OR PROFESSION

Learning Outcomes................................................................................................................. 3.1

Contents:
3.1 Meaning of ‘Business’ and ‘Profession’ ........................................................................ 3.3

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3.2 Income chargeable under this head [Section 28] ........................................................... 3.5
3.3 Speculation business ................................................................................................... 3.9

3.4 Method of Accounting ............................................................................................... 3.12

3.5 Computation of Profits and Gains from business

or profession [Section 29] .......................................................................................... 3.27
3.6 Admissible deductions ............................................................................................... 3.27
3.7 Inadmissible deductions [Section 40] ........................................................................ 3.133

3.8 Expenses or payments not deductible

in certain circumstances [Section 40A] ..................................................................... 3.145

3.9 Profits chargeable to tax [Section 41] ....................................................................... 3.152

3.10 Other provisions ...................................................................................................... 3.153
3.11 Compulsory maintenance of accounts [Section 44AA] ............................................... 3.167

3.12 Audit of accounts of certain persons

carrying on business or profession [Section 44AB].................................................... 3.171

3.13 Special provisions for computing profits and gains

of business on presumptive basis [Section 44AD/44ADA/44AE] ................................ 3.174

3.14 Method of computing deduction in the case of business

re-organization of Co-operative Banks [Section 44DB] .............................................. 3.182

3.15 Computation of business income in cases where income

is partly agricultural and partly business in nature ..................................................... 3.188

Significant Select Cases ..................................................................................................... 3.191

Test Your Knowledge .......................................................................................................... 3.200

CHAPTER 4- CAPITAL GAINS

Learning Outcomes................................................................................................................. 4.1

Contents:
4.1 Introduction ................................................................................................................. 4.2

4.2 Capital Asset ............................................................................................................... 4.2

4.3 Short-term and long-term capital assets ....................................................................... 4.7

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4.4 Transfer: What it means? [Section 2(47)] .................................................................... 4.13

4.5 Scope and year of chargeability [Section 45] .............................................................. 4.14

4.6 Capital gains on distribution of assets by companies in liquidation [Section 46] ........... 4.44
4.7 Capital gains on buyback of shares or other securities [Section 46A] .......................... 4.45
4.8 Important definitions .................................................................................................. 4.46

4.9 Transactions not regarded as transfer [Section 47] ..................................................... 4.50

4.10 Withdrawal of exemption in certain cases ................................................................... 4.68
4.11 Mode of computation of capital gains [Section 48] ...................................................... 4.69

4.12 Ascertainment of cost in specified circumstances [Section 49] .................................... 4.73

4.13 Cost of acquisition [Section 55(2)] .............................................................................. 4.85
4.14 Cost of improvement [Section 55(1)]........................................................................... 4.96

4.15 Computation of capital gains in case of depreciable assets [Section 50 & 50A]............ 4.99
4.16 Computation of capital gains in case of market linked debentures [Section 50AA] ..... 4.102
4.17 Capital gains in respect of slump sale [Section 50B] ................................................. 4.104

4.18 Deemed full value of consideration for computing capital

gains [Section 50C, 50CA & 50D] ............................................................................. 4.111

4.19 Advance money received [Section 51] ...................................................................... 4.115

4.20 Exemption of capital gains ....................................................................................... 4.118
4.21 Reference to Valuation Officer [Section 55A] ............................................................ 4.136

4.22 Tax on Short term capital gains in respect of equity

share/units of an equity oriented fund /unit of a business Trust [Section 111A] ......... 4.137

4.23 Tax on long term capital gains [Section 112] ............................................................. 4.138
4.24 Tax on long term capital gains on certain assets [Section 112A] ............................... 4.139

4.25 Surplus on sale of shares and securities - whether taxable as capital gains
or business income? [Circular No. 06/2016, dated 29-2-2016] ................................... 4.147
Significant Select Cases ..................................................................................................... 4.149

Test Your Knowledge .......................................................................................................... 4.157

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CHAPTER 5-INCOME FROM OTHER SOURCES

Learning Outcomes................................................................................................................. 5.1

Contents:

5.1 Introduction ................................................................................................................. 5.2

5.2 Method of accounting [Section 145] .............................................................................. 5.2

5.3 Incomes chargeable under this head [Section 56] ......................................................... 5.2

5.4 Applicable rate of tax in respect of casual income [Section 115BB] ............................. 5.40

5.5 Applicable rate of tax in respect of winning from online games [Section 115BBJ] ......... 5.41

5.6 Deductions allowable [Section 57] .............................................................................. 5.41

5.7 Deductions not allowable [Section 58] ........................................................................ 5.44

5.8 Deemed income chargeable to tax [Section 59] .......................................................... 5.45

Significant Select Cases ....................................................................................................... 5.46

Test Your Knowledge ............................................................................................................ 5.50

CHAPTER 6 - INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL INCOME

Learning Outcomes................................................................................................................. 6.1

Contents:
6.1 Clubbing of Income - An introduction ........................................................................... 6.3

6.2 Income of other persons includible in assessee’s total income ..................................... 6.3
6.3 Income of other persons includible in an individual’s total income ................................. 6.4
6.4 Cross transfers .......................................................................................................... 6.13

6.5 Conversion of self-acquired property into the property of a HUF[Section 64(2)] ........... 6.15
6.6 Income includes loss .................................................................................................. 6.15
6.7 Distinction between section 61 and section 64 ............................................................ 6.15

6.8 Liability of person in respect of income included in the income of another person ........ 6.16
Test Your Knowledge ............................................................................................................ 6.18

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CHAPTER 7 - AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF LOSSES

Learning Outcomes................................................................................................................. 7.1

Contents:

7.1 Aggregation of Income ................................................................................................. 7.3

7.2 Concept of set-off and carry forward of losses .............................................................. 7.4

7.3 Inter-source adjustments [Section 70] ........................................................................... 7.4

7.4 Inter-head adjustments [Section 71] ............................................................................. 7.5

7.5 Carry forward and set off of loss from house property [Section 71B] .............................. 7.6

7.6 Carry forward and set-off of business losses [Section 72] ............................................. 7.9

7.7 Carry forward and set-off of accumulated business losses

and unabsorbed depreciation in certain cases of amalgamation/
demerger, etc. [Section 72A] ...................................................................................... 7.12

7.8 Carry forward and set off of accumulated business losses

and unabsorbed depreciation in a scheme of amalgamation
in certain cases [Section 72AA] .................................................................................. 7.17

7.9 Carry forward and set off of accumulated loss and unabsorbed
depreciation in business reorganisation of Co-operative Banks [Section 72AB] ........... 7.20

7.10 Losses in speculation business [Section 73] ............................................................... 7.22

7.11 Carry forward & set-off of losses by specified businesses [Section 73A] ...................... 7.23

7.12 Losses under head ‘Capital Gains’ [Section 74] .......................................................... 7.24

7.13 Losses from the activity of owning and maintaining race horses [Section 74A(3)] ........ 7.26

7.14 Carry forward and set-off of losses in case of change in

constitution of firm or succession [Section 78] ............................................................ 7.27

7.15 Carry forward and set-off of losses in case of closely

held companies [Section 79] ...................................................................................... 7.28

7.16 No set off of losses against undisclosed income brought to tax

Consequent to search, requisition and survey [Section 79A] ....................................... 7.31

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7.17 Order of set-off of losses ............................................................................................ 7.32

7.18 Submission of Return of Losses [Section 80] .............................................................. 7.34

Significant Select Cases ....................................................................................................... 7.35

Test Your Knowledge ............................................................................................................ 7.37

CHAPTER 8 – DEDUCTIONS FROM GROSS TOTAL INCOME

Learning Outcomes ............................................................................................................................ 8.1

Contents:
8.1 General provisions ....................................................................................................... 8.2

8.2 Deductions in respect of payments ............................................................................... 8.6

8.3 Deductions in respect of certain incomes ................................................................... 8.59
8.4 Deductions in respect of other income ........................................................................ 8.91

8.5 Other Deductions ....................................................................................................... 8.94

8.6 Deduction under section 10AA ................................................................................... 8.95
Significant Select Cases ..................................................................................................... 8.105

Test Your Knowledge .......................................................................................................... 8.111

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© The Institute of Chartered Accountants of India
CHAPTER 2
7
INCOMES WHICH DO NOT
FORM PART OF TOTAL
INCOME

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 appreciate whether a particular income would constitute agricultural
income or non-agricultural income;
 compute the tax on non-agricultural income by applying the concept of
partial integration of agricultural income with non-agricultural income;
 examine the provisions of different clauses of section 10;
 analyse and apply such provisions to determine whether a particular
income would form/ would not form part of total income;
 analyse and apply the provisions of section 14A to determine the
expenditure incurred in relation to income not includible in total income.

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2.1 INTRODUCTION
(1) Exemption under section 10 vis-a-vis Deduction under Chapter VI-A
The various items of income referred to in the different clauses of section 10 are excluded from the
total income of an assessee. These incomes are known as exempted incomes. Consequently, such
income shall not enter into the computation of taxable income.
Moreover, there are certain other incomes which are included in gross total income but are wholly
or partly allowed as deductions under Chapter VI-A in computation of total income. Students should
note a very important difference between exemption under section 10 and the deduction under
Chapter VI-A.

EXEMPTION UNDER SECTION 10

The incomes which are exempt
under section 10 will not be DEDUCTION UNDER CHAPTER VI-A
included for computing total Incomes from which deductions are
income. allowable under chapter VI-A will first
be included in the gross total income
(GTI) and then the deductions will be
allowed from gross total income (GTI).

(2) Exemptions which are discussed under the relevant chapters:

In this chapter, we are going to study the provisions of section 10 which enumerate the various
categories of income that are exempt from tax.
Students may note that, in this chapter, only some of the exemptions are discussed. The
remaining exemptions are being discussed in the respective chapters as shown hereunder 1:

1 The exemptions under section 10 in relation to Salaries have been dealt with in detail at the Intermediate
level itself. The remaining exemptions are discussed in other chapters of this Study Material.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.3

LIST OF EXEMPTIONS BEING DISCUSSED IN RESPECTIVE CHAPTERS

• Receipts from ULIP [Section 10(10D)]

• Capital gain on transfer of a unit of Unit Scheme [Section 10(33)]
Capital Gains • Capital gain on compulsory acquisition of agricultural land within
specified urban limits [Section 10(37)]
• Transfer of specified capital asset under Land Pooling Scheme [Section
10(37A)]
• Income received in transaction of reverse mortgage [Section 10(43)]

• Receipts from LIC [Section 10(10D)]

Income from • Interest income arising to certain persons [Section 10(15)]
Other Sources
• Family pension received by widow/ children/ nominated heirs of armed
forces members [Section 10(19)]
Income of other
Persons
Included in • Exemption in respect of minor's income included in the hands of parent
Assessee's [Section 10(32)]
Total Income

• Payment from Sukanya Samriddhi Account [Section 10(11A)]

• Payment from NPS Trust to an assessee on closure of his account or on
his opting out of the pension scheme [Section 10(12A)]
Deductions • Payment from NPS Trust to an assessee, being a subscriber to the
from Gross UPS, at the time of his superannuation or voluntary retirement or
Total Income retirement [Section 10(12AA)]
• Lumpsum amount received by an assessee, being a subscriber to
the UPS [Section 10(12AB)]
• Payment from NPS Trust to an employee on partial withdrawal [Section
10(12B)]
• Payment from NPS Trust to an assessee, being the parent or
guardian of a minor, on partial withdrawal [Section 10(12BA)]
• Payment from Agnipath Corpus Fund to a person enrolled under the
Agnipath Scheme or to his nominee [Section 10(12C)]

Assessment of • Income of certain funds or institutions [Section 10(23C)]

Trusts and • Income of Securitisation trusts [Section 10(23DA)]
Institutions, • Income of Investment Fund [Section 10(23FBA)]
Political Parties • Income of Unit holders of Investment Fund [Section 10(23FBB)]
and other
special entities • Income of business trusts [Sections 10(23FC), 10(23FCA) and
10(23FD)]

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 2.4 DIRECT TAX LAWS

• Interest on moneys standing to the credit of individual in his NRE account

[Section 10(4)(ii)]
• Interest income of a non-corporate non-resident or foreign company on
specified off-shore Rupee Denominated Bonds issued by an Indian company or
business trust [Section 10(4C)]
• Income of a specified fund on transfer of certain specified asset [Section 10(4D)]
• Income of a non-resident as a result of transfer of non-deliverable forward
contracts/ offshore derivative instruments/ over the counter derivatives entered
into with an offshore banking unit of an IFSC [Section 10(4E)]
• Income of a non-resident by way of royalty or interest, on account of lease of an
aircraft or a ship in a previous year, paid by a unit of an IFSC [Section 10(4F)]
• Income of a non-resident from portfolio of securities etc. in an account
maintained with an offshore banking unit in any IFSC [Section 10(4G)]
• Income received by a non-resident or a Unit of an IFSC [Section 10(4H)]
• Remuneration received by individuals, who are not citizens of India [Section
10(6)]
• Tax paid on behalf of foreign state or foreign enterprise on amount paid as
consideration of acquiring aircraft, etc. on lease [Section 10(6BB)]
• Income arising to foreign companies from projects connected with the security
of India [Section 10(6C)]
• Royalty income or fees for technical services arising to non-resident fom
National Technical Research Organisation (NTRO) [Section 10(6D)]
Non- • Interest income arising to certain persons [Section 10(15)]
resident • Income arising to foreign state or foreign enterprise by way of consideration of
Taxation acquiring aircraft, etc. on lease [Section 10(15A)]
• Income of a foreign company from lease rentals of cruise ships [Section
10(15B)]
• Income of European Economic Community (EEC) [Section 10(23BBB)]
• Income derived by the SAARC Fund for Regional Projects [Section 10(23BBC)]
• Income accruing or arisiing to or received by a unit holder from a specified fund
or on transfer of units in a specified fund [Section 10(23FBC)]
• Certain incomes of wholly owned subsidiary of Abu Dhabi Investment Authority,
Sovereign Wealth Fund and specified pension fund [Section 10(23FE)]
• Capital Gains arising or received by a non-resident or a specified fund on
account of transfer of share of a company resident in india [Section10(23FF)]
• Any income of a unit of IFSC primarily engaged in the business of leasing of an
aircraft or a ship, by way of dividends from a company being a unit of any IFSC
primarily engaged in the business of leasing of an aircraft or a ship [Section
10(34B)]
• Income received by certain foreign companies in India in Indian currency from
sale of crude oil to any person in India [Section 10(48)]
• Income accruing or arising to a foreign company on account of storage of crude
oil in a facility in India and sale of crude oil therefrom to any person resident in
India [Section 10(48A)]
• Income accruing or arising to a foreign company on account of sale of leftover
stock of crude oil, if any, from the facility in India after the expiry of the
agreement or the arrangement [Section 10(48B)]

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.5

2.2 INCOMES NOT INCLUDED IN TOTAL INCOME

[SECTION 10]
Let us now have a look at the various incomes which are exempt from tax and the conditions to be
satisfied in order to be eligible for exemption.

(1) Agricultural income [Section 10(1)]

Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee. The reason for total exemption of agricultural income from the scope of central income-
tax is that under the Constitution, the Central Government has no power to levy a tax on agricultural
income.
Definition of agricultural income [Section 2(1A)]
This definition is very wide and covers the income of not only the cultivators but also the land holders
who might have rented out the lands. Agricultural income may be received in cash or in kind.
Agricultural income may arise in any one of the following three ways:-
(i) It may be rent or revenue derived from land situated in India and used for agricultural
purposes.

(ii) It may be income derived from such land by

(a) agriculture or
(b) the performance of a process ordinarily employed by a cultivator or receiver of rent
in kind to render the produce fit to be taken to the market or
(c) the sale, by a cultivator or receiver of rent in kind, of such agricultural produce
raised or received by him, in respect of which no process has been performed other
than a process of the nature mentioned in point (b) above.
(iii) Lastly, agricultural income may be derived from any farm building required for agricultural
operations.
Now let us take a critical look at the following aspects:
(i) Rent or revenue derived from land situated in India and used for agricultural purposes:
The following three conditions have to be satisfied for income to be treated as agricultural
income:
(a) Rent or revenue should be derived from land;

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(b) Land has to be situated in India (If agricultural land is situated in a foreign country, the
entire income would be taxable); and

(c) land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land is
termed as Rent. The rent can either be received by the owner of the land or by the original
tenant from the sub-tenant. It implies that ownership of land is not necessary. Thus, the rent
received by the original tenant from sub-tenant would also be agricultural income subject to
the other conditions mentioned above.
The scope of the term “Revenue” is much broader than rent. It includes income other than
rent. For example, fees received for renewal for grant of land on lease would be revenue
derived from land.
(ii) Income derived from such land by
(a) Agriculture: The term “Agriculture” has not been defined in the Act. However,
cultivation of a field involving human skill and labour on the land can be broadly termed
as agriculture.
“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It
involves basic operations and subsequent operations.

Operations to be
Basic Subsequent performed after the
Operations Those operations Operations produce of sprouts
by agriculturists from the land (e.g.,
which are weeding, digging etc.)
absolutely are subsequent
necessary for the operations. These
purpose of subsequent operations
effectively raising would be agricultural
produce from the operations only when
land are the basic taken in conjunction
operations. with and as a
continuation of the
basic operations.

“Agriculture” comprises within its scope the basic as well as the subsidiary operations
regardless of the nature of the produce raised on the land. These produce may be
grain, fruits or vegetables necessary for sustenance of human beings including

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.7

plantation and groves or grass or pasture for consumption of beasts or articles of

luxury such as betel, coffee, tea, spices, tobacco or commercial crops like cotton flax,
jute hemp and indigo. The term comprises of products of land having some utility either
for consumption or for trade and commerce and would include forest products such as
sal, tendu leaves etc.

Note: The term ‘agriculture’ cannot be extended to all activities which have some
distant relation to land like dairy farming, breeding and rearing of live stock, butter and
cheese making and poultry farming. This aspect is discussed in detail later on in this
chapter.

Whether income from nursery constitutes agricultural income?

In the past, there have been court rulings that only if a nursery is maintained by
carrying out the basic operations on land and subsequent operations in continuation
thereof, income from such nursery would be treated as agricultural income and would
qualify for exemption under section 10(1).
The Supreme Court has, in CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466,
held that the basic operations must be performed before any income can be called as
agricultural income. The basic operations involve cultivation of the ground, in the
sense of tilling of the land, sowing of the seeds, planting and other similar operations
on the land. Such basic operations demand the expenditure of human labour and skill
upon the land itself and further, they are directed to make the crop sprout from the
land. Therefore, income derived from sale of plants grown directly in pots would not
be treated as agricultural income.
However, the Madras High Court, in CIT v. Soundarya Nursery (2000) 241 ITR 530,
observed that nursing activity involves carrying out of several operations on land
before the saplings were transplanted in suitable containers including pots and
thereafter kept in shade or green house for further operation and growth. Therefore,
income arising from nursery should be considered as agricultural income.
Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or
not the basic operations were carried out on land. This Explanation ratifies the view
taken by the Madras High Court in favour of the taxpayer.

(b) Process ordinarily employed to render the produce fit to be taken to the market:
Sometimes, to make the agricultural produce a saleable commodity, it becomes
necessary to perform some kind of process on the produce. The income from the

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process employed to render the produce fit to be taken to the market would be
agricultural income. However, it must be a process ordinarily employed by the
cultivator or receiver of rent in kind and the process must be applied to make the
produce fit to be taken to the market.
The ordinary process employed to render the produce fit to be taken to the market
includes thrashing, winnowing, cleaning, drying, crushing etc. For example, the
process ordinarily employed by the cultivator to obtain the rice from paddy is to first
remove the hay from the basic grain, and thereafter to remove the chaff from the grain.
The grain has to be properly filtered to remove stones etc. and finally the rice has to
be packed in gunny bags for sale in the market.
After such process, the rice can be taken to the market for sale. This process of making
the rice ready for the market may involve manual operations or mechanical operations.
All these operations constitute the process ordinarily employed to make the product fit
for the market. The produce must retain its original character in spite of the processing
unless there is no market for selling it in that condition.
However, if marketing process is performed on a produce which can be sold in its raw
form, income derived therefrom is partly agricultural income and partly business income.
(c) Sale of such agricultural produce in the market: Any income from the sale of any
produce to the cultivator or receiver of rent-in kind is agricultural income provided it is
from the land situated in India and used for agricultural purposes. However, if the
produce is subjected to any process other than process ordinarily employed to make
the produce fit for market, the income arising on sale of such produce would be partly
agricultural income and partly non-agricultural income.
Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are
subjected to manufacturing process and the manufactured product is sold, the profit
on such sale will consist of agricultural income as well as business income. That
portion of the profit representing agricultural income will be exempted.
Apportionment of Income between business income and agriculture income: Rules 7,
7A, 7B & 8 of Income-tax Rules, 1962 provides the basis of apportionment of income between
agricultural income and business income.
I. Rule 7 - Income from growing and manufacturing of any product

Where income is partially agricultural income and partially income chargeable to income-tax
as business income, the market value of any agricultural produce which has been raised by
the assessee or received by him as rent in kind and which has been utilised as raw material

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.9

in such business or the sale receipts of which are included in the accounts of the business
shall be deducted. No further deduction shall be made in respect of any expenditure incurred
by the assessee as a cultivator or receiver of rent in kind.
Determination of market value - There are two possibilities here:
(i) The agricultural produce is capable of being sold in the market either in its raw stage
or after application of any ordinary process to make it fit to be taken to the market. In
such a case, the value calculated at the average price at which it has been so sold
during the relevant previous year will be the market value.
(ii) It is possible that the agricultural produce is not capable of being ordinarily sold in the
market in its raw form or after application of any ordinary process. In such case the
market value will be the total of the following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the circumstances
in each case to represent at reasonable profit.
ILLUSTRATION 1
Mr. Amar grows sugarcane and uses the same for the purpose of manufacturing sugar in his
factory. 40% of sugarcane produce is sold for ` 12 lakhs, and the cost of cultivation of such
sugarcane is ` 6 lakhs. The cost of cultivation of the balance sugarcane (60%) is ` 15 lakhs
and the market value of the same is ` 25 lakhs. After incurring ` 1.5 lakhs in the
manufacturing process on the balance sugarcane, the sugar was sold for ` 30 lakhs.
Compute Amar’s business income and agricultural income.
SOLUTION
Computation of Business Income and Agriculture Income of Mr. Amar
Particulars Business Agricultural Income
Income
(`) (`) (`)
Sale of Sugar
Business income
Sale Proceeds of sugar 30,00,000
Less: Market value of sugar (60%) 25,00,000

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 2.10 DIRECT TAX LAWS

Less: Manufacturing exp. 1,50,000

3,50,000
Agricultural income
Market value of sugar (60%) 25,00,000
Less: Cost of cultivation 15,00,000
10,00,000
Sale of sugarcane
Agricultural Income
Sale proceeds of sugarcane (40%) 12,00,000
Less: Cost of cultivation 6,00,000
6,00,000
16,00,000

II. Rule 7A – Income from growing and manufacturing of rubber

This rule is applicable when income derived from the sale of centrifuged latex or cenex or latex
based crepes or brown crepes or technically specified block rubbers manufactured or processed
from field latex or coagulum obtained from rubber plants grown by the seller in India. In such
cases 35% profits on sale is taxable as business income under the head “Profits and gains from
business or profession”, and the balance 65% is agricultural income and is exempt.
ILLUSTRATION 2
Mr. Nilesh manufactures latex from the rubber plants grown by him in India. These are then
sold in the market for ` 36 lakhs. The cost of growing rubber plants is ` 16 lakhs and that of
manufacturing latex is ` 12 lakhs. Compute his total income.
SOLUTION
The total income of Mr. Nilesh comprises of agricultural income and business income.
Total profits from the sale of latex = ` 36 lakhs – ` 16 lakhs – ` 12 lakhs = ` 8 lakhs.
Agricultural income = 65% of ` 8 lakhs = ` 5.2 lakhs
Business income = 35% of ` 8 lakhs = ` 2.8 lakhs
III. Rule 7B – Income from growing and manufacturing of coffee
(i) In case of income derived from the sale of coffee grown and cured by the seller in India,
25% profits on sale is taxable as business income under the head “Profits and gains
from business or profession”, and the balance 75% is agricultural income and is exempt.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.11

(ii) In case of income derived from the sale of coffee grown, cured, roasted and grounded
by the seller in India, with or without mixing chicory or other flavoring ingredients, 40%
profits on sale is taxable as business income under the head “Profits and gains from
business or profession”, and the balance 60% is agricultural income and is exempt.
IV. Rule 8 - Income from growing and manufacturing of tea

This rule applies only in cases where the assessee himself grows tea leaves and
manufactures tea in India. In such cases 40% profits on sale is taxable as business income
under the head “Profits and gains from business or profession”, and the balance 60% is
agricultural income and is exempt.
Rule Apportionment of income in certain cases Agricultural Business
Income Income
7A Income from sale of rubber products derived from 65% 35%
rubber plant grown by the seller in India
7B Income from sale of coffee
- grown and cured by the seller in India 75% 25%
- grown, cured, roasted and grounded by the 60% 40%
seller in India
8 Income from sale of tea grown and manufactured 60% 40%
by the seller in India

(iii) Income from farm building – Income from the farm building which is owned and occupied
by the receiver of the rent or revenue of any such land or occupied by the cultivator or the
receiver of the rent in kind, of any land with respect to which, or the produce of which, any
process discussed above is carried on, would be treated as agricultural income.
However, the income arising from the use of such farm building for any purpose (including
letting for residential purpose or for the purpose of business or profession) other than agriculture
referred in (b) & (c) of (ii) of para (1) in page 2.5 would not be agricultural income.
Further, the income from such farm building would be agricultural income only if the following
conditions are satisfied:

(a) The building should be on or in the immediate vicinity of the land; and
(b) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind
should, by reason of his connection with such land require it as a dwelling house or as
a store house.

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In addition to the above conditions any one of the following two conditions should also be
satisfied:
(i) The land should either be assessed to land revenue in India or be subject to a local
rate assessed and collected by the officers of the Government as such or;
(ii) Where the land is not so assessed to land revenue in India or is not subject to local rate:-
a. It should not be situated in any area as comprised within the jurisdiction of a
municipality or a cantonment board and which has a population not less than
10,000.
b. It should not be situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder –
Shortest aerial distance Population according to the last
from the local limits of a preceding census of which the
municipality or relevant figures have been
cantonment board referred published before the first day of
to in item a. the previous year.
(i) ≤ 2 kms > 10,000
(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000

Example:
Area Shortest aerial Population according Would income
distance from the to the last preceding derived from farm
local limits of a census of which the building situated
municipality or relevant figures have in this area be
cantonment been published treated as
board referred to before the first day of agricultural
in item a. the previous year income?
(i) A 1 km 9,000 Yes
(ii) B 1.5 kms 12,000 No
(iii) C 2 kms 11,00,000 No
(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No
(vi) G 6 kms 8,000 Yes
(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No
(ix) J 9 kms 15,00,000 Yes

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.13

Would income arising from transfer of agricultural land situated in urban area be
agricultural income?

No, as per Explanation 1 to section 2(1A), the capital gains arising from the transfer of such
urban agricultural land would not be treated as agricultural income under section 10 but will
be taxable under section 45.

Example: Suppose Bittoo sells agricultural land situated in New Delhi for ` 10 lakhs and
makes a surplus of ` 8 lakhs over its cost of acquisition. This surplus will not constitute
agricultural income exempt under section 10(1) and will be taxable under section 45.

Indirect connection with land

We have seen above that agricultural income is exempt, whether it is received by the tiller or the
landlord. However, non-agricultural income does not become agricultural merely on account of its
indirect connection with the land. The following examples will illustrate the above point.
Example: A rural society has as its principal business the selling on behalf of its member societies,
butter made by these societies from cream sold to them by farmers. The making of butter was a
factory process separated from the farm.
The butter resulting from the factory operations separated from the farm was not an agricultural
product and the society was, therefore, not entitled to exemption under section 10(1) in respect of
such income.
Example: X was the managing agent of a company. He was entitled for a commission at the rate of
10% p.a. on the annual net profits of the company. A part of the company’s income was agricultural
income. X claimed that since his remuneration was calculated with reference to the income of the
company, part of which was agricultural income, such part of the commission as was proportionate
to the agricultural income was exempt from income tax.

Since, X received remuneration under a contract for personal service calculated on the amount of
profits earned by the company, such remuneration does not constitute agricultural income.
Example: Y owned 100 acres of agricultural land, a part of which was used as pasture for cows.
The lands were purely maintained for manuring and other purposes connected with agriculture and
only the surplus milk after satisfying the assessee’s needs was sold. The question arose whether
income from such sale of milk was agricultural income.
The regularity with which the sales of milk were effected and quantity of milk sold showed that the
assessee carried on regular business of producing milk and selling it as a commercial proposition.
Hence, it was not agricultural income.

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Example: In regard to forest trees of spontaneous growth which grow on the soil unaided by any
human skill and labour there is no cultivation of the soil at all. Even though operations in the nature
of forestry operations performed by the assessee may have the effect of nursing and fostering the
growth of such forest trees, it cannot constitute agricultural operations.
Income from the sale of such forest trees of spontaneous growth does not, therefore, constitute
agricultural income.
Examples of Agricultural income and non-agricultural income:
For better understanding of the concept, certain examples of agricultural income and non-agricultural
income are given below:
Example: Agricultural income
• Income derived from sampling or seedlings grown in a nursery.
• Income from growing of flowers and creepers.
• Rent received from land used for grazing of cattle required for agricultural activities.
• Income from growing of bamboo.
Example: Non-agricultural income

• Income from breeding of livestock.

• Income from poultry farming.
• Income from fisheries.
• Income from dairy farming.
ILLUSTRATION 3
Ankur, the owner of a land situated in Kerala used for growing thereon different types of fruits, paddy,
vegetables and flowers, received from Yahoo Movies Ltd., Chennai, ` 5 lakhs as rent towards the
use of this land for shooting of a film. The amount so received was accounted by him in the books
as revenue derived from land and claimed to be exempt under section 10(1). He now wants to
confirm from you whether the amount has been correctly treated by him as agricultural income.
SOLUTION
The income received by Mr. Ankur from a filmmaker for allowing them to shoot a film in the
agricultural land owned by him is not in the nature of agricultural income because it was neither
received by him against the sale of agricultural produce obtained nor for carrying out the normal
agricultural operations on the land. The amount paid was only for the purpose of shooting of a film
on such land.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.15

To claim exemption in respect of agricultural income under section 10(1), the conditions contained in
section 2(1A)(a) to (c) have to be first complied with/ fulfilled by the assessee. The Madras High Court in
the case of B. Nagi Reddi v. CIT (2002) 258 ITR 719, following the judgment of Apex Court in the case
of CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, has held, on identical facts, that the income
derived for allowing a shooting of film in the agricultural land cannot be treated as agricultural income, as
it has no nexus with the land, except that it was carried out on agricultural land.
Partial integration of agricultural income with non-agricultural income
As in the above discussion, we have seen that agricultural income is exempt subject to conditions
mentioned in the definition clause of section 2(1A). However, a method has been laid down to levy
tax on agricultural income in an indirect way. This concept is known as partial integration of
agricultural income with non-agricultural income. It is applicable to individuals, HUF, AOPs,
BOIs and artificial juridical persons. Two conditions which need to be satisfied for partial integration
are:
1. The net agricultural income should exceed ` 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., If
such person is paying tax under default tax regime u/s 115BAC, then ` 4,00,000 is the basic
exemption limit irrespective of the age of the person. If such person has exercised the option
to shift out of the default tax regime, then, the basic exemption limit would be
` 5,00,000 for resident individuals of the age of 80 years or more at any time during the
previous year, ` 3,00,000 for resident individuals of the age of 60 years or more (but less
than 80 years) at any time during the previous year and ` 2,50,000 for all others). Only if non-
agricultural income exceeds this limit, partial integration would be required.
It may be noted that aggregation provisions do not apply to company, LLP, firm, co-operative society
and local authority. The object of aggregating the net agricultural income with non-agricultural
income is to tax the non-agricultural income at higher rates.
Tax calculation in such cases is as follows:
Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
Step 2: Add net agricultural income and the basic exemption limit available to the assessee.
Compute tax on the aggregate amount.
Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in
step 1 i.e., Step 1 – Step 2.

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Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced
by the rebate, if any, available u/s 87A.
Step 5: Thereafter, it would be increase by health and education cess @4%.
The above concept can be clearly understood with the help of the following illustration:
ILLUSTRATION 4
Mr. X, a resident, has provided the following particulars of his income for the P.Y.2025-26.
i. Income from salary (computed) - ` 11,50,000
ii. Income from house property (computed) - ` 3,80,000
iii. Agricultural income from a land in Assam - ` 4,50,000
iv. Expenses incurred for earning agricultural income - ` 1,60,000
Compute his tax liability for A.Y. 2026-27 assuming his age is -
(a) 40 years
(b) 75 years
SOLUTION
(a) Computation of tax liability (age 40 years)
Computation of total income of Mr. X for the A.Y. 2026-27
under default tax regime under section 115BAC
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ` 4,00,000.
His tax liability is computed in the following manner:
Particulars ` `
Income from salary 11,50,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -
Gross Total Income 15,30,000
Less: Deductions under Chapter VI-A -
Total Income 15,30,000

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.17

Step 1 : ` 15,30,000 + ` 2,90,000 = ` 18,20,000

Tax on ` 18,20,000 = ` 1,64,000
(i.e., 5% of ` 4,00,000 plus 10% of ` 4,00,000 plus 15% of ` 4,00,000 plus 20% of
` 2,20,000)
Step 2 : ` 2,90,000 + ` 4,00,000 = ` 6,90,000

Tax on ` 6,90,000 = ` 14,500 (i.e. 5% of ` 2,90,000)

Step 3 : ` 1,64,000 – ` 14,500 = ` 1,49,500
Step 4 & 5 : Total tax payable = ` 1,49,500 + 4% of ` 1,49,500 = ` 1,55,480
Computation of total income of Mr. X for the A.Y. 2026-27
under normal provisions of the Act
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ` 2,50,000.
His tax liability is computed in the following manner:
Particulars ` `
Income from salary 11,50,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -
Gross Total Income 15,30,000
Less: Deductions under Chapter VI-A -
Total Income 15,30,000

Step 1 : ` 15,30,000 + ` 2,90,000 = ` 18,20,000

Tax on ` 18,20,000 = ` 3,58,500
(i.e., 5% of ` 2,50,000 plus 20% of ` 5,00,000 plus 30% of ` 8,20,000)
Step 2 : ` 2,90,000 + ` 2,50,000 = ` 5,40,000

Tax on ` 5,40,000 = ` 20,500

(i.e. 5% of ` 2,50,000 plus 20% of ` 40,000)

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Step 3 : ` 3,58,500 – ` 20,500 = ` 3,38,000

Step 4 & 5 : Total tax payable = ` 3,38,000 + 4% of ` 3,38,000 = ` 3,51,520
(b) Computation of tax liability (age 75 years)
Computation of total income of Mr. X for the A.Y. 2026-27
under default tax regime under section 115BAC

Tax liability of Mr. X would be same under default tax regime whether he is of age of 40 years of 75
years i.e., ` 1,55,480.
Computation of total income of Mr. X for the A.Y. 2026-27
under normal provisions of the Act
His tax liability is computed in the following manner:
Step 1 : ` 15,30,000 + ` 2,90,000 = ` 18,20,000
Tax on ` 18,20,000 = ` 3,56,000

(i.e. 5% of ` 2,00,000 plus 20% of 5,00,000 plus 30% of 8,20,000)

Step 2 : ` 2,90,000 + ` 3,00,000 = ` 5,90,000.
Tax on ` 5,90,000 = ` 28,000

(i.e. 5% of ` 2,00,000 plus 20% of ` 90,000)

Step 3 : ` 3,56,000 – ` 28,000 = ` 3,28,000
Step 4 & 5: Total tax payable = ` 3,28,000 + 4% of ` 3,28,000 = ` 3,41,120.

(2) Amounts received by a member from the income of the HUF [Section 10(2)]

(i) As explained in Chapter 1, a HUF is a ‘person’ and hence, a unit of assessment under the
Act. Income earned by the HUF is assessable in its own hands.

(ii) In order to prevent double taxation of one and the same income, once in the hands of the
HUF which earns it and again in the hands of a member when it is paid out to him, section
10(2) provides that members of a HUF do not have to pay tax in respect of any amounts
received by them from the family.
(iii) The exemption applies only in respect of a payment made by the HUF to its member
(a) out of the income of the family or
(b) out of the income of the impartible estate belonging to the family.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.19

(3) Share income of a partner [Section 10(2A)]

This clause exempts from tax a partner’s share in the total income of the firm. In other words, the
partner’s share in the total income of the firm determined in accordance with the profit-sharing ratio
will be exempt from tax.

Taxability of partner’s share, where the income of the firm is exempt under Chapter III/
deductible under Chapter VI-A [Circular No. 8/2014 dated 31.03.2014]
Section 10(2A) provides that a partner’s share in the total income of a firm which is separately
assessed as such shall not be included in computing the total income of the partner. In effect, a
partner’s share of profits in such firm is exempt from tax in his hands.
Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from 1.4.1993
consequent to change in the scheme of taxation of partnership firms. Since A.Y.1993-94, a firm is
assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to tax
once again on his share in the said total income.
An issue has arisen as to the amount which would be exempt in the hands of the partners of a
partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or
Chapter VI-A.
The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and the
same can under no circumstances be taxed in the hands of its partners. Therefore, the entire profit
credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners,
even if the income chargeable to tax becomes Nil in the hands of the firm on account of any
exemption or deduction available under the provisions of the Act.

(4) Payments to Bhopal Gas Victims [Section 10(10BB)]

Any payment made to a person under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985
and any scheme framed thereunder will be fully exempt.
However, payments made to any assessee in connection with Bhopal Gas Leak Disaster to the
extent he has been allowed a deduction under the Act on account of any loss or damage caused to
him by such disaster will not be exempted.

(5) Compensation received on account of disaster [Section 10(10BC)]

(i) This clause exempts any amount received or receivable as compensation by an individual or
his legal heir on account of any disaster.

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(ii) Such compensation should be granted by the Central Government or a State Government or
a local authority.

(iii) However, exemption would not be available in respect of compensation for alleviating any
damage or loss, which has already been allowed as deduction under the Act.

(iv) "Disaster" means a catastrophe, mishap, calamity or grave occurrence in any area, arising
from natural or manmade causes, or by accident or negligence. It should have the effect of
causing -

(a) substantial loss of life or human suffering; or

(b) damage to, and destruction of, property; or

(c) damage to, or degradation of, environment.

It should be of such a nature or magnitude as to be beyond the coping capacity of the

community of the affected area.
ILLUSTRATION 5

An amount of ` 5 lakhs was paid on 17.3.2026 to the parents of Amit by the Government of
Chattisgarh as compensation to the aggrieved family, whose only son Amit lost his life in Maoist
local bus bomb blast in Dantewada.

Examine with reasons, whether the amount of compensation received is chargeable to tax in
A.Y. 2026-27.
SOLUTION
As per section 10(10BC), the meaning of “disaster” shall be derived from Disaster Management Act,
2005 which defines disaster to mean a catastrophe, mishap, calamity or grave occurrence in any
area, arising from natural or manmade causes, or by accident or negligence. It should have the
effect of causing substantial loss of life or human suffering or damage to, and destruction of property,
or damage to, or degradation of environment. It should be of such a nature or magnitude to be
beyond the coping capacity of the community of the affected area.
If, for this reason, any compensation is paid by the Central Government or by a State Government
or by a local authority, then, the same will be exempt from tax. Accordingly, the amount of ` 5 lakhs
received by the parents of deceased Amit from the Government of Chattisgarh for the disaster
because of Dantewada bus bomb blast is exempt under section 10(10BC).

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.21

(6) Educational scholarships [Section 10(16)]

The value of scholarship granted to meet the cost of education would be exempt from tax in the
hands of the recipient irrespective of the amount or source of scholarship.

(7) Payments to MPs & MLAs [Section 10(17)]

The following incomes of Members of Parliament or State Legislatures will be exempt:

(i) Daily Allowance - Daily allowance received by any Member of Parliament or of State
Legislatures or any Committee thereof.
(ii) Constituency Allowance of MPs - In the case of a Member of Parliament, any allowance
received under Members of Parliament (Constituency Allowance) Rules, 1986; and
(iii) Constituency allowance of MLAs - Any constituency allowance received by any person by
reason of his membership of any State Legislature under any Act or rules made by that State
Legislature.
(8) Awards for literary, scientific and artistic works and other awards by the Government
[Section 10(17A)]

Any payment, whether in cash or in kind -

- in pursuance of any award instituted in the public interest by the Central/ State Government
or any body approved by the Central Government or

- as a reward by Central/ State Government for such purposes as may be approved by the
Central Government in public interest,
will enjoy exemption under this clause.

(9) Pension received by recipient of gallantry awards [Section 10(18)]

(i) Exemption of Pension - Any income by way of pension received by an individual is exempt
from income-tax if -

(a) such individual was an employee of Central or State Government and

(b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such
other gallantry award notified by the Central Government in this behalf.
(ii) Exemption of Family Pension - In case of the death of such individual, any income by way
of family pension received by any member of the family of the individual shall also be exempt
under this clause.

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(iii) Meaning of Family - Family, in relation to an individual, means –

- the spouse and children of the individual; and
- the parents, brothers and sisters of the individuals or any of them wholly or mainly
dependent on the individual.

Exemption of disability pension granted to disabled personnel of armed forces who have been
invalided on account of disability attributable to or aggravated by such service [Circular No.
13/2019, dated 24.6.2019]
The entire disability pension, i.e. “disability element” and “service element” of pension granted to
members of naval, military or air forces who have been invalided out of naval, military or air force
service on account of bodily disability attributable to or aggravated by such service would be exempt
from tax.
The CBDT has, vide this circular, clarified that exemption in respect of disability pension would be
available to all armed forces personnel (irrespective of rank) who have been invalided out of such
service on account of bodily disability attributable to or aggravated by such service. However, such tax
exemption will be available only to armed forces personnel who have been invalided out of service on
account of bodily disability attributable to or aggravated by such service and not to personnel who have
been retired on superannuation or otherwise.

(10) Annual value of palaces of former rulers [Section 10(19A)]

The annual value of any one palace in the occupation of former Ruler during the relevant previous
year would be excluded from the total income, provided the annual value was exempt before
28.12.1971 by virtue of the provisions of the prevailing orders, i.e., the Merged States (Tax
Concessions) Order, 1949 or the Part B States (Tax Concessions) Order, 1950.
The Supreme Court has, in Maharao Bhim Singh of Kota v. CIT (2017) 390 ITR 532, observed that,
in order to claim exemption from payment of income-tax on the residential palace of the Ruler under
section 10(19A), it is necessary for the Ruler to satisfy the following conditions:

(i) He should own the palace as his ancestral property;

(ii) Such palace should be in his occupation as his residence; and
(iii) The palace should be declared by the Central Government to be exempt from payment of
Income-tax under paragraph 15(iii) of the 1950 Order.
The Supreme Court, accordingly, held that where part of the residential palace is found to be in
occupation of the tenant and the remaining is in occupation of the Ruler for his residence, the Ruler

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.23

is entitled to claim exemption for the whole of his residential palace under section 10(19A). Such
exemption cannot be confined to that portion of the palace which is in his actual occupation thereby
subjecting the income derived from the portion let out to payment of income-tax in the hands of the
Ruler.

(11) Income of local authorities [Section 10(20)]

(i) Exempt income - Following income arising to a local authority would be exempt
• Income under the head house property; or
• Income from Capital gains; or
• Income from Other Sources; or
• Income from trade or business carried on by it which accrues or arises
 from the supply of commodity or service under its jurisdictional area
 from the supply of water or electricity within or outside its own jurisdictional area.
(ii) Meaning of Local Authority - For the purposes of this clause, “local authority” means the
following:
(a) Panchayat
(b) Municipality
(c) Municipal Committee and District Board legally entitled to, or entrusted by the
Government with the control or management of a Municipal or local Fund
(d) Cantonment Board

(12) Income of research associations approved under section 35(1)(ii)/(iii) [Section 10(21)]

This clause provides for exemption in respect of any income of research associations which are
approved under section 35(1)(ii)/(iii) 2. This exemption has, however, been made subject to the
following conditions:
(i) Application and accumulation for the objects - It should apply its income or accumulate
for application wholly and exclusively to its objects and provisions of section 11(2) and (3) 3
would also apply in relation to such accumulation.

2Section 35(1)(ii)/(iii) will be discussed in Chapter 3

3Section 11(2) and (3) will be discussed in Chapter 10

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(ii) Approved modes of investment/ deposit - The association should invest or deposit its
funds in the forms or modes specified in section 11(5) 4. This condition would however not
apply to -
(a) any assets held by the research association where such assets form part of the corpus
of the fund of the association as on 1-6-1973;
(b) any bonus shares allotted to the research institution, in respect of the shares
mentioned above forming part of the corpus of such fund, etc.;
(c) any voluntary contributions received and maintained in the form of jewellery, furniture
or other article as the Board may specify for any period during the previous year.
(iii) Exemption in relation voluntary contribution – Exemption would not be denied in relation
to voluntary contribution, other than voluntary contribution in cash or voluntary contribution
of the nature referred in (a) to (c) above, subject to the condition that such voluntary
contribution is not held by the association otherwise than in any one or more of the forms or
modes specified in section 11(5), after the expiry of one year from the end of the previous
year in which such asset is acquired.
(iv) Non-applicability of exemption in respect of business income - The exemption will not
apply to income of such association which are in the nature of profits and gains of business
unless the business is incidental to the attainment of its objectives and separate books of
account are maintained in respect of such business.
(v) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the research association has not applied its income in accordance with sections 11(2)
and (3);

(b) the research association has not invested or deposited its funds in accordance with
point (ii) above.
(c) the activities of the research association are not genuine;

(d) the activities of the research association are not being carried out in accordance with
the conditions imposed on the basis of which the approval was granted.
Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

4Section 11(5) will be discussed in Chapter 10

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.25

(13) Income of professional associations [Section 10(23A)]

(i) Exempt and Non-exempt income - All income arising to an association is exempt from
inclusion in income, except the following categories of income, provided it satisfies the
specified conditions:
(a) income under the head ‘income from house property’;

(b) income received for rendering any specific service; and

(c) income by way of interest or dividends derived from its investments.
(ii) Conditions to be satisfied - Associations or institutions must.

• established in India

• have as its object the control, supervision, regulation or encouragement of the

profession of law, medicine, accountancy, engineering or architecture, or any other
profession specified by the Central Government

• apply their income or accumulate it solely to their objects of establishment

• be approved by the Central Government by general or special order

(iii) Withdrawal of Approval - However, approval once granted may be withdrawn if, at any time,
the Government is satisfied that –
(a) the association or institution has not applied or accumulated its income in accordance
with the provisions of the section;
(b) the activities of the association or institution are not being carried out in accordance
with the conditions imposed on the basis of which the approval was granted.
Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

(14) Income of institutions established by armed forces [Section 10(23AA)]

Any income received by any person on behalf of any regimental fund or non-public fund established
by the armed forces of the Union for the welfare of the past and present members of such forces or
their dependents is exempt from tax.
Students may note that donations to such institutions will qualify for deduction under section 80G.

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(15) Income of Funds established for welfare of employees of which such employees are
members [Section 10(23AAA)]

A number of funds have been established for the welfare of employees or their dependents in which
such employees themselves are members. These funds are utilised to provide benefits to a member
on his superannuation, or in the event of his illness or illness of any member of his family, or to the
dependents of a member on his death.
The exemption will be available to the funds only if the following conditions are fulfilled:

the fund should have been established for the welfare of employees or
their dependents and for such purposes as may be notified by the Board

such employees should be the members of the fund

the fund should apply its income, or accumulate it for application, wholly
and exclusively to the objects for which it is established

the fund shall invest its fund and contributions made by the employees
and other sums received by it in any one mode specified u/s11(5)

the fund should be approved by the Principal Commissioner or

Commissioner in accordance with the prescribed rules

The approval shall have effect for such assessment year or years not exceeding three assessment
years as may be specified in the order of approval.
(16) Income of Fund set up by Life Insurance Corporation or other insurer under pension
scheme [Section 10(23AAB)]

Any income of a fund set up by the LIC of India or any other insurer under a pension scheme to
which contribution is made by any person for receiving pensions from such fund. Such scheme
should be approved by the Controller of Insurance or the IRDA.
(17) Income of institution established for development of Khadi and Village industries
[Section 10(23B)]

(i) Institutions eligible for exemption - The exemption will be available to institutions
constituted as public charitable trusts or registered under the Societies Registration Act, 1860
or under any law corresponding to that Act in force in any part of India existing solely for
development of khadi and village industries or both and not for purpose of profit.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.27

(ii) Income eligible for exemption - Income derived by such institutions from the production,
sale or marketing of Khadi products or village industries would be exempt from income-tax.

(iii) Conditions for availing exemption -

(a) The institution has to apply its income or accumulate it for application, solely for the
development of khadi or village industries or both.

(b) They should be approved by the Khadi and Village Industries Commission.
The approval shall have effect for such assessment year or years not exceeding three
assessment years as may be specified in the order of approval.
(iv) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the institution has not applied or accumulated its income in accordance with the
provisions of the section;
(b) the activities of the institution are not being carried out in accordance with the
conditions imposed on the basis of which the approval was granted.
Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.
(18) Income of authorities set up under State or Provincial Act for promotion of Khadi and
Village Industries [Section 10(23BB)]

Income derived by authorities similar to Khadi and Village Industries Board, set up under any State
or Provincial Act, for the development of Khadi or Village industries in the state is exempt from tax.
(19) Income of authorities set up to administer religious or charitable trusts [Section
10(23BBA)

Income of bodies or authorities established, constituted or appointed under any enactment for the
administration of public religious or charitable trusts or endowments (including maths, temples,
gurudwaras, wakfs, churches, synagogues, agiaries or other places of public religious worship) or
societies for religious or charitable purpose is exempt from tax.

However, it is clarified that this section does not provide exemption in respect of income of any trust,
endowment or society.

(20) Income of the IRDA [Section 10(23BBE)]

Any income of the IRDA established under section 3(1) of the IRDA Act, 1999 will be exempt.

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(21) Income of Central Electricity Regulatory Commission [Section 10(23BBG)]

This clause provides exemption to any income of Central Electricity Regulatory Commission
constituted under section 76(1) of the Electricity Act, 2003.

(22) Income of Prasar Bharati (Broadcasting Corporation of India) [Section 10(23BBH)]

Any income of the Prasar Bharati (Broadcasting Corporation of India) established under section 3(1)
of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 is exempt.

(23) Income of certain funds or institutions [Section 10(23C)]

An exemption is available in respect of any income received by any person on behalf of the following
entities:
(i) the Prime Minister’s National Relief Fund or the Prime Minister's Citizen Assistance and Relief
in Emergency Situations Fund (PM CARES FUND) [Sub-clause (i)];
(ii) the Prime Minister’s Fund (Promotion of Folk Art) [Sub-clause (ii)];
(iii) the Prime Minister’s Aid to Students Fund [Sub-clause (iii)];
(iv) the National Foundation for Communal Harmony [Sub-clause (iiia)];
(v) the Swachh Bharat Kosh, set up by the Central Government [Sub-clause (iiiaa)];
(vi) the Clean Ganga Fund, set up by the Central Government [Sub-clause (iiiaaa)];
(vii) the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any
State or Union Territory [Sub-clause (iiiaaaa)];
(viii) any university or other educational institution exists solely for educational purposes and not for
profit which is wholly or substantially financed by the Government [Sub-clause (iiiab)];
(ix) any hospital or other institution wholly or substantially financed by the Government, which
exists solely for philanthropic purposes and not for profit and which exists for the reception
and treatment of persons suffering from illness or mental defectiveness or reception and
treatment of convalescing persons or persons requiring medical attention or rehabilitation
[Sub-clause (iiiac)];

If the government grant to a university or other educational institution, hospital or other

institution during the relevant previous year exceeds 50% of the total receipts (including any
voluntary contributions), of such university or other educational institution, hospital or other
institution, as the case may be, then, such university or other educational institution, hospital
or other institution shall be considered as being substantially financed by the Government
for that previous year.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.29

(x) any university or other educational institution existing solely for educational purposes and not
for profit and aggregate annual receipts of the person from such university(ies) or educational
institution(s) do not exceed ` 5 crore [Sub-clause (iiiad)];
(xi) any hospital or other institution which exists solely for philanthropic purposes and not for profit
and which exists for the reception and treatment of persons suffering from illness or mental
defectiveness or reception and treatment of convalescing persons or persons requiring
medical attention or rehabilitation if aggregate annual receipts of the person from such
hospital(s) or institution(s) do not exceed ` 5 crore [Sub-clause (iiiae)];

If the person has receipts from university or universities or educational institution or institutions as
referred to in (x) as well as from hospital or hospitals or institution or institutions as referred to in
(xi), the exemptions would not apply, if the aggregate of annual receipts of the person from such
university or universities or educational institution or institutions or hospital or hospitals or institution
or institutions, exceed ` 5 crore;

(xii) any other fund or institution for charitable purposes approved by the Principal Commissioner
or Commissioner of Income-tax, having regard to the objects of the fund or institution and its
importance throughout India or throughout any State or States [Sub-clause (iv)];
(xiii) any trust (including any other legal obligation) or institution wholly for public religious or wholly
for public religious and charitable purposes approved by the Principal Commissioner or
Commissioner of Income-tax [Sub-clause (v)];
(xiv) any university or other educational institutions which exists solely for educational purposes
and not for profit approved by Principal Commissioner or Commissioner of Income-tax
[Sub-clause (vi)];
(xv) any hospital or other institution which exists solely for philanthropic purposes and not for profit
and which exists for the reception and treatment of persons suffering from illness or mental
defectiveness or reception and treatment of convalescing persons or persons requiring
medical attention or rehabilitation approved by the Principal Commissioner or Commissioner
of Income-tax [Sub-clause (via)].
Refer to “Chapter 10: Assessment of Trusts or institutions, Political Parties and Other special
entities, wherein the provisions of section 10(23C) are discussed in detail.

(24) Income of Mutual Fund [Section 10(23D)]

(i) The income of a Mutual Fund registered under the SEBI Act and regulations made thereunder
or other Mutual Fund set up by a public sector bank/public financial institution/RBI subject to
certain conditions is exempt.

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(ii) “Public sector bank” means SBI or any nationalised bank or a bank included in the category
“other public sector banks” by the RBI, for example, IDBI Bank.

Note: The income of a mutual fund registered under the SEBI will be exempt without any conditions
laid down by the Central Government. In the case of other mutual funds, the conditions will be
applicable.
(25) Income of Investor Protection Funds set up by recognised stock exchanges in India
[Section 10(23EA)]

(i) Clause (23EA) excludes any income by way of contributions received from recognized stock
exchanges and the members thereof, of an Investor Protection Fund set up by recognised
stock exchanges in India, either jointly or separately, and notified by the Central Government
in this behalf.
(ii) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part, with a recognised stock exchange, the
whole of the amount so shared shall be deemed to be the income of the previous year in
which such amount is so shared and shall accordingly be chargeable to income-tax.

(26) Specified income of Investor Protection Fund set up by commodity exchanges [Section
10(23EC)]

(i) This clause exempts any income, by way of contributions received from commodity
exchanges and the members thereof, of such Investor Protection Fund set up by commodity
exchanges in India, either jointly or separately, as the Central Government may, by
notification in the Official Gazette, specify in this behalf.

(ii) Where any amount standing to the credit of the said Fund and not charged to income-tax
during any previous year is shared, either wholly or in part, with a commodity exchange, the
entire amount so shared shall be deemed to be the income of the previous year in which the
amount is so shared and shall accordingly be chargeable to income-tax.
(iii) A “commodity exchange” means a “registered association” as defined in section 2(jj) of the
Forward Contracts (Regulation) Act, 1952 i.e., an association to which for the time being a
certificate of registration has been granted by the Forward Markets Commission u/s 14B.

(27) Income of Investor Protection Fund set up by depositories [Section 10(23ED)]

(i) Under section 10(23EA), any income by way of contributions from a recognised stock
exchange received by an Investor Protection Fund set up by the recognised stock exchange
is exempt from taxation.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.31

(ii) In line with section 10(23EA), section 10(23ED) provides that any income, by way of
contribution from a depository, of such Investor Protection Fund set up by a depository in
accordance with the regulations made under the SEBI Act, 1992 and the Depositories Act,
1996, will not be included while computing the total income of such investor protection fund.
(iii) The Central Government, would, by way of notification in the Official Gazette, specify such
investor protection funds set up by depositories in accordance with the SEBI and depositories
regulations.
(iv) Where any amount standing to the credit of the fund and not charged to income-tax during
any previous year is shared wholly or partly with a depository, the amount so shared shall be
deemed to be the income of the previous year in which such amount is shared. Accordingly,
such amount would be chargeable to income-tax.
(v) “Depository” means a company formed and registered under the Companies Act, 1956 and
which has been granted a certificate of registration under section 12(1A) of the
SEBI Act, 1992.
(28) Specified income of Core Settlement Guarantee Fund (SGF) set up by a recognized
Clearing Corporation [Section 10(23EE)]

(i) The Clearing Corporations are required, under the provisions of Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 notified by
SEBI, to establish a fund, called Core Settlement Guarantee Fund (Core SGF) for each
segment of each recognized stock exchange to guarantee the settlement of trades executed
in respective segments of the exchange.
(ii) Under sections 10(23EA), 10(23EC) and 10(23ED), any income by way of contributions
received from recognized stock exchanges or commodity exchanges and the members
thereof or depositories of Investor Protection Fund set up by such recognised stock
exchanges in India, or by commodity exchanges in India or by such depository, respectively,
as the Central Government may notify in this behalf, are exempt from taxation.
(iii) On parallel lines, section 10(23EE) exempts any specified income of such Core SGF set up
by a recognized clearing corporation in accordance with the regulations, notified by the
Central Government.
(iv) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part with the specified person, the whole of
the amount so shared shall be deemed to be the income of the previous year in which such
amount is shared, and shall accordingly be chargeable to income-tax.

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(v) Meaning of certain terms:

Terms Meaning
Regulations Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 made under the SEBI Act, 1992 and
Securities Contracts (Regulation) Act, 1956 or International Financial
Services Centres Authority (Market Infrastructure Institutions)
Regulations, 2021 made under the IFSC Act, 2019.
Recognised Meaning assigned as per Regulation 2(1)(o) of the Securities Contracts
clearing (Regulation) (Stock Exchanges and Clearing Corporations) Regulations,
corporation 2012 made under the SEBI Act, 1992 and Securities Contracts
(Regulation) Act, 1956 i.e., "Recognised clearing corporation" means a
clearing corporation which is recognised by the SEBI under section 4 read
with section 8A of the SEBI Act, 1992 or under regulation 2(1)(n) of the
International Financial Services Centres Authority (Market Infrastructure
Institutions) Regulations, 2021 made under the IFSC Act, 2019 i.e., a
clearing corporation in an IFSC recognised by the Authority;
Specified (a) the income by way of contribution received from specified persons;
Income (b) the income by way of penalties imposed by the recognised clearing
corporation and credited to the Core Settlement Guarantee Fund; or
(c) the income from investment made by the Fund.
Specified (a) any recognised clearing corporation which establishes and maintains
person the Core Settlement Guarantee Fund;
(b) any recognised stock exchange being shareholder in such
recognised clearing corporation or a contributor to Core Settlement
Guarantee Fund; and
(c) any clearing member contributing to the Core Settlement Guarantee
Fund.

(29) Income of trade unions [Section 10(24)]

Any income under the heads “Income from house property” and “Income from other sources” of a
registered trade union, within the meaning of the Trade Unions Act, 1926, formed primarily for the
purpose of regulating the relations between workmen and the employers or between workmen and
workmen will be exempt.

Further, this exemption is also available in respect of an association of such registered unions.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.33

(30) Income of provident funds, superannuation funds, gratuity funds [Section 10(25)]

Any income of a recognized provident fund (RPF) and of an approved superannuation fund or gratuity
fund is exempt from tax and the trustees of these funds would not be liable to pay tax thereon.
The exemption also applies to -
(i) the interest on securities which are held by or are the property of statutory provident fund
(SPF) governed by the Provident Funds Act, 1925;
(ii) the capital gains of the fund, if any, arising to it from the sale, exchange or transfer of such
securities;
(iii) any income received by the Board of Trustees constituted
- under Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 and
- under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952,
on behalf of the Deposit Linked Insurance Funds established under these respective Acts.

(31) Income of Employees’ State Insurance (ESI) Fund [Section 10(25A)]

The contributions paid under ESI Act, 1948 and all other moneys received on behalf of the ESI
Corporation are paid into a Fund called the ESI Fund. This Fund is held and administered by the
ESI Corporation. The amounts lying in the Fund are to be expended for payment of cash benefits
and provision of medical treatment and attendance to insured persons and their families,
establishment and maintenance of hospitals and dispensaries, etc. Any income of the ESI Fund is
exempted from income-tax.

(32) Income of member of a scheduled tribe [Section 10(26)]

A member of a Scheduled Tribe residing in -

(i) any area specified in the Constitution i.e., The North Cachar Hills District, The Karbi Anglong
District, The Bodoland Territorial Areas District, Khasi Hills District, Jaintia Hills District or
The Garo Hills District or
(ii) in the States of Manipur, Tripura, Arunachal Pradesh, Mizoram and Nagaland, or
(iii) in Ladakh
is exempt from tax on his income arising or accruing -
(a) from any source in the areas or States aforesaid.
(b) by way of dividend or interest on securities.

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(33) Specified income of a Sikkimese Individual [Section 10(26AAA)]

The following income, which accrues or arises to a Sikkimese individual, would be exempt from
income-tax –
(a) income from any source in the State of Sikkim; or
(b) income by way of dividend or interest on securities.

(34) Income of an Agricultural Produce Market Committee or Board [Section 10(26AAB)]

Any income of an Agricultural Produce Market Committee or Board constituted under any law for the time
being in force for the purpose of regulating the marketing of agricultural produce would be exempt.
(35) Income of a corporation etc. for the promotion of interests of members of Scheduled
Casts or Tribes or backward classes or any two or all of them [Section 10(26B)]

Any income of a corporation (established by a Central, State or Provincial Act) or other body, institution
or association (wholly financed by Government) formed for promotion of the interests of the members of
Scheduled Castes or Tribes or backward classes or of any two or all of them is exempt from tax.
(36) Income of corporations established to protect interests of minority community [Section
10(26BB)]
Any income of a corporation established by the Central Government or any State Government for
promoting the interests of the members of a minority community will be exempt from income tax.
Section 80G also provides tax relief in respect of donations made to these corporations.
(37) Income of corporation established for welfare and economic upliftment of ex-
servicemen [Section 10(26BBB)]

Any income of a corporation established by a Central, State or Provincial Act for the welfare and
economic upliftment of ex-servicemen, being citizens of India, would be exempt from income-tax.
(38) Income of a co-operative society for promoting interest of members of Scheduled
castes or Tribes or both [Section 10(27)]

Any income of a co-operative society formed for promoting the interests of the members of either
the scheduled castes or scheduled tribes or both will be exempted from being included in the total
income of the society.
Conditions:
(i) The membership of the co-operative society should consist of only other co-operative
societies formed for similar purposes, and
(ii) The finances of the society shall be provided by the Government and such other societies.

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(39) Incomes of certain bodies like Coffee/Tea/Rubber Board, etc. [Section 10(29A)]
Under this clause, any income accruing or arising to the following bodies is exempt from tax:
(i) the Coffee Board constituted under section 4 of the Coffee Act, 1942,
(ii) the Rubber Board constituted under section 4(1) of the Rubber Board Act, 1947,
(iii) the Tea Board established under section 4 of the Tea Act, 1953,
(iv) the Tobacco Board constituted under the Tobacco Board Act, 1975,
(v) the Marine Products Export Development Authority established under section 4 of the Marine
Products Export Development Authority Act, 1972,
(vi) the Agricultural and Processed Food Products Export Development Authority established under
section 4 of the Agricultural and Processed Food Products Export Development Act, 1985,
(vii) the Spices Board constituted under section 3(1) of the Spices Board Act, 1986,
(viii) the Coir Board established under the Coir Industry Act, 1953.

(40) Tea board subsidy [Section 10(30)]

The amount of any subsidy received by any assessee engaged in the business of growing and
manufacturing tea in India through or from the Tea Board will be wholly exempt from tax.
Conditions:
(i) The subsidy should have been received under any scheme for replantation or replacement of
the bushes or for rejuvenation or consolidation of areas used for cultivation of tea, as notified
by the Central Government.
(ii) The assessee should furnish a certificate from the Tea Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.

(41) Other subsidies [Section 10(31)]

Amount of any subsidy received by an assessee engaged in the business of growing and
manufacturing rubber, coffee, cardamom or other specified commodity in India, as notified by the
Central Government, will be wholly exempt from tax.
Conditions:
(i) The subsidies should have been received from or through the Rubber Board, Coffee Board,
Spices Board or any other Board in respect of any other commodity under any scheme for
replantation or replacement of rubber, coffee, cardamom or other plants or for rejuvenation
or consolidation of areas used for cultivation of all such commodities.

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(ii) The assessee should furnish a certificate from the Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.
(42) Specified income arising from any international sporting event in India [Section 10(39)]
(i) This clause exempts income of the nature and to the extent, arising from any international
sporting event in India, to the person or persons notified by the Central Government in the
Official Gazette.
(ii) Such international sporting event should -
(a) be approved by the international body regulating the international sport relating to such
event;
(b) have participation by more than two countries;
(c) be notified by the Central Government in the Official Gazette for the purposes of this
clause.
(43) Certain grants etc. received by a subsidiary from its Indian holding company engaged in
the business of generation or transmission or distribution of power [Section 10(40)]

(i) This clause exempts income of any subsidiary company by way of grant or otherwise received
from an Indian company, being its holding company engaged in the business of generation
or transmission or distribution of power.
(ii) The receipt of such income should be for settlement of dues in connection with reconstruction
or revival of an existing business of power generation.
(iii) The exemption under this clause is available if the reconstruction or revival of any existing
business of power generation is by way of transfer of such business to the Indian company
notified under section 80-IA(4)(v)(a).

(44) Specified income of certain bodies or authorities [Section 10(42)]

(i) This clause exempts income, of the nature and to the extent, arising to a body or authority,
notified by the Central Government.
(ii) Such body or authority should have been established or constituted or appointed -
(a) under a treaty or an agreement entered into by the Central Government with two or
more countries or a convention signed by the Central Government;

(b) not for the purposes of profit.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.37

(45) Income received by any person on behalf of NPS Trust [Section 10(44)]

The NPS Trust would exempt from the applicability of –

(i) income-tax on any income received by any person for, or on behalf of, the NPS Trust [Section
10(44)]; and
(ii) securities transaction tax on all purchases and sales of equity and derivatives by the NPS Trust.

Further, the NPS Trust shall receive all income without any deduction of tax at source. [Section
197A(1E)].
Thus, the NPS Trust, which was set up to manage the assets and funds under the New Pension
System in the interest of the beneficiaries, would enjoy a “pass-through status”.
(46) Specified income of notified entities not engaged in commercial activity [Section 10(46)]

(i) Section 10(46) provides for exemption of income arising to a body or authority or Board or
Trust or Commission, other than those covered under section 10(46A), or a class thereof, the
nature and extent of which is to be specified by the Central Government.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or Trust
or Commission or a class thereof should be established or constituted by or under a Central,
State or Provincial Act or constituted by the Central or State Government with the object of
regulating or administering an activity for the benefit of the general public.
(iii) Further, the body or authority or Board or Trust or Commission should –
(a) not be engaged in any commercial activity; and
(b) be notified by the Central Government in this behalf.

(47) Any income of notified entities established or constituted under a Central Act or State Act
[Section 10(46A)]

(i) Section 10(46A) provides for exemption of any income arising to a body or authority or Board
or Trust or Commission, not being a company.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or Trust
or Commission, not being a company, should be established or constituted by or under a
Central Act or State Act with one or more of the following purposes -
- dealing with and satisfying the need for housing accommodation;

- planning, development or improvement of cities, towns and villages;

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- regulating, or regulating and developing, any activity for the benefit of the general
public; or

- regulating any matter, for the benefit of the general public, arising out of the objects
for which it has been created.
(iii) Further, the body or authority or Board or Trust or Commission, not being a company should
be notified by the Central Government in this behalf.
(48) Any income of National Credit Guarantee Trustee Company Ltd, credit guarantee fund or
credit guarantee Fund Trust [Section 10(46B)]
Section 10(46B) provides exemption of any income accruing or arising to
- National Credit Guarantee Trustee Company Ltd., being a company established and wholly
financed by the Central Government for the purpose of operating credit guarantee funds
established and wholly financed by the Central Government;
- Credit guarantee funds established and wholly financed by the Central Government and
managed by the National Credit Guarantee Trustee Company Ltd.;
- Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the
Government of India and the Small Industries Development Bank of India established under
Small Industries Development Bank of India Act, 1989.
(49) Income of notified infrastructure debt funds [Section 10(47)]

In order to give a fillip to infrastructure and encourage inflow of long-term foreign funds to this sector,
the Central Government to notify infrastructure debt funds to be set up in accordance with the
prescribed guidelines, the income of which would be exempt from tax.

(50) Certain income of Indian Strategic Petroleum Reserves Limited [Section 10(48C)]

Any income accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly
owned subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and Natural
Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility in
pursuance of directions of the Central Government would be exempt.

However, exemption would not available in respect of an arrangement, if the crude oil is not
replenished in the storage facility within three years from the end of the financial year in which the
crude oil was removed from the storage facility for the first time.

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(51) Income of an institution established for financing infrastructure and development

[Section 10(48D)]

Any income accruing or arising to an institution established for financing the infrastructure and
development, set up under an Act of Parliament and notified by the Central Government, for 10
consecutive assessment years beginning from the assessment year relevant to the previous year in
which such institution is set up would be exempt.

(52) Income of a developmental financing institution licensed by RBI [Section 10(48E)]

Any income accruing or arising to a developmental financing institution, licensed by the RBI under
an Act of Parliament referred to in section 10(48D) and notified by the Central Government, for 5
consecutive assessment years beginning from the assessment year relevant to the previous year in
which the developmental financing institution is set up would be exempt.
Further, the Central Government may, by issuing notification, extend the exemption for a further
period, not exceeding 5 more consecutive assessment year, subject to fulfillment of such conditions
as may be specified in the said notification.

Students should carefully note that all the items under section 10 listed above are either
wholly or partially exempt from taxation and the exempt portion is not even includible in the
total income of the person concerned.

2.3 RESTRICTIONS ON ALLOWABILITY OF

EXPENDITURE [SECTION 14A]
As per section 14A, notwithstanding anything to the contrary, expenditure incurred in relation to any
exempt income is not allowed as a deduction while computing income under any of the five heads
of income [Sub-section (1)].
The Assessing Officer is empowered to determine the amount of expenditure incurred in relation to
such income which does not form part of total income in accordance with such method as may be
prescribed [Sub-section (2)].
The method for determining expenditure in relation to exempt income is to be prescribed by the
CBDT for the purpose of disallowance of such expenditure under section 14A. Such method should
be adopted by the Assessing Officer in the following cases –
(i) if he is not satisfied with the correctness of the claim of the assessee, having regard to the
accounts of the assessee. [Sub-section (2)]; or
(ii) where an assessee claims that no expenditure has been incurred by him in relation to income
which does not form part of total income [Sub-section (3)].

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Rule 8D lays down the method for determining the amount of expenditure in relation to income not
includible in total income.
If the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not
satisfied with –
(a) the correctness of the claim of expenditure by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred
in relation to exempt income for such previous year, he shall determine the amount of expenditure
in relation to such income in the manner provided hereunder –
The expenditure in relation to income not forming part of total income shall be the aggregate of the
following:
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) an amount equal to 1% of the annual average of the monthly averages of the opening and
closing balances of the value of investment, income from which does not form part of total
income.
However, the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure
claimed by the assessee.
Expenditure incurred during a previous year (say, P.Y. 2025-26) in relation to exempt income would
be disallowed while computing total income of that previous year by applying the provisions of
section 14A even though such exempt income has not accrued or arisen or has not been received
during the said previous year.

Clarification regarding disallowance of expenses under section 14A in cases where

corresponding exempt income has not been earned during the financial year [Circular No.
5/2014, dated 11.2.2014]
Section 14A provides that no deduction shall be allowed in respect of expenditure incurred relating
to income which does not form part of total income. A controversy has arisen as to whether
disallowance can be made by invoking section 14A even in those cases where no income has been
earned by an assessee, which has been claimed as exempt during the financial year.
The CBDT has, through this Circular, clarified that the legislative intent is to allow only that
expenditure which is relatable to earning of income. Therefore, it follows that the expenses which
are relatable to earning of exempt income have to be considered for disallowance, irrespective of
the fact whether such income has been earned during the financial year or not.
The above position is clarified by the usage of the term “includible” in the heading to section 14A
[Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for
determining amount of expenditure in relation to income not includible in total income], which

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.41

indicates that it is not necessary that exempt income should necessarily be included in a particular
year’s income, for triggering disallowance. Also, the terminology used in section 14A is “income
under the Act” and not “income of the year”, which again indicates that it is not material that the
assessee should have earned such income during the financial year under consideration.
In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even where
the taxpayer has not earned any exempt income in a particular year.

SIGNIFICANT SELECT CASES

CASE LAW

CIT v. Kribhco (2012) 349 ITR 0618 (Delhi)

Issue Analysis & Decision

Is section 14A applicable in respect of Deductions under Chapter VIA are different from the
deductions, which are permissible and exclusions/exemptions provided under Chapter III.
allowed under Chapter VI-A? Section 14A is applicable only if an income is not included
in the total income as per the provisions of Chapter III of
the Income-tax Act, 1961. Therefore, no disallowance
can be made u/s 14A in respect of income included in
total income in respect of which deduction is
allowable u/s 80C to 80U.

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 2.42 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. Examine with reasons, based on the provisions of the Act, as to chargeability of the following
receipts to tax in the assessment year 2026-27:
(i) Rent of ` 60,000 charged from tenants occupying houses constructed on the land
situated in India and used for agricultural purposes. The tenants, working in the nearby
industrial area, occupy these houses for their own residential purposes.
(ii) Income of ` 75,000 derived by Anand Nursery from the sale of seedlings grown without
carrying out all the basic operations on land.
(iii) Mr. Gaitonde, born and brought up in the State of Sikkim, had a net profit of
` 2,25,000 from the business located in Sikkim and interest of ` 55,000 on the
securities/ bonds issued by the Government of Rajasthan.
2. Mr. Akash, a resident Indian, earns income of ` 22 lakhs from sale of rubber manufactured
from latex obtained from rubber plants grown by him in India and ` 30 lakhs from sale of
rubber manufactured from latex obtained from rubber plants grown by him in Malaysia during
the A.Y.2026-27. What would be his business income, assuming he has no other business?
3. Mr. Ram, a resident Indian, earns income of ` 15 lakhs from sale of coffee grown and cured
in India during the A.Y.2026-27. His friend, Mr. Shyam, a resident Indian, earns income of
` 25 lakhs from sale of coffee grown, cured, roasted and grounded by him in India during the
A.Y.2026-27. What would be the business income chargeable to tax in India of Mr. Ram and
Mr. Shyam?

Answers
1. (i) As per section 10(1), agricultural income is exempt from tax. The meaning and scope
of agricultural income is defined in section 2(1A). According to Explanation 2 to section
2(1A), any income derived from any building from the use of such building for any
purpose (including letting for residential purposes or for the purpose of any business
or profession) other than agriculture shall not be agricultural income. Therefore, the
rent of ` 60,000 from letting out of houses constructed on agricultural land for
residential purposes of industrial workers shall not be treated as agricultural income
by virtue of Explanation 2 to section 2(1A). Hence, such income would be chargeable
to tax.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.43

(ii) Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income, whether or
not the basic operations were carried out on land. Accordingly, the income of
` 75,000 derived by Anand Nursery from the sale of seedlings grown without carrying
out all the basic operations on land shall be treated as agricultural income and exempt
from tax under section 10(1).
(iii) Section 10(26AAA) exempts the income which accrues or arises to a Sikkimese
individual from any source in the State of Sikkim and the income by way of dividend
or interest on securities. Therefore, the income of Mr. Gaitonde from a business
located in Sikkim and interest income on the securities/bonds of Government of
Rajasthan shall not be subject to tax.
2. Since Mr. Akash is a resident, his global income would be taxable in India. Income of ` 30
lakhs from sale of rubber manufactured from latex obtained from rubber plants grown by him
in Malaysia would be his business income since it is from rubber plants grown outside India.
35% income from sale of rubber manufactured from latex obtained from rubber plants grown
by him in India would be taxable as business income and balance 65% would be exempt as
agricultural income.
Business income = 35% of ` 22 lakhs + ` 30 lakhs = ` 37.70 lakhs
3. In case of income derived from the sale of coffee grown and cured by the seller in India, 25%
income on such sale is taxable as business income. In case of income derived from the sale
of coffee grown, cured, roasted and grounded by the seller in India, 40% income on such sale
is taxable as business income.
Business income of Mr. Ram = 25% of ` 15 lakhs = ` 3.75 lakhs

Business income of Mr. Shyam = 40% of ` 25 lakhs = ` 10 lakhs

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 3

PROFITS AND GAINS OF

BUSINESS OR PROFESSION

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 examine whether a particular income would be chargeable to tax under the head
“Profits and gains of business or profession” by analysing the provisions of section
28;
 comprehend the “Income Computation and Disclosure Standards” (ICDSs) and
analyse and apply these standards to determine the income chargeable to tax under
this head;
 analyse and apply the provisions of sections 30 to 37 to determine whether any
particular expenditure /payment would be admissible as deduction while computing
income under this head;
 analyse and apply the conditions contained under sections 40 & 40A to determine
whether a particular expenditure/ payment would be admissible/ inadmissible as
deduction while computing income under this head;
 analyse and apply the provisions of section 43B to allow/ disallow expenditures
specified therein, in respect of which deduction is admissible only on actual
payment;
 examine when certain receipts are deemed as income chargeable to tax under this
head;

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 3.2 DIRECT TAX LAWS

 appreciate the provisions of section 44AA relating to maintenance of books of

account and identify the assessees, who are compulsorily required to maintain
books of account;
 appreciate the provisions of section 44AB, listing the circumstances when an
assessee is compulsorily required to get the books of account audited under
Income-tax Act, 1961;
 examine the presumptive tax provisions contained in sections 44AD, 44ADA &
44AE to determine whether an assessee engaged in a business, profession or
plying, hiring or leasing goods carriages can opt for such presumptive taxation
schemes;
 compute income under this head applying the charging and deeming provisions,
allowing the permissible deductions and disallowing the impermissible deductions.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.3

CHAPTER OVERVIEW

Computation of income under the head “Profits and gains of business

or profession”

Income chargeable under the head “Profits and gains of business or

profession” [Section 28] & Profits chargeable to tax [Section 41]

Less: Deductions

Inadmissible Expenses or
Admissible payments not
deductions
deductions deductible in certain
(Sections 30 (Section 40) circumstances
to 37) (Section 40A)

Other provisions [Sections 42, 43A, 43AA, 43B, 43C, 43CA, 43CB,
43D44AA, 44AB, 44AD, 44ADA, 44AE, 44DB]

3.1 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’

The income chargeable to tax under this head is in respect of the profits and gains of any
business or profession, carried on by an assessee at any time during the previous year.

Business Profession
The term “business” has been defined in The term “profession” has not been defined
section 2(13) to “include any trade, in the Act. It means an occupation requiring
commerce or manufacture or any adventure some degree of learning. The term
or concern in the nature of trade, commerce ‘profession’ includes vocation as well [Section
or manufacture”. 2(36)]
• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and
even an astrologer are persons who can be said to be carrying on a profession but not
business.

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 3.4 DIRECT TAX LAWS

• It is, however, not material whether a person is carrying on a ‘business’ or ‘profession’

or ‘vocation’ since for purposes of assessment, profits from all these sources are
treated and taxed alike (except in case of tax audit and presumptive income provisions,
where the rates and threshold limits are different for business and profession).
• Business necessarily means a continuous exercise of an activity with a profit motive;
nevertheless, profit from a single venture in the nature of trade may also be treated as
business.

Meaning of ‘Profits’
(1) Profits in cash or in kind: Profits may be realised in money or in money’s worth, i.e., in
cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of
the receipt on the date of receipt must be taken as the value of the income received in kind.
(2) Capital receipts: Capital receipts are not generally to be taken into account while
computing profits under this head.
(3) Voluntary Receipts: Payment voluntarily made by persons who were under no obligation
to pay anything at all would be income in the hands of the recipient, if they were received in
the course of a business or by the exercise of a profession or vocation. Thus, any amount
paid to a lawyer by a person who was not a client, but who has been benefited by the
lawyer’s professional service to another would be assessable as the lawyer’s income.
(4) Application of the gains of trade is immaterial: Gains made even for the benefit of the
community by a public body would be liable to tax. To attract the provisions of section 28, it
is necessary that the business, profession or vocation should be carried on at least for
some time during the accounting year but not necessarily throughout that year and not
necessarily by the assessee-owner personally, but it should be under his direction and
control.
(5) Income from distinct businesses: The profits of each distinct business must be computed
separately but the tax chargeable under this section is not on the separate income of every
distinct business but on the aggregate profits of all the business carried on by the
assessee.
(6) Computation of profits: Profits should be computed after deducting the losses and
expenses incurred for earning the income in the regular course of the business, profession,
or vocation unless the loss or expenses is expressly or by necessary implication, disallowed
by the Act. The charge is not on the gross receipts but on the profits and gains.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.5

(7) Legality of income: The illegality of a business, profession or vocation does not exempt its
profits from tax. The revenue is not concerned with the taint of illegality in the income or its
source. Thus, income tax is not restricted in its application to lawful business only.
However, expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law would not be allowable as deduction while computing profits of
such business.

3.2 INCOME CHARGEABLE UNDER THIS HEAD

[SECTION 28]
The various items of income chargeable to tax as income under the head ‘profits and gains of
business or profession’ are as under:
(1) Income from business, profession or vocation: Income arising to any person by way of
profits and gains from the business or profession carried on by him at any time during the
previous year.
However, income from letting out of a residential house or a part of the house by the owner
is chargeable to tax under the head “Income from house property” and not under the head
“Profits and gains of business or profession”.
(2) Any compensation or other payment due to or received by:
(i) Any person, by whatever name called, managing the whole or substantially the whole
of -
(a) the affairs of an Indian company or
(b) the affairs in India of any other company
at or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;

(ii) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person, at or in connection with the
termination of the agency or the modification of any of the terms and conditions
relating thereto;
(iii) any person, for or in connection with the vesting in the Government or in any
corporation owned or controlled by the Government under any law for the time being
in force, of the management of any property or business;

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 3.6 DIRECT TAX LAWS

(iv) any person, by whatever name called, at or in connection with the termination or
modification of the terms and conditions, of any contract relating to his business.

(3) Income from specific services performed for its members by a trade, professional or
business: Income derived by any trade, professional or similar associations from specific
services rendered by them to their members. It may be noted that this forms an exception to
the general principle of mutuality governing the assessment of income of mutual
associations such as chambers of commerce, stock brokers’ associations etc.
As a result, a trade, professional or similar association performing specific services for its
members is to be deemed as carrying on business in respect of these services and on that
assumption the income arising therefrom is to be subjected to tax. For this purpose, it is not
necessary that the income received by the association should definitely or directly be
related to these services.
(4) Incentives received or receivable by assessee carrying on export business:
(i) Profit on sale of import entitlements: Profits on sale of a licence granted under the
Imports (Control) Order, 1955 1 made under the Imports and Exports (Control) Act,
1947 2.
(ii) Cash assistance against exports under any scheme of GoI: Cash assistance (by
whatever name called) received or receivable by any person against exports under
any scheme of the Government of India.
(iii) Customs duty or excise duty re-paid or repayable as drawback: Any Customs
duty or Excise duty drawback repaid or repayable to any person against export under
the Customs and Central Excise Duties Drawback Rules, 1971 3.
(iv) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty Free
Replenishment Certificate: Any profit on the transfer of the Duty Entitlement Pass
Book Scheme 4 or Duty Free Replenishment Certificate, being Duty Remission
Scheme, under the export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) Act, 1992.

1 Now Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
2 Now Foreign Trade (Development and Regulation) Act, 1992
3 Now Customs and Central Excise Duties Drawback Rules, 2017
4 The pre‐export DEPB scheme was abolished with effect from 1 April 2000. After several extensions through the

years, the post‐export scheme was phased out on 30 September 2011 and thereafter DEPB items were incorporated
into the Duty Drawback Schedule with effect from 1 October 2011

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.7

(5) Value of any benefit or perquisite: The value of any benefit or perquisite arising from
business or the exercise of any profession, whether –

- convertible into money or not or

- in cash or in kind or partly in cash and partly in kind

Example:
If a company provides rent free residential accommodation to a lawyer in consideration of
professional services rendered by him to the company, the value of such accommodation
would be assessable in the hands of the said lawyer as his income under the head “Profits
and gains or business or profession”.

(6) Sum due to, or received by, a partner of a firm: Any interest, salary, bonus, commission
or remuneration, by whatever name called, due to or received by a partner of a firm from
such firm will be deemed to be income from business. However, where any interest, salary,
bonus, commission or remuneration by whatever name called, or any part thereof has not
been allowed to be deducted under section 40(b), in the computation of the income of the
firm the income to be taxed shall be adjusted to the extent of the amount disallowed.

Example:
Suppose a firm pays interest at 20% p.a. simple interest to a partner. The allowable rate of
interest is 12% p.a. Hence, the excess 8% paid will be disallowed in the hands of the firm.
Since the excess interest has suffered tax in the hands of the firm due to disallowance, the
same will not be taxed in the hands of the partner. However, the interest allowed to the
extent of 12% p.a. in the hands of firm will be taxed in the hands of partner.

Exemption of share income of a partner [Section 10(2A)]

Section 10(2A) exempts from tax a partner’s share in the total income of the firm. In other
words, the partner’s share in the total income of the firm determined in accordance with the
profit-sharing ratio will be exempt from tax.
(7) Any sum whether received or receivable, in cash or kind, under an agreement
(i) for not carrying out any activity in relation to any business or profession; or
However, the following sums received or receivable would not be chargeable to
tax under the head “profits and gains from business or profession”:
(a) any sum, whether received or receivable, in cash or kind, on account of
transfer of the right to manufacture, produce or process any article or thing or

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 3.8 DIRECT TAX LAWS

right to carry on any business or profession, which is chargeable under the

head “Capital gains”.
(b) any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United
Nations Environment Programme, in accordance with the terms of agreement
entered into with the Government of India.

(ii) for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or
any other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services.
Meaning of certain terms
Term Meaning
Agreement Includes any arrangement or understanding or action in concert, -
(A) whether or not such arrangement, understanding or action is
formal or in writing; or
(B) whether or not such arrangement, understanding or action is
intended to be enforceable by legal proceedings;
Service Service of any description which is made available to potential users and
includes the provision of services in connection with business of any
industrial or commercial nature such as accounting, banking,
communication, conveying of news or information, advertising,
entertainment, amusement, education, financing, insurance, chit funds,
real estate, construction, transport, storage, processing, supply of
electrical or other energy, boarding and lodging.

(8) Any sum received under a Keyman insurance policy: Any sum received by the
assessee, as an employer, under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will be taxable as income from business.
(9) Fair market value of inventory on its conversion as capital asset: Fair market value of
inventory on the date of its conversion or treatment as capital asset, determined in the
prescribed manner, would be chargeable to tax as business income 5.

5 Rule 11UAB inserted to prescribe the manner of determination of fair market value (FMV) of the inventory
on the date of conversion. For detailed reading of 11UAB of the Income-tax Rules, 1962, refer to Annexure
2 at the end of this module.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.9

(10) Sum received on account of capital asset referred under section 35AD: Any sum
received or receivable, in cash or kind, on account of any capital asset (in respect of which
whole of the expenditure on such capital asset has been allowed as a deduction under
section 35AD) being demolished, destroyed, discarded or transferred.

Note - Where a specified person, being a partner of a firm or member of other AOP/BoI, receives
during the P.Y. any stock in trade from a specified entity, being a firm or other AOP/BoI in
connection with the dissolution or reconstitution of such specified entity, then, the specified entity
would be deemed to have transferred such stock in trade to the specified person in the year in
which it is received by the specified person. Profit and gains arising from such deemed transfer
would be deemed to be the income of such specified entity in the same year of receipt by specified
person and chargeable to income-tax under the “Profit and gains of business or profession”
[Section 9B]. For detailed discussion on section 9B, refer Chapter 4 – “Capital Gains”.

3.3 SPECULATION BUSINESS

Explanation 2 to section 28 specifically provides that where an assessee carries on speculative
business, that business of the assessee must be deemed as distinct and separate from any other
business. This becomes necessary because section 73 provides that losses in speculation business
unlike other business, cannot be set-off against the profits of any business other than a speculation
business.

Likewise, a loss in speculation business carried forward to a subsequent year can be set-off only
against the profit and gains of any speculative business in the subsequent year. Profits and losses
resulting from speculative transaction must, therefore, be treated as separate and distinct from
profits and gains of business and profession from any other business.
(1) Meaning of Speculative Transaction
“Speculative transaction” means a transaction in which a contract for the purchase or sales of
any commodity including stocks and shares, is periodically or ultimately settled otherwise than by
the actual delivery or transfer of the commodity or scrips [Section 43(5)].
Where any part of the business of a company consists in the purchase and sale of the shares of
other companies, such a company shall be deemed to be carrying on speculation business to the
extent to which the business consists of the purchase and sale of such shares.

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 3.10 DIRECT TAX LAWS

However, this deeming provision does not apply to the following companies –
(i) A company whose gross total income consists of mainly income chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income
from other sources”;
(ii) A company, the principal business of which is –

(a) the business of trading in shares; or

(b) the business of banking; or
(c) the granting of loans and advances.

Accordingly, if these companies as mentioned above carry on the business of purchase and sale
of shares of other companies, they would not be deemed to be carrying on speculation business
[Explanation to section 73].

(2) Transaction not deemed to be speculative transaction

The following forms of transactions shall not be deemed to be speculative transaction:
(i) Hedging contract in respect of raw materials or merchandise: A contract in respect of
raw materials or merchandise entered into by a person in the course of his manufacturing or
merchandising business to guard against loss through future price fluctuations in respect of
his contracts for the actual delivery of goods manufactured by him or merchandise sold by
him; or
(ii) Hedging contract in respect of stocks and shares: A contract in respect of stocks and
shares entered into by a dealer or investor therein to guard against loss in his holdings of
stocks and shares through price fluctuation; or
(iii) Forward contract: A contract entered into by a member of a forward market or stock
exchange in the course of any transaction in the nature of jobbing or arbitrage to guard
against any loss which may arise in the ordinary course of his business as a member; or
(iv) Trading in derivatives: An eligible transaction carried out in respect of trading in
derivatives in a recognized stock exchange.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.11

Meaning of certain terms

Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
stock broker or sub-broker or such other intermediary registered
under section 12 of the Securities and Exchange Board of India
Act, 1992 in accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956 or the Securities and Exchange
Board of India Act, 1992 or the Depositories Act, 1996 and the
rules, regulations or bye-laws made or directions issued under
those Acts or by banks or mutual funds on a recognised stock
exchange; and
(B) which is supported by a time stamped contract note issued by
such stock broker or sub-broker or such other intermediary to
every client indicating in the contract note, the unique client
identity number allotted under any Act referred to in (A) above
and permanent account number;

(v) Trading in commodity derivatives: An eligible transaction in respect of trading in

commodity derivatives carried out in a recognised stock exchange, which is chargeable to
commodities transaction tax under Chapter VII of the Finance Act, 2013.
However, the requirement of chargeability of commodities transaction tax is not applicable
in respect of trading in agricultural commodity derivatives.
Meaning of certain terms

Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
member or an intermediary registered under the bye-laws,
rules and regulations of the recognised stock exchange for
trading in commodity derivative in accordance with the
provisions of the Forward Contracts (Regulation) Act, 1952
and the rules, regulations or bye-laws made or directions
issued under that Act on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by
such member or an intermediary to every client indicating in
the contract note, the unique client identity number allotted
under the Act, rules, regulations or bye-laws referred to in (A)
above, unique trade number and permanent account number

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 3.12 DIRECT TAX LAWS

3.4 METHOD OF ACCOUNTING

(1) Method of Accounting (Section 145)
Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section 145(1)
requires income chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” to be computed in accordance with either the cash or mercantile
system of accounting regularly employed by the assessee, subject to the provisions of section
145(2).
However, as per section 145B, certain income would be taxable in the following manner:
(i) interest received by an assessee on compensation or on enhanced compensation, shall be
deemed to be the income of the year in which it is received. [Such income is taxable under
the head “Income from other sources”]
(ii) the claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realisation is achieved.
(iii) income referred to in section 2(24)(xviii) i.e., assistance in the form of a subsidy or grant or
cash incentive or duty drawback or waiver or concession or reimbursement, by whatever
name called, by the Central Government or a State Government or any authority or body or
agency in cash or kind to the assessee shall be deemed to be the income of the previous
year in which it is received, if not charged to income tax for any earlier previous year.

Under section 145(2), the Central Government is empowered to notify in the Official Gazette from
time to time, income computation and disclosure standards (ICDSs) to be followed by any
class of assessees or in respect of any class of income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated 29.9.2016,
notified ten ICDSs to be applicable from A.Y.2017-18.
The notified ICDSs have to be followed by all assessees (other than an individual or a Hindu
undivided family who is not required to get his accounts of the previous year audited in accordance
with the provisions of section 44AB) following the mercantile system of accounting, for the
purposes of computation of income chargeable to income-tax under the head “Profits and gains of
business or profession” or “Income from other sources”, from A.Y.2017-18.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.13

The ten notified ICDSs are:

ICDS I : Accounting Policies
ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities
ICDS IX : Borrowing Costs
ICDS X : Provisions, Contingent Liabilities and Contingent Assets

Cardinal features of Notified ICDSs

(1) Applicability: All the notified ICDSs are applicable for computation of income chargeable
under the head “Profits and gains of business or profession” or “Income from other sources”
and not for the purpose of maintenance of books of accounts. This is stated in the
Preamble at the beginning of each ICDS.
(2) Position in case of conflict with the Income-tax Act, 1961: In the case of conflict
between the provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions
of the Act shall prevail to that extent. This is also stated in the Preamble at the beginning of
each ICDS.
(3) Scope Paragraph: Each of the ten notified ICDSs has a scope paragraph explaining what
exactly the ICDS deals with. In some standards, the scope paragraph also specifies what
the ICDS does not deal with.
(4) Transitional Provisions: All ICDSs (except ICDS VIII on Securities) contain transitional
provisions to facilitate first time adoption and prevent any tax leakage or any double
taxation.
(5) Disclosure Requirements: All ICDSs (except ICDS VI on Effects of changes in foreign
exchange rates and ICDS VIII on Securities) contain specific disclosure requirements. The
last paragraph(s) of these ICDSs is on disclosure.

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 3.14 DIRECT TAX LAWS

Salient Features of the notified ICDSs

ICDS I: Accounting Policies

► This ICDS deals with significant accounting policies.
► While it recognizes the fundamental accounting assumptions of going concern,
consistency and accrual, it does not recognize the concepts of “materiality” and
“prudence” in selection of accounting policies.
► Treatment and presentation of transactions have to be governed by their substance and
not merely by the legal form.
► Marked to market loss or an expected loss is not to be recognized unless recognition of
such loss is in accordance with the provisions of any other ICDS.
ICDS II: Valuation of Inventories
► “Inventories” has been defined to mean assets held for –
o sale in the ordinary course of business;
o in the process of production for such sale;
o in the form of materials or supplies to be consumed in the production process or
in the rendering of services.
► This ICDS requires inventory to be valued at cost or net realizable value, whichever is
lower.
► This ICDS requires disclosure of the accounting policies adopted in measuring
inventories including the cost formulae used and the total carrying amount of inventories
and its classification appropriate to a person.
ICDS III: Construction Contracts
► This ICDS is required to be applied in determination of income for a construction
contract of a contractor.
► It recognizes percentage of completion method (POCM) for recognizing contract
revenue and contract costs associated with a construction contract.
► However, contract revenue and contract costs associated with the construction contract,
which commenced on or before 31.3.2016 but not completed by the said date, can be
recognised based on the method regularly followed by the person prior to the previous
year 2016-17.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.15

► This ICDS also contains certain disclosure requirements, like the amount of contract
revenue recognized as revenue in the period, the methods used to determine the stage
of completion of contracts in progress etc.
ICDS IV: Revenue Recognition
► This ICDS deals with the bases for recognition of revenue arising in the course of the
ordinary activities of a person from –
o the sale of goods;
o the rendering of services;
o the use by others of the person’s resources yielding interest, royalties or
dividends.
► It does not, however, deal with the aspects of revenue recognition which are dealt with
by other ICDSs.
► “Revenue” is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of
services, or from the use by others of the person’s resources yielding interest, royalties
or dividends. In an agency relationship, the revenue is the amount of commission and
not the gross inflow of cash, receivables or other consideration.
► This ICDS also contains a provision wherein the revenue from sale of goods could be
recognized when there is reasonable certainty of its ultimate collection.
► Revenue from service transactions is required to be recognized on the basis of
percentage completion method. However, revenue can be recognised on a straight line
basis over a specific period of time, when services are provided by an indeterminate
number of acts over such period.
► Revenue from service contracts with duration of not more than 90 days to be recognised
when the rendering of services under that contract is completed or substantially
completed.
► This ICDS contains certain disclosure requirements, like the amount of revenue from
service transactions recognized as revenue during the previous year, the method used
to determine the stage of completion of service transactions in progress, information
relating to service transactions in progress at the end of the previous year etc.
ICDS V: Tangible Fixed Assets
► This ICDS deals with the treatment of tangible fixed assets.

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► “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held
with the intention of being used for the purpose of producing or providing goods or
services and is not held for sale in the normal course of business.
► This ICDS provides the components of actual cost of such assets and valuation of such
assets in special cases.
► The fair value of a tangible fixed asset acquired in exchange for shares or other
securities or another asset shall be its actual cost.
► The ICDS also provides that depreciation on such assets and income arising on transfer
of such assets shall be computed in accordance with the provisions of the Income-tax
Act, 1961.
► The ICDS also contains disclosure requirements in respect of such assets, like the
description of asset or block of assets, rate of depreciation, actual cost or written down
value, as the case may be, additions or deductions during the year with dates,
depreciation allowable and written down value at the end of the year.
ICDS VI: The Effects of changes in foreign exchange rates
► This ICDS deals with treatment of transactions in foreign currencies, translating the
financial statements of foreign operations and treatment of foreign currency transactions
in the nature of forward exchange contracts.
► This ICDS requires exchange differences arising on settlement of monetary items or
conversion thereof at last day of the previous year to be recognized as income or as
expense in that previous year.
► In respect of non-monetary items, exchange differences arising on conversion thereof as
at the last day of the previous year shall not be recognized as income or as expense in
that previous year.
► At the last day of each previous year, foreign currency monetary items shall be
converted into reporting currency by applying the closing rate.
► Non-monetary items in a foreign currency shall be converted into reporting currency by
using the exchange rate at the date of the transaction.
► Non-monetary item being inventory which is carried at net realisable value denominated
in a foreign currency shall be reported using the exchange rate that existed when such
value was determined.

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► The ICDS contains provisions for initial recognition, conversion at the last date of the
previous year and recognition of exchange differences. These provisions shall be
subject to the provisions of section 43A of the Income-tax Act, 1961 and Rule 115 of the
Income-tax Rules, 1962.
ICDS VII: Government Grants
► This ICDS deals with the treatment of government grants. It recognizes that government
grants are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks etc.
► This ICDS does not deal with Government assistance other than in the form of
Government grants and Government participation in the ownership of the enterprise.
► It requires recognition of Government Grants when there is a reasonable assurance that
the person shall comply with the conditions attached to them and the grants shall be
received. However, it also states that recognition of Government grant shall not be
postponed beyond the date of actual receipt.
► This ICDS requires Government grants relatable to depreciable fixed assets to be
reduced from actual cost/WDV. It further provides that where the Government grant is
not directly relatable to the asset acquired, then a pro-rata reduction of the amount of
grant should be made in the same proportion as such asset bears to all assets with
reference to which the Government grant is so received.
► The standard requires grants relating to non-depreciable fixed assets to be recognized
as income over the same period over which the cost of meeting such obligations is
charged to income.
► The standard also requires Government grants receivable as compensation for
expenses or losses incurred in a previous financial year or for the purpose of giving
immediate financial support to the person with no further related costs to be recognized
as income of the period in which it is receivable.
► All other Government Grants have to be recognized as income over the periods
necessary to match them with the related costs which they are intended to compensate.
► The standard contains certain disclosure requirements, like nature and extent of
Government grants recognized during the previous year as income, nature and extent of
Government grants not recognized during the previous year as income and reasons
thereof etc.

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ICDS VIII: Securities

► This ICDS deals with securities.
► There are two parts. Part A deals with securities held as stock-in-trade. Part B deals with
securities held by a scheduled bank or public financial institutions formed under a Central or
a State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013.
► It requires securities (referred to in Part A) to be recognized at actual cost on
acquisition, which shall comprise of its purchase price and include acquisition charges
like brokerage, fees, tax, duty or cess.
► The actual cost of a security (referred to in Part A) acquired in exchange for other
securities or another asset shall be the fair value of the security so acquired.
► Subsequently, at the end of any previous year, securities held as stock-in-trade have to
be valued at actual cost initially recognized or net realizable value at the end of that
previous year, whichever is lower.
► It goes on to provide that such comparison of actual cost initially recognized and net
realizable value has to be done category-wise and not for each individual security.
► Where actual cost initially recognized cannot be ascertained by reference to specific
identification, use of “First in First Out” method or “Weighted Average Cost” formula is
permitted for subsequent measurement of securities held as stock-in-trade (other than
unlisted or unquoted securities) referred to in Part A.
► Securities referred to in Part B to be classified, recognised and measured in accordance
with the extant guidelines issued by the RBI in this regard. Any claim for deduction in
excess of the said guidelines will not be taken into account. To this extent, the
provisions of ICDS VI on the effect of changes in foreign exchange rates relating to
forward exchange contracts would not apply.
ICDS IX: Borrowing Costs
► This ICDS deals with the treatment of borrowing costs. It does not deal with the actual
or imputed cost of owners’ equity and preference share capital.
► It requires borrowing costs which are directly attributable to the acquisition, construction or
production of a qualifying asset to be capitalized as part of the cost of that asset. Other
borrowing costs have to be recognized in accordance with the provisions of the Act.
► Qualifying asset has been defined to mean –
o land, building, machinery, plant or furniture, being tangible assets;

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.19

o know‐how, patents, copyrights, trade marks, licences, franchises or any other

business or commercial rights of similar nature, being intangible assets;
o inventories that require a period of twelve months or more to bring them to a
saleable condition.
► This ICDS requires capitalization of specific borrowing costs and general borrowing
costs.
► This ICDS provides the formula for capitalization of borrowing costs when funds are
borrowed generally and used for the purpose of acquisition, construction or production of
a qualifying asset.
► For the purpose of computing the amount of borrowing costs to be capitalized, in a case
where the funds are not borrowed specifically for the purposes of acquisition,
construction or production of a qualifying asset, a qualifying asset would be such asset
that necessarily require a period of 12 months or more for its acquisition, construction or
production.
► It also provides as to when capitalization of borrowing costs would commence and
cease.
► It requires disclosure of the accounting policy adopted for borrowing costs and the
amount of borrowing costs capitalized during the year.
ICDS X: Provisions, Contingent Liabilities and Contingent Assets
► This ICDS deals with Provisions, Contingent Liabilities and Contingent Assets.
However, it does not deal with provisions, contingent liabilities and contingent assets –
o resulting from financial instruments,
o resulting from executory contracts,
o arising in insurance business from contracts with policyholders and
o covered by another ICDS.
It also does not deal with recognition of revenue dealt with by ICDS on Revenue
Recognition.
► The ICDS specifies the conditions for recognition of a provision, namely, existence of a
present obligation as a result of a past event, reasonable certainty that outflow of
resources embodying economic benefits will be required to settle the obligation and
making a reliable estimate of the amount of the obligation.

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► It provides that a person shall not recognize a contingent liability or a contingent asset.
However, it requires contingent assets to be assessed continually. When it becomes
reasonably certain that inflow of economic benefit will arise, the asset and related
income have to be recognized in the previous year in which the change occurs.
► It contains provisions for measurement and review of a provision and asset and related
income.
► It also provides that a provision shall be used only for expenditures for which the
provision was originally recognized.
► The ICDS also contains specific disclosure requirements in respect of each class of
provision, asset and related income recognized.

Clarification on Income Computation and Disclosure Standards (ICDS) notified under

section 145(2) of the Income-tax Act, 1961 – [Circular No. 10/2017, dated 23-03-2017]

After notification of ICDS, it was brought to the notice of the CBDT by the stakeholders that certain
provisions of ICDS may require amendment/ clarification for proper implementation. The matter
was referred to an expert committee. The Committee after duly consulting the stakeholders in this
regard has recommended a two-fold approach for the smooth implementation of ICDS i.e.,
amendment to the provisions of ICDS in respect of certain issues and issuance of clarifications by
way of FAQs for the rest of issues.
The CBDT has, vide this circular, issued the following clarification on other issues:
Question 1: Preamble of ICDS I states that this ICDS is applicable for computation of income
chargeable under the head “Profits and gains of business or profession" or "Income from other
sources" and not for the purposes of maintenance of books of account. However, Para 1 of ICDS I
states that it deals with significant accounting policies. Accounting policies are applied for
maintenance of books of accounts and preparing financial statements. What is the interplay
between ICDS I and maintenance of books of accounts?
Answer: As stated in the Preamble, ICDS is not meant for maintenance of books of accounts or
preparing financial statements. Persons are required to maintain books of accounts and prepare
financial statements as per accounting policies applicable to them. For example, companies are
required to maintain books of account and prepare financial statements as per requirements of
Companies Act, 2013. The accounting policies mentioned in ICDS-I being fundamental in nature
shall be applicable for computing income under the heads "Profits and gains of business or
profession" or "Income from other sources".

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.21

Question 2: Certain ICDS provisions are inconsistent with judicial precedents. Whether these
judicial precedents would prevail over ICDS?

Answer: The ICDS have been notified after due deliberation and after examining judicial views for
bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in
the absence of authoritative guidance on these issues under the Act for computing Income under
the head "Profits and gains of business or profession'' or Income from other sources. Since
certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be
applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and
subsequent assessment years.
Question 3: Does ICDS apply to non-corporate taxpayers who are not required to maintain books
of account and/or those who are covered by presumptive scheme of taxation like sections 44AD,
44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act?
Answer: ICDS is applicable to specified persons having income chargeable under the head
'Profits and gains of business or profession' or 'Income from other sources'. Therefore, the relevant
provisions of ICDS shall also apply to the persons computing income under the relevant
presumptive taxation scheme. For example, for computing presumptive income of a partnership
firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue
recognition shall apply for determining the receipts or turnover, as the case may be.
Question 4: If there is conflict between ICDS and other specific provisions of the Income-tax
Rules, 1962 governing taxation of income like rules 9A, 9B etc. of the Rules, which provisions shall
prevail?
Answer: ICDS provides general principles for computation of income. In case of conflict, if any,
between the provisions of Rules and ICDS, the provisions of Rules, which deal with specific
circumstances, shall prevail.
Question 5: ICDS is framed on the basis of accounting standards notified by Ministry of Corporate
Affairs (MCA) vide Notification No. GSR 739(E) dated 7th December, 2006 under section 211(3C)
of erstwhile Companies Act 1956. However, MCA has notified in February, 2015 a new set of
standards called 'Indian Accounting Standards' (Ind-AS). How will ICDS apply to companies which
adopted Ind-AS?
Answer: ICDS shall apply for computation of taxable income under the head "Profit and gains of
business or profession" or "Income from other sources" under the Income-tax Act. This is
irrespective of the accounting standards adopted by companies i.e. either Accounting Standards or
Ind-AS.

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Question 6: Whether ICDS shall apply to computation of Minimum Alternate Tax (MAT) under
section 115JB of the Act or Alternate Minimum Tax (AMT) under section 115JC of the Act?

Answer: MAT under section 115JB of the Act is computed on 'book profit' that is net profit as
shown in the Profit and Loss Account prepared under the Companies Act subject to certain
specified adjustments. Since, the provisions of ICDS are applicable for computation of income
under the regular provisions of the Act, the provisions of ICDS shall not apply for computation of
MAT.
AMT under section 115JC of the Act is computed on adjusted total income which is derived by
making specified adjustments to total income computed as per the regular provisions of the Act.
Hence, the provisions of ICDS shall apply for computation of AMT.
Question 7: Whether the provisions of ICDS shall apply to Banks, Non-banking financial
institutions, Insurance companies, Power sector etc.?
Answer: The general provisions of ICDS shall apply to all persons unless there are sector specific
provisions contained in the ICDS or the Act. For example, ICDS VIII contains specific provisions
for banks and certain financial institutions and Schedule I of the Act contains specific provisions for
Insurance business.
Question 8: Para 4(ii) of ICDS-1 provides that Mark to Market (MTM) loss or an expected loss
shall not be recognized unless the recognition is in accordance with the provisions of any other
ICDS. Whether similar consideration applies to recognition of MTM gain or expected incomes?
Answer: Same principle as contained in ICDS-I relating to MTM losses or an expected loss shall
apply mutatis mutandis to MTM gains or an expected profit.
Question 9: ICDS-1 provides that an accounting policy shall not be changed without 'reasonable
cause'. The term 'reasonable cause' is not defined. What shall constitute 'reasonable cause'?

Answer: Under the Act, 'reasonable cause' is an existing concept and has evolved well over a
period of time conferring desired flexibility to the tax payer in deserving cases.
Question 10: Which ICDS would govern derivative instruments?

Answer: ICDS -VI (subject to para 3 of ICDS-III) provides guidance on accounting for derivative
contracts such as forward contracts and other similar contracts. For derivatives, not within the
scope of ICDS-VI, provisions of ICDS-1 would apply.
Question 12: Since there is no specific scope exclusion for real estate developers and Build -
Operate-Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether

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ICDS-III and ICDS-IV should be applied by real estate developers and BOT operators. Also,
whether ICDS is applicable for leases.

Answer: At present, there is no specific ICDS notified for real estate developers, BOT projects and
leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as
may be applicable.

Question 13: The condition of reasonable certainty of ultimate collection is not laid down for
taxation of interest, royalty and dividend. Whether the taxpayer is obliged to account for such
income even when the collection thereof is uncertain?
Answer: As a principle, interest accrues on time basis and royalty accrues on the basis of
contractual terms. Subsequent non-recovery in either cases can be claimed as deduction in view
of amendment to section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail
over the provisions of ICDS.
Question 14: Whether ICDS is applicable to revenues which are liable to tax on gross basis like
interest, royalty and fees for technical services for non-residents u/s 115A of the Act.

Answer: Yes, the provisions of ICDS, also apply for computation of these incomes on gross basis
for arriving at the amount chargeable to tax.
Question 15: Para 8 of ICDS-V states expenditure incurred on commissioning of project, including
expenditure incurred on test runs and experimental production shall be capitalized. It also states
that expenditure incurred after the plant has begun commercial production i.e., production intended
for sale or captive consumption shall be treated as revenue expenditure. What shall be the
treatment of expense incurred after the conduct of test runs and experimental production but
before commencement of commercial production?
Answer: As clarified in Para 8 of lCDS-V, the expenditure incurred till the plant has begun
commercial production, that is, production intended for sale or captive consumption, shall be
treated as capital expenditure.
Question 18: If the taxpayer sells a security on 30th April 2025. The interest payment dates are
December and June. The actual date of receipt of interest is on 30th June 2025 but the interest on
accrual basis has been accounted as income on 31st March 2025. Whether the taxpayer shall be
permitted to claim deduction of such interest i.e. offered to tax but not received while computing
the capital gain?
Answer: Yes, the amount already taxed as interest income on accrual basis shall be taken into
account for computation of income arising from such sale.

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Question 19: Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be
valued at actual cost initially recognised or net realisable value (NRV) at the end of that previous
year, whichever is lower. Para 10 of Part-A of ICDS-VIII requires the said exercise to be carried
out category wise. How the same shall be computed?
Answer: For subsequent measurement of securities held as stock-in-trade, the securities are first
aggregated category wise. The aggregate cost and NRV of each category of security are
compared and the lower of the two is to be taken as carrying value as per ICDS-VIII. This is
illustrated below –
Security Category Cost NRV Lower of ICDS Value
cost or NRV
A Share 100 75 75
B Share 120 150 120
C Share 140 120 120
D Share 200 190 190
Total 560 535 505 535
E Debt Security 150 160 150
F Debt Security 105 90 90
G Debt Security 125 135 125
H Debt Security 220 230 220
Total 600 615 585 600
Securities Total 1160 1150 1090 1135

Question 20: There are specific provisions in the Act read with Rules under which a portion of
borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(i), 40(a)(ia), 40A(2)(b), etc.
of the Act. Whether borrowing costs to be capitalized under ICDS-IX should exclude portion of
borrowing costs which gets disallowed under such specific provisions?
Answer: Since specific provisions of the Act override the provisions of ICDS, it is clarified that
borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing
costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost
shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under
the Act.
Question 21: Whether bill discounting charges and other similar charges would fall under the
definition of borrowing cost?
Answer: The definition of borrowing cost is an inclusive definition. Bill discounting charges and
other similar charges are covered as borrowing cost.

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Question 22: How to allocate borrowing costs relating to general borrowing as computed in
accordance with formula provided under Para 6 of ICDS-IX to different qualifying assets?

Answer: The capitalization of general borrowing cost under ICDS-IX shall be done on asset by-
asset basis.
Question 24: Expenditure on most post-retirement benefits like provident fund, gratuity, etc. are
covered by specific provisions. There are other post-retirement benefits offered by companies like
medical benefits. Such benefits are covered by AS-15 for which no parallel ICDS has been
notified. Whether provision for these liabilities are excluded from scope of ICDS X?

Answer: It is clarified that provisioning for employee benefit which are otherwise covered by AS 15
shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-X.
Question 25: ICDS-1 requires disclosure of significant accounting policies and other ICDS
requires specific disclosures. Where is the taxpayer required to make such disclosures specified in
ICDS?
Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of
income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD.
However, there shall not be any separate disclosure requirements for persons who are not liable to
tax audit.
Notified ICDS and Corresponding AS and IND AS

ICDS Corresponding AS Corresponding IND AS

ICDS I - Accounting AS – 1 Disclosure of Ind AS 1 - Presentation of Financial
Policies Accounting Policies Statements
ICDS II - Valuation of AS - 2 Valuation of Ind AS – 2 Inventories
Inventories Inventories (Revised)
ICDS III - Construction AS 7 – Construction Ind AS 115 – Revenue from
Contracts Contracts Contracts with Customers
ICDS IV - Revenue AS 9 – Revenue Ind AS 115 - Revenue from
Recognition Recognition Contracts with Customers
ICDS V - Tangible Fixed AS 10 – Property, Plant and Ind AS 16 Property, Plant and
Assets Equipment (Revised) Equipment
ICDS VI - The Effects of AS 11 – The Effects of Ind AS 21 – The Effects of Changes
changes in foreign Changes in Foreign in Foreign Exchange Rates
exchange rates Exchange Rates (Revised)

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ICDS VII - Government AS 12 - Accounting for Ind AS 20 – Accounting for

Grants Government Grants Government Grants and Disclosure
of Government Assistance
ICDS VIII - Securities AS 13 - Accounting for Ind AS 40 – Investment Property, Ind
Investments (Revised) AS109 – Financial Instruments, Ind
AS 105 – Non-current Assets held
for Sale and Discontinued
Operations
ICDS IX - Borrowing Costs AS 16 - Borrowing Costs Ind AS 23 - Borrowing Costs
ICDS X - Provisions, AS 29 - Provisions, Ind AS 37 - Provisions, Contingent
Contingent Liabilities and Contingent Liabilities and Liabilities and Contingent Assets
Contingent Assets Contingent Assets
(Revised)

Student may note that the text of the notified ICDSs has been given as Annexure 1 at the
end of this Module.

(2) Method of Accounting in certain cases [Section 145A]

The Delhi High Court had, in the case of Chamber of Tax Consultants & Anr vs. Union of India &
Ors, held that certain provisions of ICDSs are ultra vires the Act, since they seek to overcome
binding judicial precedents and are, thus, contrary to the law settled by the Supreme Court and
various High Courts.
In order to bring certainty in the wake of such judicial pronouncements section 36(1)(xviii), section
40A(13), section 43AA, section 43CB, section 145A and section 145B have been inserted in the
Income-tax Act, 1961 with effect from A.Y.2017-18.
Section 145A provides that for the purpose of determining the income chargeable under the head
“Profits and gains of business or profession”:
(a) the valuation of inventory shall be made at lower of actual cost or net realizable value
computed in accordance with notified ICDS i.e., ICDS II “Valuation of inventories”.

(b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to
include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to
bring the goods or services to the place of its location and condition as on the date of valuation.

(c) inventory being securities not listed or listed but not quoted on a recognised stock
exchange with regularity from time to time shall be valued at actual cost initially recognised
in accordance with the notified ICDS i.e., ICDS VIII: Securities.

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(d) inventory being listed and quoted securities, shall be valued at lower of actual cost or net
realisable value in accordance with notified ICDS i.e., ICDS VIII: Securities. Such
comparison of actual cost and net realisable value shall be done category-wise.
However, inventories being securities held by a scheduled bank or public financial institution shall
be valued in accordance with notified ICDS after taking into account the extant guidelines issued
by the RBI.
Note: Student may note that section 36(1)(xviii), section 40A(13), section 43AA, section 43CB,
and section 145B are discussed at respective places in this chapter.

3.5 COMPUTATION OF PROFITS AND GAINS FROM

BUSINESS OR PROFESSION [SECTION 29]
According to section 29, the profits and gains of any business or profession are to be computed in
accordance with the provisions contained in sections 30 to 43D. It must, however, be remembered
that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act
further permits allowance of items of expenses under the residuary section 37(1), which extends
the allowance to items of business expenditure not covered by sections 30 to 36, where these are
allowable according to accepted commercial practices.

Computation of income from business or profession [Section 29]

Inadmissible Expenses or Other

Admissible payments not Profits provisions
deductions
deductions deductible in certain chargeable to
(Sections 30 (Section 40) circumstances tax (Section 41)
to 37) (Section 40A)

3.6 ADMISSIBLE DEDUCTIONS

(1) Rent, rates, taxes, repairs and insurance for buildings [Section 30]
Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of buildings
used by the assessee for the purpose of his business or profession.

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• Where the premises are occupied by the assessee as a tenant, the rent paid for such
premises and the amount paid on account of cost of repairs, if the assessee has undertaken
to bear such repairs to the premises.
• Occupation of premises by the assessee being the owner: Where the assessee himself
is owner of the premises and occupies them for his business purposes, no notional rent
would be allowed under this section. However, where a firm runs its business in the
premises owned by one of its partners, the rent payable to the partner will be an allowable
deduction to the extent it is reasonable and is not excessive.

• Repairs of the premises: Apart from rent, this section allows deductions in respect of
expenses incurred on account of repairs to building in case where
♦ the assessee is the owner of the building or
♦ the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.
♦ Even if the assessee occupies the premises otherwise than as a tenant or owner,
i.e., as a lessee, licensee or mortgagee with possession, he is entitled to a deduction
under the section in respect of current repairs to the premises.
• Cost of repairs and current repairs of capital nature not to be allowed as deduction
[Explanation to section 30]: Amount paid on account of the cost of repairs to the premises
occupied by the assessee as a tenant and the amount paid on account of current repairs to
the premises occupied by the assessee, otherwise than as a tenant, shall not include any
capital nature expenditure. In other words, cost of repairs and current repairs other than of
capital nature is allowed as deduction while computing business income.
• Other expenses: In addition, deductions are allowed in respect of expenses by way of land
revenue, local rates, municipal taxes and insurance in respect of the premises used for the
purposes of the business or profession. Cesses, rates and taxes levied by a foreign
Government are also allowed.
• Premises used partly for business and partly for other purposes: Where the premises
are used partly for business and partly for other purposes, only a proportionate part of the
expenses attributable to that part of the premises used for purposes of business will be
allowed as a deduction [Section 38(1)].
(2) Repairs and insurance of machinery, plant and furniture [Section 31]
Section 31 allows deduction in respect of the expenses on current repairs and insurance of
machinery, plant and furniture in computing the income from business or profession.

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• Usage of the asset: In order to claim this deduction, the assets must have been used for
purposes of the assessee’s own business the profits of which are being taxed i.e., the
assessee should be the beneficial owner of the asset.
The word ‘used’ has to be read in a wide sense so as to include active as well as passive
use. However, insurance and repair charges of assets which are owned by the assessee
but have not been used for the business during the previous year would not be allowed as a
deduction.
Even if an asset is used for a part of the previous year, the assessee is entitled to the
deduction of the full amount of expenses on repair and insurance charges and not merely
an amount proportionate to the period of use.

• Repairs exclude replacement or reconstruction: The term ‘repairs’ will include renewal
or renovation of an asset but not its replacement or reconstruction.
The deduction allowable under this section is only of current repairs but not arrears of
repairs for earlier years even though they may still rank for a deduction under section 37(1).

• Insurance premium: The deduction allowable in respect of premia paid for insuring the
machinery, plant or furniture is subject to the following conditions:
♦ The insurance must be against the risk of damage or destruction of the machinery,
plant or furniture.
♦ The assets must be used by the assessee for the purposes of his business or
profession during the accounting year.
♦ The premium should have been actually paid (or payable under the mercantile
system of accounting).
The premium may even take the form of contribution to a trade association which
undertakes to indemnify and insure its members against loss; such premium or contribution
would be deductible as an allowance under this section even if a part of it is returnable to
the insured in certain circumstances.

It does not matter if the payment of the claim will enure to the benefit of someone other than
the owner.
• Current repairs of capital nature not to be allowed [Explanation to section 31]: Amount
paid on account of current repairs of machinery, plant or furniture shall not include any
capital nature expenditure. In other words, current repairs other than of capital nature
expenditure is allowed as deduction in the computation of income under the head “profits
and gains of business or profession”.

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 3.30 DIRECT TAX LAWS

• Machinery, plant and furniture used partly for business and partly for other purposes:
Where the machinery, plant and furniture are used partly for business and partly for other
purposes, only a proportionate part of the expenses attributable to that part of the
machinery, plant and furniture used for purposes of business will be allowed as a deduction
[Section 38(2)].
(3) Depreciation [Section 32]
(1) Charge of depreciation mandatory: Section 32 allows a deduction in respect of
depreciation resulting from the diminution or exhaustion in the value of certain capital
assets.
The Explanation 5 to this section provides that deduction on account of depreciation shall
be made compulsorily, whether or not the assessee has claimed the deduction in computing
his total income.
(2) Conditions to be satisfied for allowance of depreciation: The allowance of depreciation
which is regulated by Rule 5 of the Income-tax Rules, 1962, is subject to the following
conditions which are cumulative in their application.
(a) The assets in respect of which depreciation is claimed must belong to either of
the following categories, namely:
(1) buildings, machinery, plant or furniture, being tangible assets;
(2) know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets
acquired on or after 1st April, 1998, not being goodwill of a business or
profession.
 The depreciation in the value of any other capital assets cannot be
claimed as a deduction from the business income.
 No depreciation is allowable on the cost of the land on which the
building is erected because the term ‘building’ refers only to
superstructure but not the land on which it has been erected.
 The term ‘plant’ as defined in section 43(3) includes ships, vehicle,
books, scientific apparatus and surgical equipments used for the
purpose of the business or profession but does not include tea bushes
or livestock or buildings or furniture and fittings.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.31

 However, the word ‘plant’ does not include an animal, human body or
stock-in-trade. Thus, plant includes all goods and chattels, fixed or
movable, which a businessman keeps for employment in his business
with some degree of durability.
 The expression ‘plant’ includes part of a plant (e.g., the engine of a
vehicle); machinery includes part of machinery and building includes a
part of the building.
 Similarly, the term ‘buildings’ includes within its scope roads, bridges,
culverts, wells and tubewells.
(b) The assets should be actually used by the assessee for purposes of his
business or profession during the previous year - The asset must be put to use
at any time during the previous year. The amount of depreciation allowance is not
proportionate to the period of use during the previous year. If the asset is acquired
during the previous year and is not put to use in the same year, then the depreciation
shall not be allowed for such asset but the cost of such asset would be added to the
block of asset.
Asset used for less than 180 days - Where any asset is acquired by the assessee
during the previous year and is put to use for the purposes of business or profession
for a period of less than 180 days, depreciation shall be allowed at 50 per cent of
the allowable depreciation according to the percentage prescribed in respect of the
block of assets comprising such asset. It is significant to note that this restriction
applies only to the year of acquisition and not for subsequent years.

If the assets are not used exclusively for the business of the assessee but
for other purposes as well, the depreciation allowable would be a proportionate
part of the depreciation allowance to which the assessee would be otherwise
entitled. This is provided in section 38.

Depreciation would be allowable to the owner even in respect of assets which are
actually worked or utilized by another person e.g., a lessee or licensee. The
deduction on account of depreciation would be allowed under this section to the
owner who has let on hire his building, machinery, plant or furniture provided that
letting out of such assets is the business of the assessee. In other cases where the
letting out of such assets does not constitute the business of the assessee, the
deduction on account of depreciation would still be allowable under section 57(ii).

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 3.32 DIRECT TAX LAWS

Use includes passive use in certain circumstances: One of the conditions for
claim of depreciation is that the asset must be “used for the purpose of business or
profession”. Depreciation is allowed when asset is actually put to use and not ready
to use. However, in certain circumstances, Courts have held that, an asset can be
said to be in use even when it is “kept ready for use”.
For example, stand by equipment and fire extinguishers can be capitalized if they
are ‘ready for use’’.
Likewise, machinery spares which can be used only in connection with an item of
tangible fixed asset and their use is expected to be irregular, has to be capitalised.
Hence, in such cases, the term “use” embraces both active use and passive use.
However, such passive use should also be for business purposes.
(c) The assessee must own the assets, wholly or partly – Depreciation is allowed
only to the owner of the asset. If the assessee has taken an asset on lease, he,
being the lessee, cannot avail depreciation in respect of such asset. On the other
hands, the lessor will be entitled to depreciation on such asset as he is the owner.

However, in this connection, students may note that the Explanation 1 to

section 32 provides that where the business or profession of the assessee is carried
on in a building not owned by him but in respect of which the assessee holds a lease
or other right of occupancy, and any capital expenditure is incurred by the assessee
for the purposes of the business or profession or the construction of any structure or
doing of any work by way of renovation, extension or improvement to the building,
then depreciation will be allowed as if the said structure or work is a building owned
by the assessee.

Depreciation is allowable not only in respect of assets “wholly” owned by the

assessee but also in respect of assets “partly” owned by him and used for the
purposes of his business or profession.
(3) Computation of Depreciation Allowance: Depreciation allowance will be calculated on the
following basis:
(i) Power generation undertakings: In the case of assets of an undertaking engaged
in generation or generation and distribution of power, such percentage on the actual
cost to the assessee as prescribed by Rule 5(1A).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.33

Rule 5(1A) - As per this rule, the depreciation on the abovementioned assets shall
be calculated at the percentage of the actual cost at rates specified in Appendix IA of
these rules. However, the aggregate depreciation allowed in respect of any asset for
different assessment years shall not exceed the actual cost of the asset. It is further
provided that such an undertaking as mentioned above has the option of being
allowed depreciation on the written down value of such block of assets as are used
for its business at rates specified in Appendix I to these rules.
However, such option must be exercised before the due date for furnishing return
under section 139(1) for the assessment year relevant to the previous year in which
it begins to generate power.
It is further provided that any such option once exercised shall be final and shall
apply to all subsequent assessment years.
(ii) Block of assets: In the case of any block of assets, at such percentage of the
written down value of the block, as may be prescribed by Rule 5(1).

Block of Assets: A “block of assets” is defined in section 2(11), as a group of assets

falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses,

franchises or any other business or commercial rights of similar nature, not
being goodwill of a business or profession,

in respect of which the same percentage of depreciation is prescribed.

Block of asset simply means “same class of assets with same rate of depreciation”.
Know-how - In this context, ‘know-how’ means any industrial information or
technique likely to assist in the manufacture or processing of goods or in the working
of a mine, oil-well or other sources of mineral deposits (including searching for
discovery or testing of deposits for the winning of access thereto).
(iii) Additional depreciation on Plant & Machinery [Section 32(1)(iia)]: Additional
depreciation is allowed on any new machinery or plant (other than ships and aircraft)
acquired and installed after 31.3.2005 by an assessee engaged in the business of
manufacture or production of any article or thing or in the business of generation or

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 3.34 DIRECT TAX LAWS

transmission or distribution of power at the rate of 20% of the actual cost of such
machinery or plant.

Asset put to use for less than 180 days: As per second proviso to section
32(1)(ii), 50% of additional depreciation to be allowed, where the plant and
machinery is put to use for less than 180 days during the previous year in which
such asset is acquired.
Further, third proviso to section 32(1)(ii) also provides that the balance 50% of the
additional depreciation on new plant or machinery acquired and used for less than 180
days which has not been allowed in the year of acquisition and installation of such plant
or machinery, shall be allowed in the immediately succeeding previous year.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI
or an artificial juridical person, additional depreciation is not allowable under the
default tax regime under section 115BAC. Additional depreciation would be allowable
only if such person has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A) and pays tax as per the optional tax regime
under the regular provisions of the Act.
In case of companies and co-operative societies, additional depreciation would not
be allowable if they opted for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, additional depreciation would be
allowable only if companies and co-operative societies pay tax under the normal
provisions of the Act.

Plant and Machinery not qualifying for additional depreciation

Such additional depreciation will not be available in respect of:

(i) any machinery or plant which, before its installation by the assessee, was
used within or outside India by any other person (second hand machinery); or
(ii) any machinery or plant installed in office premises, residential
accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise) in
computing the income chargeable under the head “Profits and Gains of
Business or Profession” of any one previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.35

Note: Additional depreciation is not allowed to power generation undertakings opting

Appendix 1A of Rule 5 i.e., depreciation calculated as a percentage on the actual cost
to the assessee.
Eligibility for grant of additional depreciation under section 32(1)(iia) in the
case of an assessee engaged in printing or printing and publishing [Circular
No. 15/2016, dated 19-5-2016]
An assessee, engaged in the business of manufacture or production of an article or
thing, is eligible to claim additional depreciation under section 32(1)(iia) in addition to
the normal depreciation under section 32(1).
The CBDT has, vide this Circular, clarified that the business of printing or printing
and publishing amounts to manufacture or production of an article or thing and
is, therefore, eligible for additional depreciation under section 32(1)(iia).

(iv) Terminal depreciation: In case of a power concern as covered under clause (i)
above, if any asset is sold, discarded, demolished or otherwise destroyed in the
previous year (other than the previous year in which it is first brought into use) the
depreciation amount will be the amount by which the moneys payable in respect of
such building, machinery, plant or furniture, together with the amount of scrap value,
if any, falls short of the written down value thereof. The depreciation will be available
only if the deficiency is actually written off in the books of the assessee.
Example: Mahapower Ltd. purchased an asset on 20.7.2021. The actual cost of the
asset was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual
cost of the asset. WDV of the asset as on 1.4.2025 is ` 80 lakhs. On 15.5.2025,
Mahapower Ltd. sold the asset for ` 55 lakhs. Deduction allowed as terminal
depreciation u/s 32(1)(ii) for P.Y. 2025-26 is ` 25 lakhs (` 80 lakhs - ` 55 lakhs)
provided the deficiency of ` 25 lakhs is actually written off in the books of
Mahapower Ltd.
Meaning of certain terms
Term Meaning
Moneys In respect of any building, machinery, plant or furniture includes —
payable (a) any insurance, salvage or compensation moneys payable in
respect thereof;
(b) where the building, machinery, plant or furniture is sold, the
price for which it is sold.,

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 3.36 DIRECT TAX LAWS

Sold Includes a transfer by way of exchange or a compulsory acquisition

under any law for the time being in force. However, it does not include a
transfer, in a scheme of amalgamation, of any asset by the
amalgamating company to the amalgamated company where the
amalgamated company is an Indian company or a transfer of any asset
by a banking company to a banking institution in a scheme of
amalgamation of such banking company with the banking institution,
sanctioned and brought into force by the Central Government.
Clarification regarding treatment of expenditure incurred on purchase of participating
interest by the Oil Exploration and Production (E&P) Companies [Circular No.
20/2019, dated 19.08.2019]
Over the life cycle of an Oil & Gas block, Oil Exploration and Production (E&P) companies
generally buy ('Farm in') and sell ('Farm out') their participating interests (PI) in the
'Production Sharing Agreement' (PSC). 'Farm-in' expenditure is incurred when an entity in
this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes
part of the PSC entered into with the Central Government.
The Government of India (Gol) offers exploration and development rights through global bidding for
specified blocks in various rounds under the New Exploration and Licensing Policy (NELP),
Hydrocarbon Exploration & Licensing Policy (HELP), Open Acreage Licensing Policy (OALP) etc.
by signing the Production Sharing Contracts (PSC’s) with the Oil & Gas companies. The
successful Oil & Gas Companies are granted license to explore, develop and carry out production
operations in Oil & Gas blocks and in India under a PSC with the Gol. Typically, owing to the large
investments required and the risks involved, multiple E&P companies execute the PSC with the
Gol in which each member has its agreed and defined PI.
It is common international practice for the upstream companies to buy (farm-in) and sale
(farm-out) their PI in the PSC or similar contracts with the Government and thereby to share
risk, bring new and niche expertise and technologies. In such transactions, PI are treated as
interests in rights, licences and obligation under the PSC. Such farm-in purchase price is
accounted as an asset as per guidance note issued by the Institute of Chartered
Accountants of India. International accounting rules for Oil & Gas followed in Australia,
Indonesia, UK etc. also require that such acquisition cost to be capitalized and depreciated.
A perusal of the Model PSC’s {as per the website of the Director General of Hydrocarbon
(DGH)} indicates that participating interests are share in rights and obligation to explore,
exploit and sell petroleum under the PSC along with related licences, permits etc. A few of
the case-laws on this issue also support treatment of acquisition rights in a PSC as
Intangible asset.
In this regard, it is relevant to mention that earlier vide Notification No. G.S.R. 117(E) dated
08.03.1996, in exercise of its powers under section 293A of the Act, Central Government
had laid down that the persons with whom it enters into agreement for the association or

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.37

participation in any business consisting of the prospecting for or extraction or production of

mineral oils on or after the 1st day of April,1992 -
a) shall not be assessed on the income as association of persons or body of individuals
consisting of such persons; but
b) each of the persons referred to above be assessed in respect of his or its share of
income, as the case may be, in the same status in which the person enters into the
agreement with the Central Government.
Thus, as persons participating in an E&P contract are assessed individually in respect of their
share of income, the sum expended on acquisition of whole or part of such 'Participating
Interest' in an E&P contract where such acquisition is approved by the Government of India,
represents the amount paid to acquire the underlying share (expressed as a percentage) being
interests in rights, licences and obligations under the E&P contract.
In view of the above legal position, it is hereby clarified as under:-
i. amount paid for acquiring the 'Participating Interest' shall not be treated either as
cost for acquiring the share in partnership or investment for' acquisition of a
member's interest in an association of persons or body of individuals, rather it would
be treated as an amount paid to acquire the underlying assets; and
ii. the amount paid for acquiring the 'Participating Interest', after reducing component of
cost attributable to tangible assets for purposes of section 32(1)(i), would be treated
as an 'intangible asset' (being a business or commercial right akin to a licence),
eligible for claim of depreciation for purposes of section 32(1)(ii).

(4) Rates of depreciation: All assets have been divided into four main categories and rates of
depreciation as prescribed by Rule 5(1) are given below:

PART A TANGIBLE ASSETS

I Buildings
Block 1. Buildings which are used mainly for residential purposes except 5%
hotels and boarding houses
Block 2. Buildings which are not used mainly for residential purposes and 10%
not covered by Block (1) above and (3) below
Block 3. Buildings acquired on or after 1st September, 2002 for installing 40%
machinery and plant forming part of water supply project or
water treatment system and which is put to use for the purpose
of business of providing infrastructure facilities
Block 4. Purely temporary erections such as wooden structures 40%

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 3.38 DIRECT TAX LAWS

II Furniture and Fittings

Block 1. Furniture and fittings including electrical fittings ["Electrical 10%
fittings" include electrical wiring, switches, sockets, other fittings
and fans, etc.]
III Plant & Machinery
Block 1. Motor cars other than those used in a business of running them 30%
on hire, acquired during the period from 23.8.2019 to 31.3.2020
and put to use on or before 31.3.2020
Block 2. Motor cars other than those used in a business of running them 15%
on hire, acquired or put to use on or after 1-4-1990 [Other than
motor cars mentioned in Block 1 above]
Block 3. Motor buses, motor lorries and motor taxis used in a business of 45%
running them on hire, acquired during the period from 23.8.2019
to 31.3.2020 and put to use on or before 31.3.2020
Block 4. Motors buses, motor lorries, motor taxis used in the business of 30%
running them on hire [Other than motor cars mentioned in Block
4 above]
Block 5. Moulds used in rubber and plastic goods factories 30%
Block 6. Aeroplanes, Aeroengines 40%
Block 7. Specified air pollution control equipments, water pollution control 40%
equipments, solid waste control equipment and solid waste
recycling and resource recovery systems
Block 8. Plant & Machinery used in semi-conductor industry covering all 30%
Integrated Circuits (ICs) (other than mentioned in Block 7 Above)
Block 9. Life saving medical equipments 40%
Block 10. Machinery and plant, acquired and installed on or after the 1st 40%
day of September, 2002 in a water supply project or a water
treatment system and which is put to use for the purpose of
business of providing infrastructure facility
Block 11. Containers made of glass or plastic used as re-fills 40%
Block 12 Energy Saving Devices (as specified) 40%
Block 13. Renewable Energy Saving Devices (as specified) including the 40%
devices specified in (i) to (iii) below
(i) Electrically operated vehicles including battery powered 40%
or fuel-cell powered vehicles

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.39

(ii) Windmills and any specially designed devices which run 40%
on windmills installed on or after 1.4.2014
(iii) Any special devices including electric generators and 40%
pumps running on wind energy installed on or after
1.4.2014
Block 14. Windmills and any specially designed devices running on 15%
windmills installed on or before 31.3.2014 and any special
devices including electric generators and pumps running on wind
energy installed on or before 31.3.2014
Block 15. Computers including computer software (See Note below) 40%
Block 16. Books (annual publications or other than annual publications) 40%
owned by assessees carrying on a profession
Block 17. Books owned by assessees carrying on business in running 40%
lending libraries
Block 18. Plant & machinery (General rate) 15%
IV Ships
Block 1. Ocean-going ships 20%
Block 2. Vessels ordinarily operating on inland waters not covered by 20%
Block 3 below
Block 3. Speed boats operating on inland water 20%

PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any other 25%
business or commercial rights of similar nature

Note - Mobile phones and EPABX are not considered as computers and hence, not eligible
for 40% rate of depreciation while computer accessories such as UPS, printers’ scanners,
etc. are eligible for 40% rate of depreciation.
Note: Students should refer to Income-tax Rules, 1962 for the detailed classification
of assets under Rule 5(1) and the rate of depreciation applicable thereto.
(5) Increased rate of depreciation for certain assets [Rule 5(2)]
Any new machinery or plant installed to manufacture or produce any article or thing by
using any technology or other know-how developed in or is an article or thing invented in a
laboratory owned or financed by the Government or a laboratory owned by a public sector
company or a University or an institution recognized by the Secretary, Department of

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 3.40 DIRECT TAX LAWS

Scientific and Industrial Research, Government of India shall be treated as a part of the
block of assets qualifying for depreciation @40% of written down value.
Conditions to be fulfilled:
1. The right to use such technology or other know-how or to manufacture or produce
such article or thing has been acquired from the owner of such laboratory or any
person deriving title from such owner.

2. The return filed by the assessee for any previous year in which the said machinery is
acquired, should be accompanied by a certificate from the Secretary, Department of
Scientific and Industrial Research, Government of India to the effect that such article or
thing is manufactured or produced by using such technology or other know-how
developed in such laboratory or such article or thing has been invented in that laboratory.
3. The machinery or plant is not used for the purpose of business of manufacture or
production of any article or thing specified in the Eleventh Schedule [The exclusion list
comprises of beer, wine and other alcoholic spirits, tobacco and tobacco preparations,
cosmetic and toilet preparations, tooth paste, dental cream, tooth powder and soap,
confectionery and chocolates, office machines and apparatus, steel furniture etc.].
The depreciation ordinarily allowable to an assessee in respect of any block of assets shall
be calculated at the above specified rates on the WDV of such block of assets as are used
for the purposes of the business or profession of the assessee at any time during the
previous year.
ILLUSTRATION 1
XYZ (P) Ltd., engaged in manufacturing business since 2016, furnishes the following
particulars:
Particulars `
(1) Opening WDV of plant and machinery as on 1.4.2025 (i.e., WDV as 30,00,000
on 31.3.2025 after reducing depreciation for P.Y. 2024-25)
(2) New plant and machinery purchased and put to use on 08.06.2025 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2025 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2026 3,00,000

Compute the amount of depreciation and additional depreciation as per the Income-tax Act,
1961 for the A.Y. 2026-27. Assume that all the assets were purchased by way of account
payee cheque and that the company does not opt for section 115BAA.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.41

SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2026-27

Plant & Computer

Particulars Machinery (40%)
(15%)
(`) (`)
Normal depreciation
• @ 15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
• @ 7.5% (50% of 15%, since put to use for less than 60,000 -
180 days) on ` 8,00,000
• @ 20% (50% of 40%, since put to use for less than - 60,000
180 days) on ` 3,00,000
Additional Depreciation
• @ 20% on ` 20,00,000 (new plant and machinery put 4,00,000 -
to use for more than 180 days)
• @10% (50% of 20%, since put to use for less than -
180 days) on ` 8,00,000 80,000
Total depreciation 12,90,000 60,000

Working Note:
Computation of written down value of Plant & Machinery

Particulars Plant & Computer

Machinery
(`) (`)
Written down value as on 1.4.2025 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2025 (put to 20,00,000 -
use for more than 180 days)
Add: Plant & Machinery acquired on 15.12.2025 (put to use 8,00,000 -
for less than 180 days)
Computer acquired and installed in the office premises (put - 3,00,000
to use for less than 180 days)
Written down value as on 31.03.2026 58,00,000 3,00,000

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 3.42 DIRECT TAX LAWS

Composition of plant and machinery included in the WDV

Plant & Computer

Particulars Machinery (`)
(`)
Plant and machinery put to use for 180 days or more 50,00,000
[` 30,00,000 (WDV) + ` 20,00,000 (purchased on 8.6.2025)]
Plant and machinery put to use for less than 180 days 8,00,000 -
Computers put to use for less than 180 days - 3,00,000
58,00,000 3,00,000

Notes:
1. As per the second proviso to section 32(1)(ii), where an asset acquired during the
previous year is put to use for less than 180 days in that previous year, the amount
of deduction allowable as normal depreciation and additional depreciation would be
restricted to 50% of amount computed in accordance with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on
15.12.2025 and computer acquired and installed on 02.01.2026, is restricted to 50%
of 15% and 40%, respectively. The additional depreciation on the said plant and
machinery is restricted to ` 80,000, being 10% (i.e., 50% of 20%) of ` 8 lakh.
2. As per third proviso to section 32(1)(ii), the balance additional depreciation of
` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2027-28 if XYZ (P) Ltd. does not opt for the provisions of
section 115BAA.

3. As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005 by an assessee engaged,
inter alia, in the business of manufacture or production of any article or thing, @20%
of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in any
guest house.
Accordingly, additional depreciation is not allowable on computer installed in the
office premises.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.43

ILLUSTRATION 2
A newly qualified Chartered Accountant, Mr. Dhaval, commenced practice and has acquired
the following assets in his office during F.Y. 2025-26 at the cost shown against each item.
Calculate the amount of depreciation that can be claimed from his professional income for
A.Y.2026-27. Assume that all the assets were purchased by way of account payee cheque.

Sl. Description Date of Date when Amount

No. acquisition put to use `
1. Computer including computer 27 Sept., 25 1 Oct., 25 35,000
software
2. Computer UPS 2 Oct., 25 8 Oct., 25 8,500
3. Computer printer 1 Oct., 25 1 Oct., 25 12,500
4. Books (of which books being annual 1 Apr., 25 1 Apr., 25 13,000
publications are of ` 12,000)
5. Office furniture 1 Apr., 25 1 Apr., 25 3,00,000
(Acquired from a practising C.A.)
6. Laptop 26 Sep., 25 8 Oct., 25 43,000
SOLUTION
Computation of depreciation allowable for A.Y.2026-27

Asset Rate Depreciation

Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software, 40%
computer UPS, laptop, computer printer & books) 34,500
Total depreciation allowable 64,500

Working Notes:
Computation of depreciation

Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]
Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant [Rate of depreciation - 40%]
(a) Computer including computer software (put to use for more than 180 14,000
days) [` 35,000@40%]

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 3.44 DIRECT TAX LAWS

(b) Computer UPS (put to use for less than 180 days) [` 8,500@20%] 1,700
[See Note below]
(c) Computer Printer (put to use for more than 180 days) [` 12,500@40%] 5,000
(d) Laptop (put to use for less than 180 days) [` 43,000@20%] [See Note 8,600
below]
(e) Books (being annual publications or other than annual publications) 5,200
(Put to use for more than 180 days) [` 13,000@40%]
34,500

Note - Where an asset is acquired by the assessee during the previous year and is put to
use for the purposes of business or profession for a period of less than 180 days, the
deduction on account of depreciation would be restricted to 50% of the prescribed rate. In
this case, since Mr. Dhaval commenced his practice in the P.Y.2025-26 and acquired the
assets during the same year, the restriction of depreciation to 50% of the prescribed rate
would apply to those assets which have been put to use for less than 180 days in that year,
namely, laptop and computer UPS.

(6) Depreciation in case of succession of firm/sole proprietary concern by a company or

business reorganization, amalgamation or demerger of companies or succession of
business otherwise than on death
As per the sixth proviso to section 32(1)(ii), depreciation allowable in the hands of
- predecessor and the successor in case of succession of firm/ sole proprietary
concern by a company fulfilling the conditions mentioned in section 47(xiii)/(xiv) or
- predecessor company and successor LLP in case of conversion of a private
company or an unlisted public company into an LLP fulfilling the conditions
mentioned in section 47(xiiib) or
- predecessor and the successor in case of succession of business otherwise than on
death
- amalgamating/ amalgamated company or demerged or resulting company in case of
amalgamation or demerger of companies
shall not exceed the amount of depreciation calculated at the prescribed rates as if the
succession, business reorganization, amalgamation or demerger had not taken place.

It is also provided that such amount of depreciation shall be apportioned between the two
entities in the ratio of the number of days for which the assets were used by them.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.45

ILLUSTRATION 3
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose WDV as on
31.3.2025 after reducing depreciation for P.Y. 2024-25 was ` 40 lakhs. It purchased
another asset (second-hand plant and machinery) of the same block on 01.11.2025 for
` 14.40 lakhs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd.
with effect from 01.01.2026.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2026 assuming that the assets were transferred to Shirdi Ltd. at
` 60 lakhs. Also assume that the plant and machinery were purchased by way of account
payee cheque.
SOLUTION
Statement showing computation of depreciation allowable
to Sai Ltd. & Shirdi Ltd. for A.Y. 2026-27

Particulars `
Opening WDV as on 1.4.2025 [i.e., WDV as on 31.3.2025 after reducing 40,00,000
depreciation for P.Y. 2024-25
Addition during the P.Y. 2025-26 (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @15% 6,00,000
Depreciation on ` 14,40,000 @7.5% 1,08,000
Total depreciation for the P.Y. 2025-26 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
` 6,00,000 × 275/365 4,52,055
` 1,08,000 × 61/151 43,629
4,95,684
(b) Amalgamated company, Shirdi Ltd.
` 6,00,000 × 90/365 1,47,945
` 1,08,000 × 90/151 64,371
2,12,316

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 3.46 DIRECT TAX LAWS

Notes:
(i) The aggregate deduction, in respect of depreciation allowable to the amalgamating
company and amalgamated company in the case of amalgamation shall not exceed
in any case, the deduction calculated at the prescribed rates as if the amalgamation
had not taken place. Such deduction shall be apportioned between the
amalgamating company and the amalgamated company in the ratio of the number of
days for which the assets were used by them.
(ii) The price at which the assets were transferred, i.e., ` 60 lakhs, has no implication in
computing eligible depreciation.
(7) Hire purchase: In the case of assets under the hire purchase system the allowance for
depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-1943,
be granted as follows:
• In every case of payment purporting to be for hire purchase, production of the agreement
under which the payment is made would be insisted upon by the department.
• Where the effect of an agreement is that the ownership of the asset is at once
transferred on the lessee, the transaction should be regarded as one of purchase by
instalments and consequently no deduction in respect of the hire amount should be
made. This principle will be applicable in a case where the lessor obtains a right to
sue for arrears of installments but has no right to recover the asset back from the
lessee. Depreciation in such cases should be allowed to the lessee on the hire
purchase price determined in accordance with the terms of hire purchase agreement.
• Where the terms of an agreement provide that the asset shall eventually become the
property of the hirer or confer on the hirer an option to purchase an asset, the
transaction should be regarded as one of hire purchase. In such case, periodical
payments made by the hirer should for all tax purposes be regarded as made up of
(i) the consideration for hirer which will be allowed as a deduction in
assessment, and
(ii) payment on account of the purchase price, to be treated as capital outlay and
depreciation being allowed to the lessee on the initial value namely, the
amount for which the hired assets would have been sold for cash at the date
of the agreement.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.47

The allowance to be made in respect of the hire should be the amount of the
difference between the aggregate amount of the periodical payments under the
agreement and the initial value as stated above. The amount of this allowance
should be spread over the duration of the agreement evenly. If, however, agreement
is terminated either by outright purchase of the asset or by its return to the seller, the
deduction should cease as from the date of termination of agreement.
For the purpose of allowing depreciation, an assessee claiming deduction in respect
of the assets acquired on hire purchase would be required to furnish a certificate
from the seller or any other suitable documentary evidence in respect of the initial
value or the cash price of the asset.
In cases where no such certificate or other evidence is furnished the initial value of
the assets should be arrived at by computing the present value of the amount
payable under the agreement at an appropriate per centum.
For the purpose of allowing depreciation the question whether in a particular case
the assessee is the owner of the hired asset or not is to be decided on a
consideration of all the facts and circumstances of each case and the terms of the
hire purchase agreement. Where the hired asset is originally purchased by the
assessee and is registered in his name, the mere fact that the payment of the price
is spread over the specified period and is made in installments to suit the needs of
the purchaser does not disentitle the assessee from claiming depreciation in respect
of the asset, since the assessee would be the real owner although the payment of
purchase price is made subsequent to the date of acquisition of the asset itself.
(8) Actual Cost [Section 43(1)]
The expression “actual cost” means the actual cost of the asset to the assessee as reduced
by that portion of the cost thereof, if any, as has been met directly or indirectly by any other
person or authority.
However, where an assessee incurs any expenditure for acquisition of any asset or part
thereof in respect of which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft
or use of electronic clearing system through a bank account or through such other
prescribed electronic mode, exceeds ` 10,000, such expenditure shall not form part of
actual cost of such asset [Second proviso to section 43(1)].

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The prescribed electronic modes include credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
Actual cost in certain special situations [Explanations to section 43(1)]

Explanation Situation Actual cost of the asset to the

assessee
1 Where an asset is used for Actual cost to the assessee as reduced
the purposes of business by any deduction allowed u/s 35(1)(iv).
after it ceases to be used for Note - Actual cost of such asset would
scientific research related to be Nil as already 100% deduction would
that business have been claimed u/s 35(1)(iv)
1A Where inventory is converted Fair market value of such inventory as
or treated as a capital asset on the date of its conversion into capital
and is used for the purpose of asset determined in the prescribed
business or profession manner
2 Where an asset is acquired Actual cost to the previous owner minus
by way of gift or inheritance depreciation allowable to the assessee
as if asset was the only asset in the
relevant block of assets.
Further, any expenditure incurred by the
assessee such as expenditure on freight,
installation etc. of such asset would also
be includible in the actual cost.
3 Where, before the date of its An amount which the Assessing Officer
acquisition by the assessee, may, with the previous approval of the
the asset was at any time Joint Commissioner, determine, having
used by any other person for regard to all the circumstances of the
the purposes of his business case
or profession, and the
Assessing Officer is satisfied
that the main purpose of the
transfer of the asset directly
or indirectly to the assessee
was the reduction of liability
of income-tax directly or
indirectly to the assessee (by
claiming depreciation with
reference to an enhanced
cost)

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.49

4 Where any asset which had (a) the actual cost when he first
once belonged to the acquired the asset minus
assessee and had been used depreciation allowable to the
by him for the purposes of his assessee as if asset was the only
business or profession and asset in the relevant block of assets;
thereafter ceased to be his or
property by reason of transfer (b) the actual price for which the asset is
or otherwise, is re-acquired re-acquired by him
by him
whichever is less
4A Where before the date of Actual cost of the transferred assets, in
acquisition by the assessee, the case of Mr. A, shall be the same as
say, Mr. A, the assets were at the written down value of the said assets
any time used by any other at the time of transfer thereof by Mr. B.
person, say Mr. B, for the
purposes of his business or
profession and depreciation
allowance has been claimed
in respect of such assets in
the case of Mr. B and such
person acquires on lease,
hire or otherwise, assets from
Mr. A
5 Where a building which was Actual cost of the building to the
previously the property of the assessee, as reduced by an amount
assessee is brought into use equal to the depreciation calculated at
for the purposes of the the rates in force on that date that would
business or profession have been allowable had the building
been used for the purposes of the
business or profession since the date of
its acquisition by the assessee
6 When any capital asset is The actual cost of the transferred capital
transferred by a holding asset to the transferee company shall be
company to its wholly owned taken to be the same as it would have
Indian subsidiary company or been if the transferor company had
by a subsidiary company to continued to hold the capital asset for
its 100% holding company, the purposes of its own business
being an Indian company
then, the transaction not
being regarded as a transfer
of a capital asset

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 3.50 DIRECT TAX LAWS

7 In a scheme of The actual cost of the transferred capital

amalgamation, if any capital assets to the amalgamated company will
asset is transferred by the be taken at the same amount as it would
amalgamating company to have been taken in the case of the
the amalgamated Indian amalgamating company had it continued
company to hold it for the purposes of its own
business
7A In the case of a demerger, The actual cost of the transferred asset
where any capital asset is to the resulting company shall be taken
transferred by the demerged to be the same as it would have been if
company to the resulting the demerged company had continued to
Indian company hold the capital asset for the purpose of
its own business.
However, the actual cost shall not
exceed the WDV of the asset in the
hands of the demerged company

Explanation 4A overrides Explanation 3

Explanation 3 to section 43(1) deals with a situation where a transfer of any asset is made
with the main purpose of reduction of tax liability (by claiming depreciation on enhanced
cost), and the Assessing Officer, having satisfied himself about such purpose of transfer
with the prior approval of the joint commissioner, may determine the actual cost having
regard to all the circumstances of the case.
In the Explanation 4A, a non-obstante clause has been included to the effect that
Explanation 4A will have an overriding effect over Explanation 3. The result of this is that
there is no necessity of finding out whether the main purpose of the transaction is reduction
of tax liability. Explanation 4A is activated in every situation described above without
inquiring about the main purpose.

Example:
A person (say “B”) owns an asset and uses it for the purposes of his business or profession. B
has claimed depreciation in respect of such asset. The said asset is transferred by B to another
person (say “A”). B then acquires the same asset back from A on lease, hire or otherwise. A
being the new owner will be entitled to depreciation. In the above situation, the cost of
acquisition of the transferred assets in the hands of A shall be the same as the written down
value of the said assets at the time of transfer in the hands of B.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.51

Actual cost in other special situations

(i) Capitalization of interest paid or payable in connection with acquisition of an
asset: Certain taxpayers have, with a view to obtain more tax benefits and reduce
the tax outflow, resorted to the method of capitalising interest paid or payable in
connection with acquisition of an asset relatable to the period after such asset is first
put to use.
This capitalisation implies inclusion of such interest in the ‘Actual Cost’ of the asset for
the purposes of claiming depreciation under the Income-tax Act, 1961. This was never
the legislative intent nor was it in accordance with recognised accounting practices.
Therefore, with a view to counter-acting tax avoidance through this method and placing
the matter beyond doubt, Explanation 8 to section 43(1) provides that any amount paid or
payable as interest in connection with the acquisition of an asset and relatable to period
after asset is first put to use shall not be included and shall be deemed to have never
been included in the actual cost of the asset.
(ii) Amount of duty of excise or additional duty leviable shall be reduced if credit
is claimed: Where an asset is or has been acquired by an assessee, the actual cost
of asset shall be reduced by the amount of duty of excise or the additional duty
leviable under section 3 of the Customs Tariff Act, 1975 in respect of which a claim
of credit has been made and allowed under the Central Excise Rules, 1944 6
[Explanation 9].
(iii) Subsidy or grant or reimbursement: Where a portion of the cost of an asset
acquired by the assessee has been met directly or indirectly by the Central
Government or a State Government or any authority established under any law or by
any other person, in the form of a subsidy or grant or reimbursement (by whatever
name called), then, so much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to the assessee.
However, where such subsidy or grant or reimbursement is of such nature that it
cannot be directly relatable to the asset acquired, so much of the amount which
bears to the total subsidy or reimbursement or grant the same proportion as such
asset bears to all the assets in respect of or with reference to which the subsidy or
grant or reimbursement is so received, shall not be included in the actual cost of the
asset to the assessee [Explanation 10].

6 Now Central Excise Rules, 2002

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 3.52 DIRECT TAX LAWS

Note: ICDS VII requires Government grants relatable to depreciable assets to be

reduced from actual cost of the asset/WDV of the block of asset. It further provides
that where the Government grant is not directly relatable to the asset acquired, then
a pro-rata reduction of the amount of grant should be made in the same proportion
as such asset bears to all assets with reference to which the Government grant is so
received.
(iv) Asset is acquired outside India by an assessee, being a non-resident and such
asset is brought by him to India: Where an asset is acquired outside India by an
assessee, being a non-resident and such asset is brought by him to India and used
for the purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost of the asset to the assessee, as reduced by an
amount equal to the amount of depreciation calculated at the rate in force that would
have been allowable had the asset been used in India for the said purposes since
the date of its acquisition by the assessee [Explanation 11].
(v) Capital asset is acquired under a scheme for corporatization: Where any capital
asset is acquired under a scheme for corporatization of a recognised stock exchange
in India approved by the SEBI, the actual cost shall be deemed to be the amount which
would have been regarded as actual cost had there been no such corporatization
[Explanation 12].
Note: Under the scheme of corporatization, recognised stock exchange gets
converted into ‘Company’ from the status of being ‘Association of persons’ or ‘Body
of Individuals’.
(vi) Capital asset on which deduction is allowable under section 35AD: Explanation
13 to section 43(1) provides that the actual cost of any capital asset, on which
deduction has been allowed or is allowable to the assessee under section 35AD,
shall be nil.
This would be applicable in the case of transfer of asset by the assessee where –
(1) the assessee himself has claimed deduction under section 35AD; or
(2) the previous owner has claimed deduction under section 35AD. This would be
applicable where the capital asset is acquired by the assessee by way of –
(a) gift, will or an irrevocable trust;
(b) any distribution on liquidation of the company;

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.53

(c) any distribution of capital assets on total or partial partition of a HUF;

(d) any transfer of a capital asset by a holding company to its 100%
subsidiary company, being an Indian company;
(e) any transfer of a capital asset by a subsidiary company to its 100%
holding company, being an Indian company;

(f) any transfer of a capital asset by the amalgamating company to an

amalgamated company in a scheme of amalgamation, if the
amalgamated company is an Indian company;
(g) any transfer of a capital asset by the demerged company to the
resulting company in a scheme of demerger, if the resulting company
is an Indian company;

(h) any transfer of a capital asset or intangible asset by a firm to a

company as a result of succession of the firm by a company in the
business carried on by the firm, or any transfer of a capital asset to a
company in the course of demutualization or corporatisation of a
recognized stock exchange in India as a result of which an association
of persons or body of individuals is succeeded by such company
(fulfilling the conditions specified);
(i) any transfer of a capital asset or intangible asset by a sole proprietary
concern to a company, where the sole proprietary concern is
succeeded by a company (fulfilling the conditions specified).
(j) any transfer of a capital asset or intangible asset by a private company
or unlisted public company to an LLP as a result of conversion of the
company into LLP (fulfilling the conditions prescribed).
However, where an asset, in respect of which deduction is claimed and allowed
under section 35AD is deemed to be the income of the assessee in accordance with
the provisions of section 35AD(7B) (on account of being used for a purpose other
than specified business under section 35AD), the actual cost of the asset to the
assessee shall be actual cost to assessee as reduced by the amount of
depreciation allowable had the asset been used for the purpose of business,
calculated at the rate in force, since the date of its acquisition [Proviso to
Explanation 13 to section 43(1)]

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 3.54 DIRECT TAX LAWS

(9) Written down value [Section 43(6)]

(i) Assets acquired by the assessee during the previous year: In the case of assets
acquired by the assessee during the previous year, the written down value means
the actual cost to the assessee.
(ii) Assets acquired before the previous year: In the case of assets acquired before
the previous year, the written down value would be the actual cost to the assessee
less the aggregate of all deductions actually allowed in respect of depreciation.
For this purpose, any depreciation carried forward is deemed to be depreciation
actually allowed [Section 43(6)(c)(i) read with Explanation 3].
(iii) In case of any block of assets: The written down value of any block of assets shall
be worked out as under in accordance with section 43(6)(c):

(1) W.D.V. of the block of assets in immediately preceding previous year xxx
(P.Y. 2024-25)
(2) Less: Depreciation actually allowed in respect of that block of assets xxx
in said preceding previous year (i.e., in P.Y. 2024-25)
Opening balance as on 1st April of the current P.Y. (i.e., on 1.4.2025) xxx
Increased by
(3) Actual cost of assets acquired during the previous year 2025-26, not xxx
being on account of acquisition of goodwill of a business or
profession
(4) Total (1) - (2) + (3) xxx
Reduced by
(5) Money receivable in respect of any asset falling within the block xxx
which is sold, discarded, demolished or destroyed during that
previous year. However, such amount cannot exceed the amount in
(4).
(6) In case of slump sale, actual cost of the asset (-) amount of xxx
depreciation that would have been allowable to the assessee for any
assessment year as if the asset was the only asset in the block.
However, such amount of reduction cannot exceed the WDV.
(7) W.D.V at the end of the year (as on 31.3.2026, on which depreciation xxx
is allowable) [(4) – (5) – (6)]
(8) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (7) above) xxx

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.55

(iv) Succession to business or profession otherwise than on death: When in the

case of a succession to business or profession otherwise than on death, an
assessment is made on the successor under section 170(2), the written down value
of an asset or block of assets shall be the amount which would have been taken as
the written down value if the assessment had been made directly on the person
succeeded to [Explanation 1 to section 43(6)].
Example: Tapan succeeded his father’s business due to retirement of his father. The
WDV of the assets in the hands of Tapan would be the WDV of the assets in the
hands of his father.
(v) Transfer of block of assets by a holding company to a subsidiary company or
vice versa or by amalgamating company to amalgamated company: Where in
any previous year any block of assets is transferred by a holding company to its
wholly owned Indian subsidiary company or by a subsidiary company to its 100%
holding company, being an Indian company or by an amalgamating company to an
amalgamated company, the latter being an Indian company, then the actual cost of
the block of assets in the case of transferee-company or amalgamated company as
the case may be, shall be the written down value of the block of assets as in the
case of the transferor company or amalgamating company, as the case may be, for
the immediately preceding year as reduced by depreciation actually allowed in
relation to the said previous year [Explanation 2 to section 43(6)].
(vi) Block of assets is transferred by demerged company to the resulting company:
Where in any previous year any asset forming part of a block of assets is transferred
by demerged company to the resulting company, the written down value of the block
of assets of the demerged company for the immediately preceding year shall be
reduced by the written down value of the assets transferred to the resulting company
[Explanation 2A to section 43(6)].
(vii) Block of assets is transferred by a demerged company to the resulting
company: Where any asset forming part of a block of assets is transferred by a
demerged company to the resulting company, the written down value of the block of
assets in the case of resulting company shall be the written down value of the
transferred assets of the demerged company immediately before the demerger
[Explanation 2B to section 43(6)].

(viii) Block of assets in the case of the successor LLP: The actual cost of the block of
assets in the case of the successor LLP on conversion of private or unlisted

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 3.56 DIRECT TAX LAWS

company to a LLP and the conditions of clause 47(xiiib) are satisfied, shall be the
written down value of the block of assets as in the case of the predecessor company
on the date of conversion [Explanation 2C to section 43(6)].
(ix) Block of assets transferred by a recognised stock exchange in India to a
company under a scheme for corporatization: Where any asset forming part of a
block of assets is transferred in any previous year by a recognised stock exchange in
India to a company under a scheme for corporatisation approved by SEBI, the
written down value of the block shall be the written down value of the transferred
assets immediately before the transfer [Explanation 5 to section 43(6)].
(x) Depreciation provided in the books of account deemed to be depreciation
actually allowed: Section 32(1)(ii) provides that depreciation shall be allowed at the
prescribed percentage on the written down value (WDV) of any block of assets.
Section 43(6)(b) provides that written down value in the case of assets acquired
before the previous year means the actual cost to the assessee less all depreciation
actually allowed to him under the Income-tax Act, 1961.
Persons who were exempt from tax were not required to compute their income under
the head “Profits and gains of business or profession”. However, when the
exemption is withdrawn subsequently, such persons became liable to income-tax
and hence, were required to compute their income for income-tax purposes. In this
regard, a question arises as to the basis on which depreciation is to be allowed
under the Income-tax Act, 1961 in respect of assets acquired during the years when
the person was exempt from tax.
Explanation 6 to section 43(6) provides that -
(a) the actual cost of an asset has to be adjusted by the amount attributable to
the revaluation of such asset, if any, in the books of account;
(b) the total amount of depreciation on such asset provided in the books of
account of the assessee in respect of such previous year or years preceding
the previous year relevant to the assessment year under consideration shall
be deemed to be the depreciation actually allowed under the Income-tax Act,
1961 for the purposes of section 43(6);
(c) the depreciation actually allowed as above has to be adjusted by the amount
of depreciation attributable to such revaluation.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.57

(xi) Composite Income: Explanation 7 provides that in cases of ‘composite income’, for
the purpose of computing written down value of assets acquired before the previous
year, the total amount of depreciation shall be computed as if the entire composite
income of the assessee is chargeable under the head “Profits and Gains of business
or profession”. The depreciation so computed shall be deemed to have been
“actually allowed” to the assessee.

Rule 8 prescribes the taxability of income from the manufacture of tea. Under the
said rule, income derived from the sale of tea grown and manufactured by seller
shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax.
Example: If the turnover is, say, ` 20 lakh, the depreciation ` 1 lakh and other
expenses ` 4 lakh, then, the income would be ` 15 lakh. Business income would be
` 6 lakh (being 40% of ` 15 lakh). In this case, ` 1 lakh, being the amount of
depreciation would be deemed to have been actually allowed.
The WDV is required to be computed by deducting the full depreciation attributable
to composite income i.e. ` 1 lakh. Explanation 7 clarifies this legislative intent.

(xii) Cases where the Written Down Value reduced to Nil: The written down value of
any block of assets, may be reduced to nil for any of the following reasons:
(a) The moneys receivable by the assessee in regard to the assets sold or
otherwise transferred during the previous year together with the amount of
scrap value may exceed the written down value at the beginning of the year
as increased by the actual cost of any new asset acquired, or

(b) All the assets in the relevant block may be transferred during the year.
(10) Carry forward and set-off of depreciation [Section 32(2)]
Section 32(2) provides for carry forward of unabsorbed depreciation. Where, in any
previous year the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, the unabsorbed depreciation shall be added to the depreciation
allowance for the following previous year and shall be deemed to be part of that allowance.
If no depreciation allowance is available for that previous year, the unabsorbed depreciation
of the earlier previous year shall become the depreciation allowance of that year. The effect
of this provision is that the unabsorbed depreciation shall be carried forward indefinitely till
it is fully set off.

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 3.58 DIRECT TAX LAWS

Example: Profits and gains from business or profession of Mr. X for P.Y. 2024-25, before
charging depreciation of ` 20 lakhs u/s 32, was ` 16 lakhs. In such a case, after setting off
the depreciation, the unabsorbed depreciation of P.Y. 2024-25 would be ` 4 lakhs. If profits
and gains from business or profession for P.Y. 2025-26 before depreciation is ` 11 lakhs
and depreciation allowance u/s 32 for the said previous year is ` 5 lakhs, then, the
unabsorbed depreciation of ` 4 lakhs for the P.Y. 2024-25 would be added to the
depreciation allowance of ` 5 lakhs. Consequently, ` 9 lakhs would be allowed to be set-off
against the profits of ` 11 lakhs and the taxable profits for P.Y. 2025-26 would be ` 2 lakhs.
Order of set-off
However, in the order of set-off of losses under different heads of income, effect shall first
be given to current year depreciation then brought forward business losses and only then to
unabsorbed depreciation.
The provisions in effect are as follows:
• Since the unabsorbed depreciation forms part of the current year’s depreciation, it
can be set off against any other head of income except “Salaries”.
• The unabsorbed depreciation can be carried forward for indefinite number of
previous years.
• Set off will be allowed even if the same business to which it relates is no longer in
existence in the year in which the set off takes place.
Current depreciation to be deducted first - The Supreme Court, in CIT v. Mother India
Refrigeration (P.) Ltd. [1985] 23 Taxman 8, has categorically held that current depreciation
must be deducted first before deducting the unabsorbed carried forward business losses of
the earlier years in giving set off while computing the total income of any particular year.

ORDER OF SET-OFF

Current Year Brought forward Unabsorbed

Depreciation Business Loss depreciation

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.59

ILLUSTRATION 4
Lights and Power Ltd. engaged in the business of generation of power, furnishes the
following particulars pertaining to P.Y. 2025-26. Compute the depreciation allowable under
section 32 for A.Y.2026-27 and the opening balance of written down value of the block of
assets as on 01.04.2026, while computing his income under the head “Profits and gains of
business or profession”. The company has opted for the depreciation allowance on the
basis of written down value. Assume that all the assets were purchased by way of account
payee cheque and that the company has not opted for the special tax regimes under
section 115BAA or under section 115BAB.
Particulars (` )
1. Opening Written down value of Plant and Machinery (15% block) as 5,78,000
on 01.04.2025 (Purchase value ` 8,00,000) [WDV for P.Y. 2024-25
less depreciation for that year]
2. Purchase of second hand machinery (15% block) on 29.12.2025 for 2,00,000
business purpose
3. Machinery Y (15% block) purchased and installed on 12.07.2025 for 8,00,000
the purpose of power generation
4. Acquired and installed for use a new air pollution control equipment 2,50,000
on 31.7.2025
5. New air conditioner purchased and installed in office premises on 3,00,000
8.9.2025
6. New machinery Z (15% block) acquired and installed on 23.11.2025 3,25,000
for the purpose of generation of power
7. Sale value of an old machinery X, sold during the year (Purchase 3,10,000
value ` 4,80,000, WDV as on 01.04.2025 ` 3,46,800)

SOLUTION
Computation of depreciation allowance under section 32 for the A.Y. 2026-27
Plant and Plant and
Particulars Machinery Machinery
(15%) (40%)
(`) (`) (`)
Opening WDV as on 01.04.2025 5,78,000 -
Add: Plant and Machinery acquired during the
year
- Second hand machinery 2,00,000

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 3.60 DIRECT TAX LAWS

- Machinery Y 8,00,000
- Air conditioner for office 3,00,000
- Machinery Z 3,25,000 16,25,000 -
- Air pollution control equipment - 2,50,000
22,03,000 2,50,000
Less: Asset sold during the year 3,10,000 Nil
Written down value as on 31.3.2026 before 18,93,000 2,50,000
charging depreciation
Normal depreciation
40% on air pollution control equipment (` 2,50,000 - 1,00,000
x 40%)
Depreciation on plant and machinery put to
use for less than 180 days@ 7.5% (i.e., 50% of
15%)
- Second hand machinery (` 2,00,000 × 7.5%) 15,000
- Machinery Z (` 3,25,000 × 7.5%) 24,375 39,375
15% on the balance WDV being put to use for 2,05,200
more than 180 days (` 13,68,000 × 15%)
Additional depreciation
- Machinery Y (` 8,00,000 × 20%) 1,60,000
- Machinery Z (` 3,25,000 × 10%, being 50% of 32,500 1,92,500 -
20%)
- Air pollution control equipment (` 2,50,000× - 50,000
20%)
Total depreciation 4,37,075 1,50,000
WDV as on 1.4.2026 [WDV of P.Y. 2025-26 less 14,55,925 1,00,000
depreciation for that year]

Notes:
(i) Power generation equipments qualify for claiming additional depreciation in respect
of new plant and machinery.
(ii) Additional depreciation is not allowed in respect of second hand machinery and air
conditioner installed in office premises.

(iii) The balance 50% additional depreciation in respect of Machinery Z of ` 32,500

(10% x ` 3,25,000) can be claimed as deduction in the subsequent financial year
i.e., F.Y. 2026-27.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.61

(11) Building, machinery, plant and furniture not exclusively used for business purpose
[Section 38(2)]
Where any building, plant and machinery, furniture is not exclusively used for the purposes
of business or profession, the deduction on account of expenses on account of current
repairs to the premises, insurance premium of the premises, current repairs and insurance
premium of machinery, plant and furniture and depreciation in respect of these assets shall
be restricted to a fair proportionate part thereof, which the Assessing Officer may determine
having regard to the user of such asset for the purposes of the business or profession.
(12) Balancing Charge
Section 41(2) provides for the manner of calculation of the amount which shall be chargeable
to income-tax as income of the business of the previous year in which the moneys payable for
the building, machinery, plant or furniture on which depreciation has been claimed under
section 32(1)(i), i.e., in the case of power undertakings, is sold, discarded, demolished or
destroyed. The balancing charge will be the amount by which the moneys payable in respect
of such building, machinery, plant or furniture, together with the amount of scrap value, if any,
exceeds the written down value. However, the amount of balancing charge should not exceed
the difference between the actual cost and the WDV. The tax shall be levied in the year in
which the moneys payable become due.
The Explanation below section 41(2) makes it clear that where the moneys payable in
respect of the building, machinery, plant or furniture referred to in section 41(2) become due
in a previous year in which the business, for the purpose of which the building, machinery,
plant or furniture was being used, is no longer in existence, these provisions will apply as if
the business is in existence in that previous year.
Example: Mahapower Ltd. purchased an asset on 20.7.2021. The actual cost of the asset
was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual cost of the
asset. WDV of the asset as on 1.4.2025 is ` 80 lakhs. On 15.5.2025, Mahapower Ltd. sold
the asset for ` 90 lakhs. The balancing charge of ` 10 lakhs (` 90 lakhs - ` 80 lakhs) would
be taxable as income u/s 41(2).
(4) Tea Development Account/ Coffee Development Account/ Rubber Development
Account [Section 33AB]
(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of growing and
manufacturing tea or coffee or rubber in India.

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 3.62 DIRECT TAX LAWS

(ii) Quantum of deduction: It provides that where the assessee has before the expiry of six
months from the end of the previous year or before the due date of furnishing the return of
income, whichever is earlier,
(a) deposited with a National Bank any amount in a special account maintained by the
assessee with that Bank in accordance with a scheme approved by Tea Board or
Coffee Board or Rubber Board, or
(b) deposited any amount in an account to be known as Deposit Account opened by the
assessee in accordance with the scheme framed by the Tea Board or Coffee Board
or Rubber Board, as the case may be, (hereinafter referred to as the deposit
scheme) with the previous approval of the Central Government,
the assessee shall be allowed a deduction of:

(a) A sum equal to the aggregate of the deposits made or

(b) 40% of the profits of such business (as computed under the head ‘Profits and gains
of business or profession before making any deduction under this section),
whichever is less.
The above deduction will be allowed before the setting off of brought-forward loss under
section 72.
(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where
the assessee is a firm or any association of persons or any body of individuals, the
deduction under this section shall not be allowed in the computation of the income of any
partner or member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Deposit Account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other
previous year.
(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1), and the assessee furnishes by that date the
report of such audit in the prescribed form duly signed and verified by such accountant.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.63

Particulars Due date of filing of return Specified Date

Assessees (other 31st October of the relevant 30th September of the relevant
than a company) A.Y. A.Y.
subject to tax audit
For A.Y.2026-27, on or before For A.Y.2026-27, on or before
31st October, 2026 30th September, 2026

However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount from special account or deposit account: Any
amount standing to the credit of the assessee in the special account or deposit account
cannot be withdrawn except for the purposes specified in the scheme, or, as the case may
be, in the deposit scheme.
The above amount can also be withdrawn in the following circumstances:
(a) Closure of business
(b) Death of an assessee
(c) Partition of HUF
(d) Dissolution of a firm
(e) Liquidation of a company.
(vii) Amount withdrawn and utilised for purchase of specified assets would be chargeable
to tax as business income: Where the sum standing to the credit of the assessee in the
Special account or in the Deposit account is released by the National Bank or is withdrawn
by the assessee from the Deposit account and is utilised for the purchase of:

(a) Any machinery or plant installed in any office premises or residential accommodation
including a guest house.
(b) Any office appliances (other than computers)
(c) Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;

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 3.64 DIRECT TAX LAWS

(d) Any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
the whole of such amount so utilised will be treated as taxable profits of that year and taxed
accordingly.

(viii) Amount withdrawn on the closure of business or dissolution of a firm: Where any
amount is withdrawn by the assessee from the special account or deposit account during
any previous year on the closure of his business or dissolution of a firm, the whole of such
withdrawal shall be deemed to be the profits and gains of business of that previous year
and shall be chargeable to tax as the income of that previous year, as if the business had
not closed or the firm had not been dissolved.
(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the deposit
account is utilised by the assessee for the purpose of any expenditure in connection with
such business in accordance with the scheme or deposit scheme, such expenditure shall
not be allowed in computing the business income.
(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the
special account which is released during any previous year by the National Bank or is
withdrawn by the assessee from the Deposit Account, for being utilised by the assessee for
the purposes of such business and is not utilized in accordance with the scheme or deposit
scheme in that year, the unutilised amount shall be deemed to be profits and gains and
chargeable to income-tax as the income of that previous year.
However, where such amount is released during the previous year at the closing of the
account on the death of the assessee, partition of a HUF or liquidation of a company, the
above restriction will not apply.
(xi) Consequences of sale or transfer: Where an asset acquired in accordance with the
scheme or deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which it was acquired, such portion of the cost relatable to the deduction
allowed under section 33AB(1) shall be deemed to be profits and gains of business or
profession of the previous year in which the asset is sold or transferred and shall be
chargeable to income-tax as the income of that previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.65

Exceptions: Such restriction will not apply in the following cases:

(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.
(b) Where the sale or transfer is made in connection with the succession of a firm by a
company in the business or profession carried on by the firm as a result of which the
firm sells or otherwise transfers any asset to the company and the scheme or deposit
scheme continues to apply to the company in the same manner as applicable to the
firm.
Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.
(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.
(xiii) Meaning of National Bank: “National Bank” means the National Bank for Agricultural and
Rural Development (NABARD).
(5) Site Restoration Fund [Section 33ABA]
(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of prospecting for, or
extraction or production, of petroleum or natural gas or both in India and in relation to which
the Central Government has entered into an agreement with such assessee for such
business.
(ii) Quantum of deduction: It provides that where the assessee has before the end of the
previous year -
(a) deposited any sum with the State Bank of India in a special account maintained by
the assessee with that bank in accordance with the scheme approved in this behalf
by the Government of India in the Ministry of Petroleum and Natural Gas, or
(b) deposited any amount in a Site Restoration Account opened by the assessee for the
purposes specified in a scheme framed by the said Ministry (hereinafter referred to
as the deposit scheme),

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 3.66 DIRECT TAX LAWS

the assessee shall be entitled to a deduction of —

- a sum equal to the sum deposited; or
- a sum equal to 20% of its profits (as computed under the head “Profits and gains of
business or profession” before making any deduction under this section),
whichever is less.
For this purpose, it is provided that any amount credited in the special account or Site
Restoration Account by way of interest shall also be deemed to be a deposit.
The above deduction will be allowed before the setting off of brought-forward loss under
section 72.

(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where

the assessee is a firm or any association of persons or anybody of individuals the deduction
under this section shall not be allowed in the computation of the income of any partner or
member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Site Restoration Account has been
allowed in any previous year, no deduction shall be allowed in respect of such amount in
any other previous year.
(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1) and the assessee furnishes by that date the report
of such audit in the prescribed form duly signed and verified by such accountant.
However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount - Any amount standing to the credit in the special
account or the Site Restoration Account will not be allowed to be withdrawn except for the
purposes specified in the scheme or in the deposit scheme.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.67

(vii) No deduction: No deduction shall be allowed in respect of any amount utilised for the
purchase of the following items:

(a) any machinery or plant to be installed in any office premises or residential

accommodation, including any accommodation in the nature of a guest house;
(b) any office appliances (not being computers);

(c) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
(viii) Withdrawal on closure of account: Where any amount standing to the credit of the
assessee in the special account or in the Site Restoration Account is withdrawn on closure
of the account during any previous year by the assessee, the amount so withdrawn from the
account as reduced by the amount, if any, payable to the Central Government by way of
profit or production share as provided in the agreement referred to in section 42, shall be
deemed to be the profits and gains of business or profession of that previous year and shall
accordingly be chargeable to income-tax as the income of that previous year.
Where any amount is withdrawn on closure of the account in a previous year in which the
business carried on by the assessee in no longer in existence, these provisions will apply
as if the business is in existence in that previous year.
(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the Site
Restoration Account is utilised by the assessee for the purpose of any expenditure in
connection with such business in accordance with the scheme or deposit scheme, such
expenditure shall not be allowed in computing the business income.
(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the
special account or Site Restoration Account is released in the previous year by the State
Bank of India or is withdrawn from the Site Restoration Account for being utilised by the
assessee for the purposes of such business and is not utilised in accordance with the
scheme or the deposit scheme in that year, the unutilised amount shall be deemed to be
profits and gains and chargeable to income-tax as the income of that previous year.

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(xi) Consequences of sale or transfer - Where any asset acquired in accordance with the
scheme or the deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which such assets were acquired, such part of the cost of such asset as is
relatable to the deduction allowed under section 33ABA(1) shall be deemed to be the profits
and gains of business or profession of the previous year in which the asset is sold or
otherwise transferred and shall accordingly be chargeable to income-tax as the income of
that previous year.
Exceptions: This restriction will not apply in the following cases:
(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.
(b) Where the sale or transfer of the asset is made in connection with the succession of
a firm by a company in the business or profession carried on by the firm as a result
of which the firm sells or otherwise transfers to the company any asset and the
scheme or the deposit scheme continues to apply to the company in the manner
applicable to the firm.
Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.
(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.

(6) Expenditure on Scientific Research [Section 35]

This section allows a deduction in respect of any expenditure on scientific research related to the
business of assessee.
Meaning of certain terms:

Term Meaning
Scientific research Activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries
[Section 43(4)(i)].
Scientific research Expenditure incurred on scientific research would include all
expenditure expenditure incurred for the prosecution or the provision of facilities for
the prosecution of scientific research but does not include any

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.69

expenditure incurred in the acquisition of rights in or arising out of

scientific research.
Scientific research Scientific research related to a business or a class of business would
related to a business include
or a class of (i) any scientific research which may lead to or facilitate an extension
business of that business or all the business of that class, as the case may
be;
(ii) any scientific research of a medical nature which has a special
relation to the welfare of the workers employed in that business or
all the business of that class, as the case may be.

The deduction allowable under this section consists of –

by a company engaged in business of

Bio-technology or in any business of
manufacture or production of any article, 100% of expenditure incurred
not being article or thing specified in the (other than expenditure on
Expenditure on Scientific research

list of the Eleventh Schedule on an land & building)

approved in-house research and
development facility
100% of the
Revenue Expenditure expenditure
Incurred by assessee on
scientific research related to incurred
business (other than
Capital Expenditure expenditure
on land)
Approved Indian company for
scientific research
100% of
Notified approved University/ college/ sum
Research association/ other institution
for social science or statistical
paid
research
Paid to
Notified approved University/ college/
Research association/ other institution 100% of
for scientific research sum
paid
Approved National
Laboratory/university/IIT/ specified person
for scientific research undertaken under an
approved programme

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(I) Incurred by assessee:

(i) Revenue Expenditure: Any revenue expenditure incurred by the assessee on
scientific research related to his business would be allowed as deduction in the
year in which it was incurred. Expenditure incurred within 3 years immediately
preceding the commencement of the business on payment of salary to research
personnel engaged in scientific research related to his business carried on by the
taxpayer or on purchase of material inputs for such scientific research will be allowed
as deduction in the year in which the business is commenced. The deduction will be
limited to the amount certified by the prescribed authority [Section 35(1)(i)]
(ii) Capital Expenditure: Any expenditure of a capital nature on scientific research
related to the business carried on by the assessee would be deductible in full in the
previous year in which it is incurred [Section 35(1)(iv)].
(a) Capital expenditure prior to commencement of business
The Explanation 1 to section 35(2)(ia) specifically provides that where any
capital expenditure has been incurred prior to the commencement of the
business, the aggregate of the expenditure so incurred within the three years
immediately preceding the commencement of the business shall be deemed
to have been incurred in the previous year in which the business is
commenced and will rank for deduction as expenditure for scientific research
incurred during the previous year.
Expenditure on land disallowed
No deduction will be allowed in respect of capital expenditure incurred on the
acquisition of any land whether the land is acquired as such or as part of any
property.
(b) Carry forward of deficiency
Capital expenditure incurred on scientific research which cannot be absorbed
by the business profits of the relevant previous year can be carried forward to
the immediately succeeding previous year and shall be treated as the
allowance for that year. In effect, this means that there is no time bar on the
period of carry forward. It shall be accordingly allowable for that previous year
against any head of income other than salaries [Section 35(4)].

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.71

(c) No depreciation
Section 35(2)(iv) clarifies that no depreciation will be admissible on any
capital asset represented by expenditure which has been allowed as a
deduction under section 35 whether in the year in which deduction under
section 35 was allowed or in any other previous year.
(d) Sale of asset representing expenditure of capital nature on scientific
research
Section 41, inter alia, seeks to tax the profits arising on the sale of an asset
representing expenditure of a capital nature on scientific research.
Where the asset representing expenditure of a capital nature on scientific
research is sold without having been used for other purposes, the provisions
of section 41(3) would be attracted. If the proceeds of sale together with the
total amount of the deductions made under section 35(1)(iv) exceed the
amount of capital expenditure, the excess or the amount of deduction so
made, whichever is less, will be charged to tax as income of the business of
the previous year in which the sale took place.
In simple words, since amount of deduction under section 35(1)(iv) is equal to
the amount of expenditure, lower of amount of sale proceeds or deduction
allowed under section 35(1)(iv) will be the charged to tax as income of the
business in the previous year in which the asset is sold.

Example - If capital expenditure incurred for scientific research in P.Y. 2024-

25 is ` 3 lakhs, then deduction u/s 35(1)(iv) would have been ` 3 lakhs in that
P.Y. If the asset is sold for ` 4 lakhs in P.Y.2025-26, ` 3 lakhs, being lower of
sale proceeds of ` 4 lakhs and deduction u/s 35(1)(iv) of ` 3 lakhs, would be
charged to tax u/s 41(3) in the P.Y. 2025-26, being the year of sale.

Note - Deduction under section 35(1)(i) and 35(1)(iv) read with section 35(2) would be
available to an assessee under the special concessional tax regimes under section
115BAA/115BAB/115BAC/115BAD/115BAE as well as the regular provisions of the Act.

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(II) Amount contributed or paid to:

(i) Notified approved research association, university, college or other institution:

An amount equal to any sum paid to -

- a research association which has as its object, the undertaking of scientific

research or

- to a university, college or other institution to be used for scientific research.

provided that such university, college, institution or association is approved for this
purpose and notified by the Central Government. [Section 35(1)(ii)]

The payments so made to such institutions would be allowable irrespective of whether:

(a) the field of scientific research is related to the assessee’s business or not,
and

(b) the payment is of a revenue nature or of a capital nature.

Note - Deduction u/s 35(1)(ii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they exercise
the option of shifting out of the default tax regime provided under section 115BAC(1A)
and pay tax as per the optional tax regime under the regular provisions of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(ii) would not be
allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(ii) would be
allowable only if they pay tax under the normal provisions of the Act.

(ii) Approved Indian company for scientific research: A sum equal to any amount
paid to a company to be used by it for scientific research [Section 35(1)(iia)]

However, such deduction would be available only if;

- the company is registered in India and

- has as its main object the scientific research and development.

Further, it should be approved by the prescribed authority and should fulfill the other
prescribed conditions.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.73

Note - Deduction u/s 35(1)(iia) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(iia) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iia) would be
allowable only if they pay tax under the normal provisions of the Act.

(iii) Approved notified research association, university, college or other institution:

A sum equal to any amount paid to
- a research association which has as its object the undertaking of research in
social science or statistical research or
- a university, college or other institution to be used for research in any social
science or statistical research
provided that they are approved for this purpose and notified by the Central
Government. [Section 35(1)(iii)]

Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum to a research association or university or
college or other institution for scientific research or research in a social science or
statistical research or to a company for scientific research, shall not be denied
merely on the ground that subsequent to payment of such sum by the assessee, the
approval granted to any of the aforesaid entities is withdrawn.

Note - Deduction u/s 35(1)(iii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(iii) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iii) would be
allowable only if they pay tax under the normal provisions of the Act.

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Approval -
The research association, university, college or other institution for scientific
research or research in a social science or statistical research has to make an
application in the prescribed form and manner to the Central Government for the
purpose of grant of approval, or continuance thereof.
The Central Government before granting approval, call for such documents or
information as it thinks necessary in order to satisfy itself about the genuineness of
the activities of the research association, university, college or other institution and
that Government may also make such inquiries as it may deem necessary.
Every notification in respect of research association, university, college or other
institution or Indian company for scientific research issued on or before 1.4.2021
shall be deemed to have been withdrawn unless such association/institution/
university/college/company makes an intimation to the prescribed income-tax
authority in the prescribed form. Such intimation has to be made within 3 months
from 1.4.2021. Such notification shall be valid for a period of 5 consecutive
assessment years beginning with the A.Y. 2022-23 or thereafter subject to the
intimation made by the association/institution/university/college/company.
However, where any notification is issued by the Central Government after
29.9.2020, it shall, at any time, have effect for such assessment year(s), but not
exceeding 5 assessment years as may be specified in the notification.
Requirements –
Research association, university, college or other institution or Indian company for
scientific research has to
(i) prepare prescribed statement for prescribed period and deliver or cause to be
delivered such statement to the prescribed income-tax authority or the person
authorized by such authority in such form, verified in such manner, setting
forth such particulars and within such prescribed time.
Such association/institution/university/college/company may also deliver to
the prescribed authority a correction statement for rectification of any mistake
or to add, delete or update the information furnished in the statement
delivered in the prescribed form and verified in prescribed manner.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.75

(ii) furnish to the donor, a certificate specifying the amount of donation in the
such manner, containing such particulars and within such time from the date
of receipt of sum, as may be prescribed.
The deduction with respect to the donation given by the assessee to any research
association, university, college or other institution referred to in section 35(1)(ii)/(iii)
or the company referred to in section 35(1)(iia) would not be allowed unless such
research association, university, college or other institution or company complies
with the above requirements stipulated under section 35(1A) .

(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]: Section 35(2AA)
provides that any sum paid by an assessee to a National Laboratory or University or
Indian Institute of Technology or a specified person for carrying out programmes of
scientific research approved by the prescribed authority will be eligible for deduction
of the amount so paid.
No other deduction under the Act: No contribution which qualifies for deduction
under this clause will be entitled to deduction under any other provision of the Act.
Further, it has been clarified that the deduction to which an assessee is entitled on
account of payment of any sum by him to an approved National Laboratory,
University, Indian Institute of Technology or a specified person for the approved
programme shall not be denied to the donor-assessee merely on the ground that
after payment of such sum by him, the approval granted to any of the aforesaid
donee-entities or the programme has been withdrawn.
Term Meaning
Specified person A person who is approved by the prescribed authority

Note - Deduction u/s 35(2AA) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(2AA) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(2AA) would be
allowable only if they pay tax under the normal provisions of the Act.

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 3.76 DIRECT TAX LAWS

(III) Company engaged in Business of bio-technology or manufacturing of article or thing

etc. [Section 35(2AB)]

Where a company engaged in the business of bio-technology or in any business of

manufacture or production of any article or thing, not being an article or thing specified
in the list of the Eleventh Schedule [The exclusion list comprises of beer, wine and other
alcoholic spirits, tobacco and tobacco preparations, cosmetic and toilet preparations, tooth
paste, dental cream, tooth powder and soap, confectionery and chocolates, office machines
and apparatus, steel furniture etc] incurs any expenditure on scientific research on in-house
research and development facility as approved by the prescribed authority, a deduction of a
sum equal to the expenditure will be allowed. Such expenditure should not be in the
nature of cost of any land or building.

“Expenditure on scientific research” in relation to drugs and pharmaceuticals shall

include expenditure incurred on clinical drug trial, obtaining approval from any state
regulatory authority, and filing an application for a patent under the Patents Act, 1970.

No other deduction under the Act: No deduction will be allowed in respect of the above
expenditure under any other provision of the Income-tax Act, 1961.
Agreement with the prescribed authority: No company will be entitled to this deduction
unless it enters into an agreement with the prescribed authority for co-operation in such
research and development facility and fulfills the prescribed conditions with regard to
maintenance and audit of accounts and also furnishes prescribed reports in the prescribed
manner.
Approval of the Authority: The prescribed authority shall submit its report in relation to
the approval of the said facility to the Principal Chief Commissioner or the Chief
Commissioner or Principal Director General Director General in such form and within such
time as may be prescribed.

Note - In case of companies, deduction u/s 35(2AB) would not be allowable if they opt for
the special provisions u/s 115BAA/115BAB. In other words, deduction u/s 35(2AB) would be
allowable only if they pay tax under the normal provisions of the Act.

ILLUSTRATION 5

A Ltd., engaged in the business of manufacturing since 2015, furnishes the following particulars for
the P.Y.2025-26. Compute the deduction allowable under section 35 for A.Y.2026-27, while
computing its income under the head “Profits and gains of business or profession”, assuming that
it does not opt for special tax regime under section 115BAA.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.77

Particulars `
1. Amount paid to notified approved Indian Institute of Science, Bangalore, for 1,00,000
scientific research
2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
3. Amount paid to X Ltd., a company registered in India which has as its main 4,00,000
object scientific research and development, as is approved by the prescribed
authority
4. Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) 7,50,000
on scientific research

SOLUTION
Computation of deduction under section 35 for the A.Y.2026-27
Particulars ` Section % of Amount of
deduction deduction
(`)
Payment for scientific research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-house
research and development facility
Revenue expenditure 3,00,000 35(2AB)) 100% 3,00,000
Capital expenditure (excluding cost
of acquisition of land ` 5,00,000) 2,50,000 35(2AB) 100% 2,50,000
Deduction allowable under section 35 13,00,000

(7) Expenditure for obtaining right to use spectrum for telecommunication services
[Section 35ABA]
(i) Section 32 allows depreciation in respect of assets including certain intangible assets.
Section 35ABB provides for amortisation of licence fee in case of telecommunication
service.
(ii) The Government has introduced spectrum fee for auction of airwaves.

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 3.78 DIRECT TAX LAWS

(iii) In order to resolve the uncertainty in tax treatment of payments in respect of spectrum i.e.,
whether spectrum is an intangible asset and the spectrum fees paid is eligible for
depreciation under section 32 or whether it is in the nature of a 'licence to operate
telecommunication business' and eligible for deduction under section 35ABB, section
35ABA provides for tax treatment of spectrum fee.
(iv) Tax treatment of spectrum fee:
Transaction Manner of deduction
(1) Acquisition of right to use spectrum
Any capital expenditure Appropriate fraction of the amount of such expenditure
incurred for acquisition [1/ total number of relevant previous years]
of any right to use
spectrum for
telecommunication Meaning of relevant previous years:
services either before Case Meaning
the commencement of
the business or Where the The previous years beginning with
thereafter at any time spectrum fee is the P.Y. in which such business
during any previous year actually paid commenced and the subsequent
and for which payment before the P.Y. or P.Y.s during which the
has actually been commencement of spectrum, for which the fee is paid,
made to obtain a right to business to shall be in force.
use spectrum. operate
telecommunication
services
In any other case The previous years beginning with
the P.Y. in which the spectrum fee
is actually paid and the
subsequent P.Y. or years during
which the spectrum, for which the
fee is paid, shall be in force.
Meaning of ‘payment has actually been made’.
Payment has actually been made means actual payment of expenditure irrespective
of the previous year in which the liability for expenditure was incurred according to
the method of accounting regularly employed by the assessee or payable in the
prescribed manner.
Rule 6A substantiates the meaning of the phrase ‘payment has actually been
made’
(a) In a case where full upfront payment of spectrum fee has been made:
Where an assessee has opted and been allowed by the Department of

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.79

Telecommunications, Government of India to make full upfront payment of

spectrum fee, the actual payment of expenditure irrespective of the previous
year in which the liability for the expenditure was incurred according to the
method of accounting regularly employed by the assessee;
(b) In a case where deferred payment is made:
Where an assessee has opted and been allowed by the Department of
Telecommunications, Government of India to make deferred payment, the
amount which would have been payable by the assessee had he opted for full
upfront payment of spectrum fee irrespective of the previous year in which the
liability for the expenditure was incurred according to the method of accounting
regularly employed by the assessee.
However, in case of deferred payment referred to in clause (b) above, where there is
failure by the assessee to comply with any of the conditions specified by the scheme
of the Department of Telecommunications, Government of India and Department of
Telecommunications terminates the allotment or assignment of spectrum, the
Assessing Officer shall, in exercise of power vested in him under section 35ABA(3),
re-compute the total income of the assessee for the previous year in which the
deduction has been claimed and granted to him by deeming that,-
(i) the total amount of spectrum fee paid up to the date of termination is the
amount of “payment actually been made”;
(ii) the spectrum was in force up to the date of its termination for the purpose of
computing “relevant previous year”.
(2) Transfer of the spectrum
Case 1: Where the The expenditure remaining unallowed as reduced by
proceeds of the transfer the proceeds of transfer shall be allowed in the previous
of spectrum are less year in which the spectrum has been transferred.
than the expenditure Amount of deduction = Expenditure remain unallowed
incurred remaining – Sale proceeds
unallowed
Case 2: Where the The excess amount or expenditure allowed till date (i.e.,
proceeds of the transfer difference between expenditure incurred to obtain
of whole or any part of spectrum and the expenditure remain unallowed),
the spectrum exceed whichever is less, shall be chargeable to tax as profits
the amount of and gains of business in the previous year in which the
expenditure remaining spectrum has been transferred.
unallowed Taxable as profits and gains from business and
profession =
Sale proceeds – Expenditure remain Whichever
unallowed
is less
OR
Expenditure allowed till date

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 3.80 DIRECT TAX LAWS

If the spectrum is transferred in a previous year in which

the business is no longer in existence, the taxability
would arise in the above manner as though the business
is in existence in that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in
proceeds of the transfer the previous year in which spectrum is transferred or in
of whole or any part of respect of any subsequent previous year or years.
the spectrum are not Amount of deduction = NIL
less than the amount of
expenditure incurred
remaining unallowed.
Case 4: Where a part of Unallowed expenditure would be amortised in the
the spectrum is following manner –
transferred and the case (i) subtracting the proceeds of transfer from the
is not covered under expenditure remaining unallowed; and
Case 2 above i.e., the
(ii) dividing the remainder by the number of relevant
proceeds of transfer of a
previous years which have not expired at the
part of the spectrum
beginning of the previous year during which the
does not exceed the
spectrum is transferred.
amount of expenditure
remaining unallowed Unallowed expenditure − Sale proceeds
Amount of deduction =
Unexpired number of relevant P.Y.s

(3) Transfer of spectrum in a scheme of amalgamation

If the amalgamating The provisions of section 35ABA will apply to
company sells or amalgamated company as they would have applied to
transfers the spectrum amalgamating company as if the latter has not
to the amalgamated transferred the spectrum.
company, being an The tax treatment in cases 1, 2 & 3 given in (2) above
Indian company under will not apply to the amalgamating company.
the scheme of
amalgamation
(4) Transfer of spectrum in a scheme of demerger
If the demerged The provisions of section 35ABA will apply to resulting
company sells or company as they would have applied to demerged
transfers the spectrum company as if the latter has not transferred the
to the resulting spectrum.
company, being an The tax treatment in cases 1, 2 & 3 given in (2) above
Indian company under will not apply to the demerged company.
the scheme of demerger

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.81

(v) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.
(vi) Consequences of failure to comply with the conditions after grant of deduction:

Where, in a previous year, any deduction has been claimed and granted to an assessee
and subsequently, there is failure to comply with any of the provisions of this section, then –
(1) the deduction shall be deemed to have been wrongly allowed;

(2) the Assessing Officer may recompute the total income of the assessee for the said
previous year and make the necessary rectification. This is notwithstanding anything
contained in the Income-tax Act, 1961;
(3) the provisions under section 154 for rectification of mistake apparent from the record
would apply. The period of four years would be reckoned from the end of the
previous year in which the failure to comply with the provisions of section 35ABA
takes place.
(8) Expenditure for obtaining licence to operate telecommunication services
[Section 35ABB]
(i) Tax treatment of licence fee:
Transaction Manner of deduction
(1) Acquisition of right to operate telecommunication services
Any capital expenditure Appropriate fraction of the amount of such expenditure
incurred for acquisition [1/ total number of relevant previous years]
of any right to operate Meaning of relevant previous years:
telecommunication
services either before Case Meaning
the commencement of Where the licence The previous years beginning with
the business or fee is actually paid the P.Y. in which such business
thereafter at any time before the commenced and the subsequent
during any previous commencement of P.Y. or P.Y.s during which the
year and for which business to operate licence, for which the fee is paid,
payment has actually telecommunication shall be in force.
been made (actual services
payment of In any other case The previous years beginning with
expenditure) to obtain a the P.Y. in which the licence fee is
licence. actually paid and the subsequent

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 3.82 DIRECT TAX LAWS

P.Y. or years during which the

licence, for which the fee is paid,
shall be in force.
Payment has actually been made means the actual payment of expenditure
irrespective of the previous year in which the liability for the expenditure was
incurred according to the method of accounting regularly employed by the assessee.
(2) Transfer of the licence
Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the transfer proceeds of transfer shall be allowed in the previous year
of licence are less than in which the licence has been transferred.
the expenditure
incurred remaining Amount of deduction = Expenditure remain unallowed –
unallowed Sale proceeds
Case 2: Where the The excess amount shall be chargeable to tax as profits
proceeds of the transfer and gains of business in the previous year in which the
of whole or any part of licence has been transferred. However, the excess
the licence exceed the should not exceed the difference between the
amount of expenditure expenditure incurred to obtain the licence and the amount
remaining unallowed of expenditure remaining unallowed.
Taxable as profits and gains from business and
profession =
Sale proceeds – Expenditure remain
unallowed Whichever is
OR less
Expenditure allowed till date
If the licence is transferred in a previous year in which
the business is no longer in existence, the taxability
would arise in the above manner as if the business is in
existence in that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the transfer previous year in which licence is transferred or in respect
of whole or any part of of any subsequent previous year or years.
the licence are not less Amount of deduction = NIL
than the amount of
expenditure incurred
remaining unallowed.
Case 4: Where a part of Unallowed expenditure would be amortised in the
the licence is following manner –
transferred and the (i) subtracting the proceeds of transfer from the
case is not covered expenditure remaining unallowed; and
under Case 2 above (ii) dividing the remainder by the number of relevant

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.83

i.e., the proceeds of previous years which have not expired at the
transfer of a part of the beginning of the previous year during which the
licence does not exceed licence is transferred.
the amount of Amount of deduction=
expenditure remaining Unallowed expenditure − Sale proceeds
unallowed
Unexpired number of relevant P.Y.s

(3) Transfer of licence in a scheme of amalgamation

If the amalgamating The provisions of section 35ABB will apply to
company sells or amalgamated company as they would have applied to
transfers the licence to amalgamating company as if the latter has not
the amalgamated transferred the licence.
company, being an Indian
The tax treatment in cases 1, 2 & 3 given in (2) above will
company, under the
not apply to the amalgamating company.
scheme of amalgamation
(4) Transfer of licence in a scheme of demerger
If the demerged The provisions of section 35ABB will apply to resulting
company sells or company as they would have applied to demerged
transfers the licence to company as if the latter has not transferred the licence.
the resulting company,
The tax treatment in cases 1, 2 & 3 given in (2) above will
being an Indian
not apply to the demerged company.
company, under the
scheme of demerger

(ii) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.
ILLUSTRATION 6

X Ltd., providing telecommunication services, acquired a telecom licence at cost of ` 50 lakhs on

01.04.2023 for a period of 10 years. Assuming the telecom licence is transferred by X Ltd. in P.Y.
2025-26, say for: (a) ` 32 lakhs; (b) ` 43 lakhs or (c) ` 52 lakhs, and if:

(i) Whole of the license is transferred

(ii) Part of the license is transferred.

Explain, how the transfer shall be dealt with under the Income-tax Act, 1961 and the amount, if
any, deductible for A.Y. 2026-27.

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 3.84 DIRECT TAX LAWS

SOLUTION
(i) Whole of the license is transferred:

Particulars ` (in lakhs)

Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
45
Less: Deduction u/s 35ABB for P.Y. 2024-25 5
Expenditure remaining unallowed 40
(a) If transferred for ` 32 lakhs
Proceeds from transfer 32
Deduction allowed u/s 35ABB in P.Y. 2025-26 (Expenditure 8
remaining unallowed as reduced by the proceeds of transfer)
(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession 3
(Lesser of: ` 3 lakhs i.e., Proceed from transfer - Expense
remain unallowed i.e. ` 43 lakhs - ` 40 lakhs or ` 10 lakhs i.e.,
expense allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Taxable as profits and gains from business and profession 10
(Lesser of: ` 12 lakhs i.e., Proceed from transfer - Expense
remain unallowed i.e. ` 52 lakhs - ` 40 lakhs or ` 10 lakhs i.e.,
expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(ii) Part of the license is transferred:

Particulars ` (in lakhs)
Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
45
Less: Deduction u/s 35ABB for P.Y. 2024-25 5
Expenditure remaining unallowed 40

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.85

(a) If transferred for ` 32 lakhs

Proceeds from transfer 32
Deduction allowed u/s 35ABB in P.Y. 2025-26 [` 40 lakhs - ` 32 1
lakhs)/ 8 years
(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession (Lesser 3
of: ` 3 lakhs i.e., Proceeds from transfer - Expense remaining
unallowed i.e. ` 43 lakhs - ` 40 lakhs or ` 10 lakhs i.e., expense
allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Amount taxable as profits and gains from business and profession 10
(Lesser of: ` 12 lakhs i.e., Proceeds from transfer - Expense
remaining unallowed i.e. ` 52 lakhs - ` 40 lakhs or ` 10 lakhs i.e.,
expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(9) “Investment-linked tax incentives” for specified businesses [Section 35AD]

(i) List of specified businesses: With the specific objective of creating rural infrastructure
and environment friendly alternate means for transportation of bulk goods, investment-
linked tax incentives have been introduced for specified businesses, namely –

• setting-up and operating ‘cold chain’ facilities for specified products;

• setting-up and operating warehousing facilities for storing agricultural produce;

• laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network;

• building and operating a hotel of two-star or above category, anywhere in India;

• building and operating a hospital, anywhere in India, with at least 100 beds for
patients;

• developing and building a housing project under a notified scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State
Government.

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 3.86 DIRECT TAX LAWS

• developing and building a housing project under a notified scheme for affordable
housing framed by the Central Government or State Government;

• production of fertilizer in India;

• setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar;

• laying and operating a slurry pipeline for the transportation of iron ore;

• setting up and operating a semiconductor wafer fabrication manufacturing unit, if

such unit is notified by the Board in accordance with the prescribed guidelines;

• developing or maintaining and operating or developing, maintaining and operating a

new infrastructure facility.

(ii) Deduction for Capital Expenditure: 100% of the capital expenditure incurred during the
previous year, wholly and exclusively for the above businesses would be allowed as
deduction from the business income to the assessee opting for deduction under section
35AD.

However, expenditure incurred on acquisition of any land, goodwill or financial

instrument would not be eligible for deduction.

Further, any expenditure in respect of which payment or aggregate of payment

made to a person of an amount exceeding ` 10,000 in a day otherwise than by an account
payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account or through such other prescribed electronic mode would not
be eligible for deduction. The prescribed electronic modes include credit card, debit card,
net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay [Notification No. 8/2020 dated 29.01.2020].

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.87

Note - In case of an individual/HUF/AoP/BoI carrying on specified business, deduction u/s

35AD would be available only if such person exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A). If such person is paying
concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35AD
would not be available.

A company/ cooperative society would not be eligible for deduction under section 35AD, if it
opted for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE,
respectively.

(iii) Expenditure prior to commencement of operation: Further, the expenditure incurred,

wholly and exclusively, for the purpose of specified business prior to commencement of
operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business.

The amount incurred prior to commencement should be capitalized in the books of account
of the assessee on the date of commencement of its operations.

(iv) Conditions to be fulfilled: For claiming deduction under section 35AD, the specified
business should fulfill the following conditions –

General Conditions:
To be fulfilled by every specified business
(i) it should not be set up by splitting up, or the reconstruction, of a business already
in existence;
(ii) it should not be set up by the transfer to the specified business of machinery or
plant previously used for any purpose;
In order to satisfy this condition, the total value of the plant or machinery so
transferred should not exceed 20% of the value of the total plant or machinery
used in such specified business.
For the purpose of this condition, machinery or plant would not be regarded as
previously used if it had been used outside India by any person other than the
assessee provided the following conditions are satisfied:
(a) such plant or machinery was not used in India at any time prior to the date
of its installation by the assessee;
(b) the plant or machinery was imported into India from a foreign country;
(c) no deduction in respect of depreciation of such plant or machinery has
been allowed to any person at any time prior to the date of installation by
the assessee.

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Conditions required to be fulfilled by certain specified businesses:

I. Business of laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including storage facilities being an
integral part of such network
(i) Such business should be owned by a company formed and registered in India
under the Companies Act, 1956 7 or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any Central
or State Act;
(ii) It should have been approved by the Petroleum and Natural Gas Regulatory Board
and notified by the Central Government in the Official Gazette
(iii) It should have made not less than such proportion of its total pipeline capacity
available for use on common carrier basis by any person other than the assessee
or an associated person.
(iv) It should fulfill any other prescribed condition.
II. Business of developing or operating and maintaining or developing,
operating and maintaining a new infrastructure facility
(i) The business should be owned by a company registered in India or by a consortium
of such companies or by an authority or a board or corporation or any other body
established or constituted under any Central or State Act.
(ii) The entity should have entered into an agreement with the Central Government or
a State Government or a local authority or any other statutory body for developing
or operating and maintaining or developing, operating and maintaining, a new
infrastructure facility.
(v) No deduction under section 10AA or Chapter VI-A under the heading “C.-Deductions
in respect of certain incomes”: Where a deduction under this section is claimed and
allowed in respect of the specified business for any assessment year, no deduction under
the provisions of Chapter VI-A under the heading “C - Deductions in respect of certain
incomes” or section 10AA is permissible in relation to such specified business for the same
or any other assessment year.
Correspondingly, section 80A has been amended to provide that where a deduction under
any provision of this Chapter under the heading “C – Deductions in respect of certain
incomes” is claimed and allowed in respect of the profits of such specified business for any
assessment year, no deduction under section 35AD is permissible in relation to such
specified business for the same or any other assessment year.

In short, once the assessee has claimed the benefit of deduction under section
35AD for a particular year in respect of a specified business, he cannot claim benefit under
Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” or section
10AA, for the same or any other year and vice versa.

7
Now Companies Act, 2013

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.89

(vi) No deduction allowable under the Act in respect of expenditure for which deduction
allowed under this section: The assessee cannot claim deduction in respect of such
expenditure incurred for specified business under any other provision of the Income-tax Act,
1961 in the current year or under this section for any other year, if the deduction has been
claimed or opted by him and allowed to him under section 35AD.
(vii) Date of Commencement of specified businesses:
S. Specified business Date of commencement
No. of operations
1. Laying and operating a cross country natural gas on or after 1st April, 2007
pipeline network for distribution, including storage
facilities being an integral part of such network
2. (a) building and operating anywhere in India, a on or after 1st April, 2010
hotel of two-star or above category as
specified by the Central Government
(b) building and operating a hospital with at least
100 beds for patients
(c) notified scheme for slum redevelopment or
rehabilitation housing projects
3. (a) notified scheme for affordable housing on or after 1st April, 2011
projects and
(b) production of fertilizer in a new plant or in a
newly installed capacity in an existing plant
4. (a) setting up and operating an inland container on or after 1st April, 2012
depot or a container freight station notified or
approved under the Customs Act, 1962,
(b) bee-keeping and production of honey and
beeswax and
(c) setting up and operating a warehousing
facility for storage of sugar
5. (a) laying and operating a slurry pipeline for the on or after 1st April, 2014
transportation of iron ore or
(b) setting up and operating a semi-conductor
wafer fabrication manufacturing unit
6. developing or operating and maintaining or on or after 1st April, 2017
developing, operating and maintaining, any
infrastructure facility
7. In any other case, namely, setting and operating - on or after 1st April, 2009
(a) “cold-chain” facilities for specified products or
(b) warehousing facilities for storing agricultural
produce

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(viii) Meaning of certain terms

Term Meaning
Cold chain A chain of facilities for storage or transportation of agricultural and
facility forest produce, meat and meat products, poultry, marine and dairy
products, products of horticulture, floriculture and apiculture and
processed food items under scientifically controlled conditions including
refrigeration and other facilities necessary for the preservation of such
produce.
Associated In relation to the assessee means a person—
person (i) who participates directly or indirectly or through one or more
intermediaries in the management or control or capital of the
assessee;
(ii) who holds, directly or indirectly, shares carrying not less than
26% of the voting power in the capital of the assessee;
(iii) who appoints more than half of the Board of directors or
members of the governing board, or one or more executive
directors or executive members of the governing board of the
assessee; or
(iv) who guarantees not less than 10% of the total borrowings of the
assessee.
Infrastructure (i) A road including toll road, a bridge or a rail system.
facility (ii) A highway project including housing or other activities being an
integral part of the highway project.
(iii) A water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management
system.
(iv) A port, airport, inland waterway, inland port or navigational
channel in the sea.
(ix) Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction under section 35AD in respect of a specified
business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD.
Such loss can, however, be carried forward indefinitely for set-off against profits of the
same or any other specified business but the assessee has to file return of income on or
before the due date of filling return of income under section 139 for carry forward of losses
from specified business.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.91

Example:
A assessee can therefore, set-off the losses of a hospital or hotel which begins to operate
after 1st April, 2010 and which is eligible for deduction section 35AD, against the profits of
the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel
(of two-star or above category) started before 1st April, 2010, even if the latter is not eligible
for deduction under section 35AD.

ILLUSTRATION 7
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of
food grains, sugar and edible oil on 1.4.2025. He incurred capital expenditure of ` 80 lakh, ` 60
lakh and ` 50 lakh, respectively, on purchase of land and building during the period January, 2025
to March, 2025 exclusively for the above businesses, and capitalized the same in its books of
account as on 1st April, 2025. The cost of land included in the above figures is ` 50 lakh, ` 40 lakh
and ` 30 lakh, respectively. During the P.Y. 2025-26, he incurred capital expenditure of ` 20 lakh,
` 15 lakh & ` 10 lakh, respectively, for extension/ reconstruction of the building purchased and
used exclusively for the above businesses.
The profits from the business of setting up a warehousing facility for storage of food grains, sugar
and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2026-27
is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs, respectively. Assume in respect of expenditure incurred,
the payments are made by account payee cheque or use of ECS through bank account.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2026-27 and the loss to be carried forward, assuming that Mr. A is exercising the option of
shifting out of the default tax regime provided under section 115BAC(1A) and has fulfilled all the
conditions specified for claim of deduction under section 35AD and wants to claim deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. –
Deductions in respect of certain incomes”.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2026-27
Particulars ` (in lakhs)
Profit from business of setting up of warehouse for storage of edible oil (before 31
providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or profession” 28

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 3.92 DIRECT TAX LAWS

Computation of income/loss from specified business under section 35AD

Particulars Food Sugar Total

Grains
` (in lakhs)
(A) Profits from the specified business of setting up a 16 14 30
warehousing facility (before providing deduction under
section 35AD)
Less: Deduction under section 35AD
(B) Capital expenditure incurred prior to 1.4.2025 (i.e., prior to
commencement of business) and capitalized in the books
of account as on 1.4.2025 (excluding the expenditure
incurred on acquisition of land) = ` 30 lakh (` 80 lakh –
` 50 lakh) and ` 20 lakh (` 60 lakh – ` 40 lakh) 30 20 50

(C) Capital expenditure incurred during the P.Y.2025-26 20 15 35

(D) Total capital expenditure (B + C) 50 35 85
(E) Deduction under section 35AD
100% of capital expenditure (food grains/sugar) 50 35 85
Total deduction u/s 35AD for A.Y.2026-27 50 35 85
(F) Loss from the specified business of setting up and
operating a warehousing facility (after providing for
deduction under section 35AD) to be carried forward
(34) (21) (55)
as per section 73A (A-E)

Notes:
(i) Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2026-27
in respect of specified business of setting up and operating a warehousing facility for storage
of sugar and setting up and operating a warehousing facility for storage of agricultural
produce where operations are commenced on or after 01.04.2012 or on or after 01.04.2009,
respectively.

(ii) However, since setting up and operating a warehousing facility for storage of edible oils is not
a specified business, Mr. A is not eligible for deduction under section 35AD in respect of
capital expenditure incurred in respect of such business.

(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use for more
than 180 days during the P.Y. 2025-26.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.93

(iv) Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ` 55 lakh from the specified businesses of setting up and
operating a warehousing facility for storage of food grains and sugar cannot be set-off against
the profits of ` 28 lakh from the business of setting and operating a warehousing facility for
storage of edible oils, since the same is not a specified business. Such loss can, however, be
carried forward indefinitely for set-off against profits of the same or any other specified
business provided Mr. A file his return of income on or before the due date as specified
u/s 139.
ILLUSTRATION 8
XYZ Ltd. commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu
on 1.4.2025. The company incurred capital expenditure of ` 50 lakh during the period January,
2025 to March, 2025 exclusively for the above business, and capitalized the same in his books of
account as on 1st April, 2025. Further, during the P.Y. 2025-26, it incurred capital expenditure of
` 2 crore (out of which ` 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2026-27, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim of deduction
under section 35AD and opted for claiming deduction under section 35AD; and has not claimed
any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain
incomes”. The company is not opting for the concessional tax regime under section 115BAA.
The profits from the business of running this hotel (before claiming deduction under section 35AD) for
the A.Y.2026-27 is ` 25 lakhs. Assume that the company also has another existing business of
running a four-star hotel in Coimbatore, which commenced operations fifteen years back, the profits
from which are ` 120 lakhs for the A.Y.2026-27. Also, assume that expenditure incurred during the
previous year 2025-26 were paid by account payee cheque or use of ECS through bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2026-27

Particulars ` (in lakhs)

Profits from the specified business of new hotel in Madurai (before providing 25
deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2025-26 (excluding the
expenditure incurred on acquisition of land) = ` 200 lakhs – ` 150 50 lakh
lakhs

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 3.94 DIRECT TAX LAWS

Capital expenditure incurred prior to 1.4.2025 (i.e., prior to

commencement of business) and capitalized in the books of account
as on 1.4.2025 50 lakh
Total deduction under section 35AD for A.Y.2026-27 100
Loss from the specified business of new hotel in Madurai (75)
Profit from the existing business of running a hotel in Coimbatore 120
Net profit from business after set-off of loss of specified business against profits
of another specified business under section 73A 45

(x) Transfer of hotel built by the assessee: Where the assessee builds a hotel of two-star or
above category as classified by the Central Government and subsequently, while continuing
to own the hotel, transfers the operation of the said hotel to another person, the assessee
shall be deemed to be carrying on the specified business of building and operating a hotel.
Therefore, he would be eligible to claim investment-linked tax deduction under section
35AD.

Therefore, in effect, the assessee shall be deemed to be carrying on the

specified business of building and operating hotel if –
(i) The assessee builds a hotel of two-star or above category;
(ii) Thereafter, he transfers the operation of the hotel to another person;
(iii) He, however, should continue to own the hotel.

(xi) Other conditions contained under section 35AD

S. Particulars Condition
No.
1. Transfer of goods Where any goods or services held for the purposes of the
and services specified business are transferred to any other business
carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the
market value of the goods or services then the profits and
gains of the specified business shall be computed as if the
transfer was made at market value.
Market value means the price such goods or services would
ordinarily fetch in the open market, subject to statutory or
regulatory restrictions, if any.
2. Close connection Where due to the close connection between the assessee
between assessee and the other person or for any other reason, it appears to

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.95

and any other the Assessing Officer that the profits of specified business is
person increased to more than the ordinary profits, the Assessing
Officer shall compute the amount of profits of such eligible
business on a reasonable basis for allowing the deduction.
2. Audit of accounts The deduction shall be allowed to the assessee only if the
accounts of the assessee for the relevant previous year
have been audited by a chartered accountant and the
assessee furnishes the audit report in the prescribed form,
duly signed and verified by such accountant along with his
return of income.
3. Asset to be used Section 35AD(7A) provides that any asset in respect of
for specified which a deduction is claimed and allowed under section
business for eight 35AD shall be used only for the specified business for a
years period of eight years beginning with the previous year in
which such asset is acquired or constructed.
4. Asset demolished, destroyed, discarded or transferred for which a deduction
has been allowed
If any asset on which a deduction under section 35AD has been claimed and
allowed, is demolished, destroyed, discarded or transferred, the sum received or
receivable for the same is chargeable to tax under clause (vii) of section 28.
This does not take into account a case where asset on which deduction under
section 35AD has been claimed is used for any purpose other than the specified
business by way of a mode other than that specified above.
5. Asset used for any other business other than specified business during 8
years [Section 35AD(7B)]
If asset is used for any purpose other than the specified business during 8
years beginning with the previous year in which such asset is acquired, the total
amount of deduction so claimed and allowed in any previous year(s) in respect of
such asset, as reduced by the amount of depreciation allowable in accordance with
the provisions of section 32 as if no deduction had been allowed under section
35AD, shall be deemed to be income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset
is so used.
In such a case, as per the proviso to Explanation 13 to Section 43(1), the actual
cost of such asset for the assesse shall be the actual cost as reduced by amount of
depreciation would have been allowable had the asset been used for the purpose
of business since the date of its acquisition.
However, the deeming provision under sub-section (7B) shall not be applicable to a
company which has become a sick industrial company under section 17(1) of the
Sick Industrial Companies (Special Provisions) Act, 1985, during the intervening
period of eight years specified in sub-section (7A).

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ILLUSTRATION 9
ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2024 and it claimed deduction of ` 100 lakhs incurred on
purchase of two buildings for ` 50 lakhs each (for operating a warehousing facility for storage of
sugar) under section 35AD for A.Y. 2025-26. However, in February, 2026, Unit A transferred one
of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of ABC Ltd.
SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lakhs was claimed under section
35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-
specified business in the P.Y.2025-26, the deeming provision under section 35AD(7B) is attracted
during the A.Y. 2026-27.
Particulars `
Deduction allowed under section 35AD for A.Y.2025-26 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2025-26 [10% of ` 50 lakhs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

ABC Ltd., however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation
under section 32 on the building in Unit B for A.Y. 2026-27. For the purpose of claiming
depreciation on building in Unit B, the actual cost of the building would be:
Particulars `
Actual cost to the assesse 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2025-26 [10% of ` 50 lakhs] 5,00,000
Actual cost in the hands of ABC Ltd. in respect of building in Unit B 45,00,000

(10) Contributions for Rural Development [Section 35CCA]

This section allows a deduction of the following payment or contribution made by the assessee
during the previous year to:
(1) Notified rural development fund - Payment to a rural development fund set up and
notified by the Central Government.
(2) Notified National Urban Poverty Eradication Fund - Payments made to “National Urban
Poverty Eradication Fund” (NUPEF) set up and notified by the Central Government.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.97

No other deduction - It has been specifically provided that in every case where any deduction
under this section is claimed by the assessee and allowed to him for any assessment year in
respect of any expenditure incurred by way of payment of contribution to such notified fund, no
deduction in respect of the same expenditure can again be claimed by the assessee under any
other relevant provision for the same or any other assessment year.
(11) Deduction in respect of expenditure incurred on notified agricultural extension
project [Section 35CCC]
(i) Eligible project and Quantum of Deduction: In order to incentivize the business entities
to provide better and effective agriculture extensive services, section 35CCC provides a
deduction of a sum equal to expenditure incurred by an assessee on agricultural extension
project in accordance with the prescribed guidelines.
(ii) No other deduction: In case deduction in respect of such expenditure is allowed under this
section then, no deduction in respect of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.
(iii) Project must be notified: The agricultural extension project eligible for this deduction shall
be notified by the CBDT.
The agricultural extension project shall be considered for notification if it fulfils all of the
following conditions, namely:—
(a) the project shall be undertaken by an assessee for training, education and guidance
of farmers;
(b) the project shall have prior approval of the Ministry of Agriculture, Government of India;
and
(c) an expenditure (not being expenditure in the nature of cost of any land or building)
exceeding the amount of ` 25 lakhs is expected to be incurred for the project.

Components of expenditure: All expenses (not being expenditure in the nature of cost
of any land or building), as reduced by the amount received from beneficiary, if any,
incurred wholly and exclusively for undertaking an eligible agricultural extension project
shall be eligible for deduction under section 35CCC.
However, expenditure incurred on the agricultural extension project which is
reimbursed or reimbursable to the assessee by any person, whether directly or
indirectly, shall not be eligible for deduction under section 35CCC.

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(iv) Conditions for claiming deduction: Deduction in respect of expenditure incurred for
notified agricultural extension project would be available, if

♦ assessee maintain separate books of account of such agricultural extension project

and get such books of account audited by an Accountant and
♦ furnish the following on or before the due date of furnishing the return of income to
the Commissioner of Income-tax or Director of Income-tax, as the case may be :-
 the audited statement of accounts of the agricultural extension project along
with the audited report and amount of deduction claimed under this section,
 a note on agricultural project undertaken and programme of agricultural
extension project to be undertaken during the current year and financial
allocation for such programme and

 a certificate from Ministry of Agriculture, Government of India, regarding the

genuineness of such project.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction u/s 35CCC would be available only if such person exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A). If such person is
paying concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35CCC
would not be available.

A company/ cooperative society would not be eligible for deduction under section 35CCC, if it
opted for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE,
respectively.
(12) Deduction in respect of expenditure incurred by companies on notified skill
development project [Section 35CCD]
(i) Quantum of Deduction: In order to encourage companies to invest on skill development
projects in the manufacturing sector, section 35CCD provides for a deduction of a sum
equal to the expenditure (not being expenditure in the nature of cost of any land or building)
on skill development project incurred by the company in accordance with the prescribed
guidelines. However, expenditure incurred on the notified skill development project which is
reimbursed or reimbursable to the company by any person, whether directly or indirectly,
shall not be eligible for deduction under section 35CCD.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.99

(ii) No other deduction allowed: In case deduction in respect of such expenditure is allowed
under this section then, no deduction of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.
(iii) Only notified projects are eligible: The skill development project eligible for this
deduction shall be notified by the CBDT.

A skill development project would be considered for notification if it is undertaken by an

eligible company (a company engaged in the business of manufacture or production of any
article or thing, not being beer, wine and other alcoholic spirits and tobacco and tobacco
preparations or engaged in providing specified services) and the project is undertaken in
separate facilities in a training institute.
Skill development project in respect of existing employees of the company, however, would
not be eligible for notification, where the training of such employees commences after six
months of their recruitment.
Further, the deduction would be available, if the company undertaking such project
- maintain separate books of account of the skill development project and get such
books of account audited by an accountant.
- furnish the audited statement of accounts of the skill development project along with
the audited report and amount of deduction claimed under this section, to the
Commissioner of Income-tax or Director of Income-tax, as the case may be.

Note - A company would not be eligible for deduction under section 35CCD, if it opted for the
special provisions of section 115BAA/115BAB.

(13) Amortisation of Preliminary Expenses [Section 35D]

(i) Nature of expenditure: Section 35D provides for the amortisation of preliminary expenses
incurred by Indian companies and other resident non-corporate taxpayers for the
establishment of business concerns or the expansion of the business of existing concerns.
(ii) Applicable: This section applies
(a) only to Indian companies and resident non-corporate assessees;
(b) in the case of new companies to expenses incurred before the commencement of the
business;

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(c) in the case of extension of an existing undertaking to expenses incurred till the
extension is completed, i.e., in the case of the setting up of a new unit - expenses
incurred till the new unit commences production or operation.
(iii) Amount eligible for deduction: Such preliminary expenditure incurred shall be amortised
over a period of 5 years. In other words, 1/5th of such expenditure is allowable as a
deduction for each of the five successive previous years beginning with the previous year in
which the business commences or, the previous year in which the extension of the
undertaking is completed or the new unit commences production or operation, as the case
may be.
(iv) Eligible expenses - The following expenditure are eligible for amortisation:
(I) Expenditure in connection with –
(a) the preparation of feasibility report
(b) the preparation of project report;
(c) conducting market survey or any other survey necessary for the business of
the assessee;
(d) engineering services relating to the assessee’s business;
The assessee has to furnish a statement containing the particulars of above
expenditure within one month prior to the due date for furnishing the return of income
as specified under section 139(1) to the Principal Director General of Income-tax
(Systems) or the Director General of Income-tax (Systems), as the case may be, or
any person authorised by the Principal Director General of Income-tax (Systems) or
Director General of Income-tax (Systems) in the Form No. 3AF in prescribed manner
for each previous year [Rule 6ABBB].
(II) legal charges for drafting any agreement between the assessee and any other
person for any purpose relating to the setting up to conduct the business of
assessee.
(III) Where the assessee is a company, in addition to the above, expenditure incurred –
(f) by way of legal charges for drafting the Memorandum and Articles of
Association of the company;
(g) on printing the Memorandum and Articles of Association;

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.101

(h) by way of fees for registering the company under the Companies Act; 1956 8,
(i) in connection with the issue, for public subscription, of the shares in or
debentures of the company, being underwriting commission, brokerage and
charges for drafting, printing and advertisement of the prospectus; and
(IV) Such other items of expenditure (not being expenditure qualifying for any allowance
or deduction under any other provision of the Act) as may be prescribed by the
Board for the purpose of amortisation. However, the Board, so far, has not
prescribed any specific item of expense as qualifying for amortisation under this
clause.
(v) Overall Limits - The maximum aggregate amount of the qualifying expenses that can be
amortised is
In case of resident non-corporate assessee - 5% of the cost of the project
In the case of an Indian company – 5% of the cost of the project or, at the option of the
company, 5% of the capital employed in the business of the company, whichever is higher.
The excess, if any, of the qualifying expenses shall be ignored.

Amount of • 5% of cost of
deduction
• 5% of the cost project Whichever is
higher

of the project • 1/5th of qualifying OR

limit
• for each five • 5% of capital
successive years employed
In case of resident non-
corporate assessees
In case of Indian
companies

8
Now Companies Act, 2013

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 3.102 DIRECT TAX LAWS

(vi) Meaning of certain terms:

Terms Meaning
Cost of the (i) Expenses incurred before the commencement of business: The
project actual cost of the fixed assets, being land, buildings, leaseholds,
plant, machinery, furniture, fittings, railway sidings (including
expenditure on the development of land, buildings) which are
shown in the books of the assessee as on the last day of the
previous year in which the business of the assessee commences;
(ii) Expenses incurred for extension of the business or setting up of
a new unit: The cost of the fixed assets being land, buildings,
leaseholds, plant, machinery, furniture, fittings, and railway sidings
(including expenditure on the development of land and buildings)
which are shown in the books of the assessee as on the last day of
the previous year in which the extension of the undertaking is
completed or, as the case may be, the new unit commences
production or operation, in so far as such assets have been
acquired or developed in connection with the extension of the
undertaking or the setting up of the new unit.
Capital (i) In the case of new company: The aggregate of the issued share
employed capital, debentures and long-term borrowings as on the last day of
in the the previous year in which the business of the company
business commences;
of the (ii) In the case of extension of the business or the setting up of a
company new unit: The aggregate of the issued share capital, debentures,
and long-term borrowings as on the last day of the previous year in
which the extension of the undertaking is completed or, as the case
may be, the unit commences production or operation in so far as
such capital, debentures and long-term borrowings have been
issued or obtained in connection with the extension of the
undertaking or the setting up of the new undertaking or the setting
up of the new unit of the company.
Long-term (i) Any moneys borrowed in India by the company from the
borrowing Government or the Industrial Finance Corporation of India or the
Industrial Credit and Investment Corporation of India or any other
financial institution eligible for deduction under section 36(1)(viii) or
any banking institution, or
(ii) any moneys borrowed or debt incurred by it in a foreign country in
respect of the purchase outside India of plant and machinery where
the terms under which such moneys are borrowed or the debt is
incurred provide for the repayment thereof during a period of not
less than 7 years.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.103

(vii) Audit of accounts: In cases where the assessee is a person other than a company or a co-
operative society, the deduction would be allowable only if the accounts of the assessee for
the year or years in which the expenditure is incurred have been audited by a Chartered
Accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1); and the assessee has, by that date, furnished for
the first year in which the deduction is claimed, the report of such audit in the prescribed
form duly signed and verified by the auditor and setting forth such other particulars as may
be prescribed.
Particulars Due date of filing of return Specified Date

Assessees (other 31st October of the relevant 30th September of the relevant
than a company) A.Y. A.Y.
subject to tax
audit For A.Y.2026-27, on or before For A.Y.2026-27, on or before
31st October, 2026 30th September, 2026

(viii) Special provisions for amalgamation and demerger- Where the undertaking of an Indian
company is transferred, before the expiry of the period of five years, to another Indian
company under a scheme of amalgamation, the aforesaid provisions will apply to the
amalgamated company as if the amalgamation had not taken place. But no deduction will
be admissible in the case of the amalgamating company for the previous year in which the
amalgamation takes place.
Likewise, in the scheme of demerger where the resulting company will be able to claim
amortisation of preliminary expenses as if demerger had not taken place, and no deduction
shall be allowed to the demerged company in the year of demerger.
(ix) No other deduction under any provision of the Act: It has been clarified that in case
where a deduction under this section is claimed and allowed for any assessment year in
respect of any item of expenditure, the expenditure in respect of which deduction is so
allowed shall not qualify for deduction under any other provision of the Act for the same or any
other assessment year.
(14) Amortisation of expense for Amalgamation/demerger [Section 35DD]
(i) Nature of expenditure: This section applies where an assessee, being an Indian company,
incurs expenditure, wholly and exclusively for the purpose of amalgamation or demerger.

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 3.104 DIRECT TAX LAWS

(ii) Amount of deduction: The assessee shall be allowed a deduction equal to one-fifth of
such expenditure for five successive previous years beginning with the previous year in
which amalgamation or demerger takes place.
(iii) No other deduction under any provision of the Act: No deduction shall be allowed in
respect of the above expenditure under any other provisions of the Act.
(15) Amortisation of expenditure incurred under voluntary retirement scheme
[Section 35DDA]
(i) Nature of expenditure: This section applies to an assessee who has incurred expenditure
in any previous year in the form of payment to any employee in connection with his
voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.
(ii) Amount of deduction: The amount of deduction allowable is one-fifth of the amount
paid for that previous year, and the balance in four equal installments in the four
immediately succeeding previous years.
(iii) Transfer of business: In case of amalgamation, demerger, reorganisation or succession of
business during the intervening period of the said 5 years, the benefit of deduction will be
available to the “new company” for the balance period including the year in which such
amalgamation/ demerger/ reorganisation or succession takes place.
Conditions to be satisfied - This will be applicable in the following situations:
(i) where an Indian company is transferred to another Indian company in a scheme of
amalgamation;
(ii) where the undertaking of an Indian company is transferred to another company in a
scheme of demerger;
(iii) where due to a re-organisation of business, a firm is succeeded by a company
fulfilling the conditions in section 47(xiii) or a proprietary concern is succeeded by a
company fulfilling the conditions in section 47(xiv);
(iv) where a private company or unlisted company is succeeded by LLP fulfilling the
conditions laid down in section 47(xiiib).
In the above cases, the deduction shall be available to the successor company as such
deduction would have applied to the original entity if such transfer had not taken place at all.
It is further provided that no deduction shall be available to the original entity being the
amalgamating company, demerged company, or the firm or proprietary concern or private
company (as the case may be) for the previous year in which the amalgamation,
demerger or succession takes place.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.105

(iv) No other deduction under any provision of the Act: No deduction shall be allowed in
respect of the above expenditure under any other provision of the Act.
(16) Amortisation of expenses for prospecting and development of certain minerals
[Section 35E]
(i) Eligible assessee: This provision applies only to expenditure incurred by an Indian
company or other resident non-corporate taxpayer. In order to qualify for amortisation, the
assessee should be engaged in any operations relating to prospecting for or the extraction
or production of any mineral.
(ii) Eligible expenses - The nature and kind of expenditure qualifying for amortisation are –
(i) It must have been incurred during the year of commercial production and any one or
more of the four years immediately preceding that year,
(ii) It must be incurred wholly and exclusively on any operations relating to the pros-
pecting for any mineral or group of certain minerals listed in the Seventh Schedule of
the Income-tax Act, 1961 or on the development of a mine or other natural deposit of
any mineral or group of associated minerals.

(iii) Expenditure not allowed for deduction - Any portion of the expenditure which is met
directly or indirectly by any other persons or authority and the sale, salvage, compensation
or insurance moneys realised by the assessee in respect of any property or rights brought
into existence as a result of the expenditure should be excluded from the amount of
expenditure qualifying for amortisation.

Further, specific provision has been made to the effect that the following items of expenses
do not qualify for amortisation at all viz.:

(a) Expenditure incurred on the acquisition of the site of the source of any minerals or
group of associated minerals stated above or of any right in or over such site;

(b) Expenditure on the acquisition of the deposits of minerals or group of associated

minerals referred to above or to any rights in or over such deposits; or

(c) Expenditure of a capital nature in respect of any building, machinery, plant or

furniture for which depreciation allowance is permissible under section 32.
(iv) Amount of deduction - The assessee will be allowed for each of ten relevant previous
years, a deduction of an amount equal to one-tenth of the aggregate amount of the
qualifying expenditure.

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 3.106 DIRECT TAX LAWS

Thus, the deduction to be allowed for any relevant previous year is

(i) one-tenth of the expenditure or
(ii) such amount as will reduce to nil the income of the previous year arising from the
commercial exploration of any minerals or other natural deposit of the mineral or minerals
in a group of associated minerals in respect of which the expenditure was incurred,

whichever figure is less.

The amount of the deduction admissible in respect of any relevant previous year to the
extent to which it remains unallowed, shall be carried forward and added to the installment
relating to the previous year next following and shall be deemed to be a part of the
installment and so on, for ten previous years beginning from the year of commercial
production.

(v) Meaning of certain terms:

Term Meaning
Operation relating Any operation undertaken for the purpose of exploiting, locating
to prospecting or proving deposits of any minerals and includes any such
operation which proves to be infructuous or abortive.
Year of commercial The previous year in which as a result of any operation relating
production to prospecting or commercial production of any material or one
or more of the minerals in a group of associated minerals
specified in Part A or Part B, respectively, of the Seventh
Schedule to Act actually commences.
Relevant previous Ten previous years beginning with the year of commercial pro-
year duction

(vi) Audit of accounts: The provisions with regard to audit of accounts relating to the qualifying
expenditure are similar to those applicable for amortisation of preliminary expenses
discussed earlier.
(vii) Special provisions for amalgamation or demerger: In the case of amalgamation, such
deduction would continue to be admissible to the amalgamated company as if the
amalgamation had not taken place.
Likewise, in case of demerger where such deduction can be availed of by the resulting company
as if the demerger had not taken place.
Further, no deduction will be admissible to the amalgamating/ demerged company in the
year of amalgamation/ demergers.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.107

(viii) No other deduction allowed in respect of the expenditure for which deduction is
claimed under this section: Where a deduction is claimed and allowed on account of
amortisation of the expenses under section 35E in any year in respect of any expenditure,
the expenditure in respect of which deduction is so allowed shall not again qualify for
deduction from the profits and gains under any other provisions of the Act for the same or
any other assessment year.
(17) Other Deductions [Section 36]
This section authorises deduction of certain specific expenses. The items of expenditure and the
conditions under which such expenditures are deductible are:
(1) Insurance premia paid [Section 36(1)(i)] - If insurance policy has been taken out against
risk, damage or destruction of the stock or stores of the business or profession, the premia
paid is deductible. But the premium in respect of any insurance undertaken for any other
purpose is not allowable under the clause.
(2) Insurance premia paid by a Federal Milk Co-operative Society [Section 36(1)(ia)] -
Deduction is allowed in respect of the amount of premium paid by a Federal Milk Co-
operative Society to effect or to keep in force an insurance on the life of the cattle owned by
a member of a co-operative society, being a primary society engaged in supply of milk
raised by its members to such Federal Milk Co-operative Society. The deduction is
admissible without any monetary or other limits.
(3) Premia paid by employer for health insurance of employees [Section 36(1)(ib)] - This
clause seeks to allow a deduction to an employer in respect of premia paid by him by any
mode of payment other than cash to effect or to keep in force an insurance on the health of
his employees in accordance with a scheme framed by
(i) the General Insurance Corporation of India and approved by the Central
Government; or
(ii) any other insurer and approved by the IRDA.
(4) Bonus and Commission [Section 36(1)(ii)] - These are deductible in full provided the sum
paid to the employees as bonus or commission shall not be payable to them as profits or
dividends if it had not been paid as bonus or commission.
It is a provision intended to safeguard against a private company or an association
escaping tax by distributing a part of its profits by way of bonus amongst the members, or
employees of their own concern instead of distributing the money as dividends or profits.

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 3.108 DIRECT TAX LAWS

(5) Interest on borrowed capital [Section 36(1)(iii)] - Deduction of interest is allowed in

respect of capital borrowed for the purposes of business or profession in the computation of
income under the head "Profits and gains of business or profession".
Capital may be borrowed for several purposes like for acquiring a capital asset, or to pay off
a trading debt or loss etc. The scope of the expression ‘for the purposes of business’ is very
wide. Capital may be borrowed in the course of the existing business as well as for
acquiring assets for extension of existing business.
As per proviso to section 36(1)(iii), deduction in respect of any amount of interest paid, in
respect of capital borrowed for acquisition of new asset (whether capitalised in the books of
account or not) for any period beginning from the date on which the capital was borrowed
for acquisition of the asset till the date on which such asset was first put to use shall not be
allowed.

Explanation 8 to section 43(1) clarifies that interest relatable to a period after the asset is
first put to use cannot be capitalised. Interest in respect of capital borrowed for any period
from the date of borrowing to the date on which the asset was first put to use should,
therefore, be capitalised.

Note: In the case of genuine business borrowings, the department cannot disallow any part
of the interest on the ground that the rate of interest is unreasonably high except in cases
falling under section 40A.

(6) Discount on Zero Coupon Bonds (ZCBs) [Section 36(1)(iiia)] - Section 36(1)(iiia)
provides deduction for the discount on ZCB on pro rata basis having regard to the period of
life of the bond to be calculated in the manner prescribed.

Term Meaning
Discount Difference of the amount received or receivable by an infrastructure
capital company/ infrastructure capital fund/ public sector company/
scheduled bank on issue of the bond and the amount payable by such
company or fund or bank on maturity or redemption of the bond.
Period of life The period commencing from the date of issue of the bond and ending on
of the bond the date of the maturity or redemption.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.109

Meaning of Infrastructure Capital Company [Section 2(26A)]

“Infrastructure capital company" means such company which makes investments by way of
acquiring shares or providing long-term finance to -
(1) any enterprise or undertaking wholly engaged –
(a) in the business referred to in section 80-IA(4) i.e. business of

(i) developing/ operating and maintaining/ developing, operating and

maintaining any infrastructure facility fulfilling the specified conditions
(ii) providing telecom services, whether basic or cellular

(iii) developing, developing and operating or maintaining and operating an

industrial park or special economic zone notified by the Central
Government
(iv) generating, transmitting or distributing power or undertaking substantial
renovation and modernization of the existing network of transmission
or distribution lines.
(b) in the business referred to in section 80-IAB(1) i.e. any business of
developing a SEZ.
(2) an undertaking developing and building a housing project referred to in section 80-
IB(10) i.e. approved before 31.3.2008 by a local authority and commences or
commenced development and construction on or after 1.10.98 and completes or
completed development and construction within the time specified.
(3) a project for constructing a hotel of not less than three-star category as classified by
the Central Government or
(4) a project for constructing a hospital with at least 100 beds for patients.
Meaning of Infrastructure Capital Fund [Section 2(26B)]
Infrastructure capital fund means such fund operating under a trust deed registered under
the provisions of the Registration Act, 1908 established to raise monies by the trustees for
investment by way of acquiring shares or providing long-term finance to -
(1) any enterprise or undertaking wholly engaged in the business referred to in section
80-IA(4) or section 80-IAB(1); or

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 3.110 DIRECT TAX LAWS

(2) an undertaking developing and building a housing project referred to in section

80-IB(10); or

(3) a project for constructing a hotel of not less than three star category as classified by
the Central Government; or
(4) a project for constructing a hospital with at least 100 beds for patients.

(7) Contributions to provident and other funds [Section 36(1)(iv) and (v)] - Contribution to
the employees’ recognised provident fund/approved superannuation fund is allowable
subject to the limits laid down for the purpose of recognizing the provident fund or
approving superannuation fund.
Contribution to an approved gratuity fund is allowable subject to the condition that the
gratuity fund should be for exclusive benefit of the employees under an irrevocable trust
The nature of the benefit available to the employees from the fund is not material; it may be
pension, gratuity or provident fund.
(8) Employer’s contribution to the account of the employee under a Pension Scheme
referred to in section 80CCD [Section 36(1)(iva)]
(i) Section 36(1)(iva) to provide that the employer’s contribution to the account of an
employee under a Pension Scheme as referred to in section 80CCD would be
allowed as deduction while computing business income.
(ii) However, deduction would be restricted to 14% of salary of the employee in the
previous year.

(iii) Salary, for this purpose, includes dearness allowance, if the terms of employment so
provide, but excludes all other allowances and perquisites.
(iv) Correspondingly, section 40A(9), which provides for disallowance of any sum paid by an
employer towards contribution to any fund or trust has been amended to exclude from
the scope of its disallowance, contribution by an employer to the pension scheme
referred to in section 80CCD, to the extent to which deduction is allowable under section
36(1)(iva).
ILLUSTRATION 10
X Ltd. contributes 20% of basic salary to the account of each employee under a pension
scheme referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it
forms part of pay of the employees.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.111

Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the
employees aggregate to ` 10 lakh. Would disallowance under section 40A(9) be attracted,
and if so, to what extent?
SOLUTION
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)

Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of `10 lakh) 2,00,000
Less: Permissible deduction under section 36(1)(iva) [14% of (basic
salary plus dearness pay) = 14% of ` 14,00,000 = ` 1,96,000] 1,96,000
Excess contribution disallowed under section 40A(9) 4,000

(9) Amount received by assessee-employer as contribution from his employees towards

their welfare fund to be allowed only if such amount is credited on or before due date
– Section 36(1)(va) and section 57(ia) provide that deduction in respect of any sum
received by the taxpayer as contribution from his employees towards any welfare fund of
such employees will be allowed only if such sum is credited by the taxpayer to the
employee’s account in the relevant fund on or before the due date.

Due date The date by which the assessee is required as an employer to credit such
contribution to the employee’s account in the relevant fund under the
provisions of any law on term of contract of service or otherwise.

As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in
respect of wages of the employees for any particular month shall be paid within 15 days of
the close of every month.
Note - It is clarified that the provisions of section 43B regarding allowability of certain
expenditure in a previous year only on actual payment basis on or before due date of filing
of return of income for relevant assessment year, does not apply and would deemed never
to be applied on employee’s contribution received by employer towards any welfare fund of
such employee. In effect, the extended time upto due date of filing of return for is not
available for credit of employees contribution towards any welfare fund received by the
employer.

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(10) Allowance for animals [Section 36(1)(vi)] – This clause grants an allowance in respect of
animals which have died or become permanently useless.
The amount of the allowance is the difference between the actual cost of the animals and
the price realized on the sale of the animals themselves or their carcasses.
The allowance under the clause would thus recoup to the assessee the entire capital
expenditure in respect of animal.
(11) Bad debts [Section 36(1)(vii) and section 36(2)] – These can be deducted subject to the
following conditions:

(a) The debts or loans should be in respect of a business which was carried on by the
assessee during the relevant previous year.
(b) The debt should have been taken into account in computing the income of the
assessee of the previous year in which such debt is written off or of an earlier
previous year or should represent money lent by the assessee in the ordinary course
of his business of banking or money lending.

I. Deduction under section 36(1)(vii) for bad debts limited to the amount by which
bad debts exceed credit balance in the provision for doubtful debts account
under section 36(1)(viia)

Under section 36(1)(vii), bad debt actually written off as irrecoverable in the books of
account of the assessee is deductible. However, in the case of entities for which
provision for bad and doubtful debts is allowable under section 36(1)(viia), deduction
for bad debts written off under said clause (vii) shall be limited to the amount by
which the bad debt written off exceeds the credit balance in the provision for bad and
doubtful debts account made under section 36(1)(viia). This is provided in the
proviso to section 36(1)(vii).

The CBDT has, clarified vide Circular no. 12/2016, dated 30-05-2016, that claim for
any debt or part thereof in any previous year, shall be admissible under section
36(1)(vii), if it is written off as irrecoverable in the books of accounts of the assessee
for that previous year and it fulfills the conditions stipulated in section 36(2).

However, no such requirement is there in law that the assessee has to establish that
the debt has, in fact, become irrecoverable.

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Further, the provisions of section 36(1)(vii) are subject to the provisions of section
36(2). Section 36(2)(v) provides that where the debt or part thereof relates to
advances made by an assessee, to which section 36(1)(viia) applies, no deduction
shall be allowed unless the assessee has debited the amount of such debt or part of
such debt in that previous year to the provision for bad and doubtful debts account
made under section 36(1)(viia).

Explanation 2 to section 36(1)(vii) states that for the purposes of the proviso to
section 36(1)(vii) and section 36(2)(v), only one account as referred to therein shall
be made in respect of provision for bad and doubtful debts under section 36(1)(viia)
and such account shall relate to all types of advances, including advances made by
rural branches.

Therefore, in the case of an assessee to which section 36(1)(viia) applies, the

amount of deduction in respect of the bad debts actually written off under section
36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit
balance in the provision for bad and doubtful debts account made under section
36(1)(viia) without any distinction between rural advances and other advances.

II. Amount of debt taken into account in computing the income of the assessee
on the basis of notified ICDSs to be allowed as deduction in the previous year
in which such debt or part thereof becomes irrecoverable [Second proviso to
section 36(1)(vii)]

(i) Under section 36(1)(vii), deduction is allowed in respect of the amount of any
bad debt or part thereof which is written off as irrecoverable in the accounts of
the assessee for the previous year.

(ii) Therefore, write off in the books of account is an essential condition for claim
of bad debts under section 36(1)(vii).

(iii) Amount of debt taken into account in computing the income of the assessee
on the basis of notified ICDSs to be allowed as deduction in the previous year
in which such debt or part thereof becomes irrecoverable.

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If a debt, which has not been recognized in the books of account as per the
requirement of the accounting standards but has been taken into account in the
computation of income as per the notified ICDSs, has become irrecoverable, it can
still be claimed as bad debts under section 36(1)(vii) since it shall be deemed that
the debt has been written off as irrecoverable in the books of account by virtue
of the second proviso to section 36(1)(vii). This is because some ICDSs require
recognition of income at an earlier point of time (prior to the point of time such
income is recognised in the books of account). Consequently, if the whole or part of
such income recognised at an earlier point of time for tax purposes becomes
irrecoverable, it can be claimed as bad debts on account of the second proviso to
section 36(1)(vii).

Where the amount of such debt or part thereof has been taken into account in
computing the income of the assessee (on the basis of ICDSs without recording
the same in the accounts)
of the previous year in which such debt (or)
of an earlier previous year
has become irrecoverable

Such debt or part thereof shall be allowed in the previous year in which such debt
or part thereof becomes irrecoverable

(and)
It shall be deemed that such debt or part thereof has been written off as
irrecoverable in the accounts

III. Deduction of differential amount of debts due as bad debts in the year of
recovery, to the extent of deficiency in recovery
If on the final settlement the amount recovered in respect of any debt, where
deduction had already been allowed, falls short of the difference between the debt
due and the amount of debt allowed, the deficiency can be claimed as a deduction
from the income of the previous year in which the ultimate recovery out of the debt is
made. It is permissible for the Assessing Officer to allow deduction in respect of a
bad debt or any part thereof in the assessment of a particular year and subsequently

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.115

to allow the balance of the amount, if any, in the year in which the ultimate recovery
is made, that is to say, when the final result of the process of recovery comes to be
known.
Recovery of a bad debt subsequently [Section 41(4)] - If a deduction has been
allowed in respect of a bad debt under section 36, and subsequently the amount
recovered in respect of such debt is more than the amount due after the allowance
had been made, the excess shall be deemed to be the profits and gains of business
or profession and will be chargeable as income of the previous year in which it is
recovered, whether or not the business or profession in respect of which the
deduction has been allowed is in existence at the time.

Example: For P.Y. 2024-25, bad debts of ` 40,000 was allowed by the Assessing Officer out
of total bad debts of ` 75,000. Subsequently, ` 44,000 is recovered during P.Y. 2025-26.
Actual bad debts of the assessee after recovery = ` 75,000 – ` 44,000 i.e. ` 31,000 but the
bad debts allowed in P.Y. 2024-25 were ` 40,000, so the excess ` 9,000 that was allowed
in P.Y. 2024-25 would be deemed to be the profits and gains of business or profession of
P.Y. 2025-26 and will be chargeable as income of the P.Y. 2025-26 in which it is recovered.

(12) Provision for bad and doubtful debts in cases of specified banks [Section 36(1)(viia)]
(i) A scheduled bank which is not a bank incorporated by or under the laws of a country
outside India or a non-scheduled bank or a co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and rural
development bank, the following deductions will be allowed:
(a) an amount not exceeding 8.5% of the total income (computed before making
any deduction under this clause and Chapter VI-A), and
(b) an amount not exceeding 10% of the aggregate average advances made by the
rural branches of such bank computed in the manner prescribed by the CBDT.
Accordingly, Rule 6ABA prescribed the manner for computation of aggregate
average advance. The aggregate average advances made by the rural
branches of a scheduled bank shall be computed in the following manner–
(i) the amounts of advances made by each rural branch as outstanding at
the end of the last day of each month comprised in the previous year
shall be aggregated separately;

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(ii) the sum so arrived at in the case of each such branch shall be divided
by the number of months for which the outstanding advances have
been taken into account for the purposes of clause (i)
(iii) the aggregate of the sums so arrived at in respect of each of the rural
branches shall be the aggregate average advances made by the rural
branches of the scheduled bank.
Such scheduled bank or a non-scheduled bank shall, at its option, be allowed
in any of the relevant assessment years, deduction in respect of any provision
made by it for any assets classified by the RBI as doubtful assets or loss
assets in accordance with the guidelines issued by it in this behalf, for an
amount not exceeding 5% of the amount of such assets shown in the books of
account of the bank on the last day of the previous year.
Such scheduled bank or a non-scheduled bank shall, at its option, be allowed
a further deduction in excess of the limits specified in the foregoing
provisions, for an amount not exceeding the income derived from redemption
of securities in accordance with a scheme framed by the Central Government.
It is also provided that this deduction shall not be allowed unless such income
has been disclosed in the return of income under the head "Profits and gains
of business or profession".
Meaning of certain terms:
Term Meaning
Scheduled Bank It refers to the State Bank of India or any of its
subsidiaries or any of the nationalised banks and would
also include any other bank which is listed in the
Second Schedule to the Reserve Bank of India Act,
1934.
Non-Scheduled Bank This refers to a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949
which is not a scheduled bank.
Rural branch A branch of a scheduled bank or a non-scheduled bank
situated in a place which has a population of not more
than 10,000 according to the last preceding census of
which the relevant figures have been published before
the first day of the previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.117

Co-operative bank, Shall have the same meaning assigned in Explanation

primary agriculture to section 80P(4).
credit society, primary
co-operative
agricultural and rural
development bank

(ii) Foreign Banks: In the case of foreign banks the deduction will be an amount not
exceeding 5% of the total income (computed before making any deduction under
this clause and Chapter VI-A).
(iii) Public financial institutions: A public financial institution, a State Financial
Corporation and a State Industrial Investment Corporation will be entitled to a
deduction in respect of provision for bad and doubtful debts made out of profits. The
maximum amount to be allowed as a deduction will be limited to 5% of its total
income before making any deduction in respect of the provision for bad and doubtful
debt or in respect of any deduction in Chapter VI-A.
(iv) Non-Banking Financial Companies (NBFCs): Since Non-Banking Financial
Companies (NBFCs) are also engaged in financial lending to different sectors of
society, deduction on account of provision for bad and doubtful debts of an amount
not exceeding 5% of total income (before making any deduction under section
36(1)(viia) and Chapter VI-A) would be allowed in the case of NBFCs also.
Meaning of certain terms:

Terms Meaning
Public Financial Shall have the meaning assigned to it in section 4A of the
Institution Companies Act, 1956 9
State Financial A financial corporation established under section 3 or
Corporation section 3A or an institution notified under section 46 of the
State Financial Corporations Act, 1951.
State Industrial A Government company within the meaning of Section 617
Investment of the Companies Act, 1956 10 engaged in the business of
Corporation providing long-term finance for industrial projects and
eligible for deduction under clause (viii) of this sub-section.

9 Now section 2(72) of the Companies Act, 2013

10 Now section 2(45) of the Companies Act, 2013

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Non-Banking Shall have the same meaning assigned to it in Section 45-

Financial I(f) of the Reserve Bank of India Act, 1934. Accordingly, it
Company means
(i) a financial institution which is a company
(ii) a non-banking institution which is a company and
which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any
other manner, or lending in any manner
(iii) such other non-banking institution or class of such
institutions, as the Bank may, with the previous
approval of the Central Government and by
notification in the Official Gazette, specify.

Provision for bad and doubtful debts in cases of specified banks/FIs/NBFCs

Indian scheduled banks

Non-scheduled banks Foreign Banks
Co-operative banks* Public Financial Institutions
State Financial Corporations
State Industrial Investment
Maximum 8.5% of Total Corporations
Income [before deduction
u/s 36(1)(viia) and Non-Banking Financial Companies
Chapter VI-A]
+
Maximum 5% of Total
Maximum 10% of Income [before
aggregrate average deduction u/s 36(1)(viia)
advances made by and Chapter VI-A]
Rural branches

* other than a primary agricultural credit society or primary co-operative agricultural and rural development bank

(13) Special deduction to specified entities engaged in eligible business [Section 36(1)(viii)]

(i) This section provides deduction in respect of any special reserve created and
maintained by a specified entity.
(ii) Amount of deduction: The quantum of deduction, however, should not exceed
20% of the profits derived from eligible business computed under the head “Profits
and gains of business or profession” (before making any deduction under this
clause) carried to such reserve account.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.119

However, where the aggregate amount carried to such reserve account exceeds
twice the amount of paid up share capital and general reserve, no deduction shall be
allowed in respect of such excess.
In simple terms, quantum of deduction shall be the least of the following
(i) Amount transferred to special reserve
(ii) 20% of profit derived from eligible business (before this deduction)
(iii) 200% of paid up capital and general reserve less aggregate amount carried to
Special Reserve account.
(iii) Eligible business for specified entities: The eligible business for different entities
specified are given in the table below –

Specified entity Eligible business

1. (a) Financial Corporation Business of providing long-term finance
specified in section 4A of for -
the Companies Act, 1956 11 (i) industrial or agricultural
(b) Financial corporation development or
which is a public sector (ii) development of infrastructure facility
company in India; or
(c) Banking company (iii) development of housing in India.
(d) Co-operative bank (other
than a primary agricultural
credit society or a primary
co-operative agricultural
and rural development
bank)
2. A housing finance company Business of providing long-term finance
for the construction or purchase of
residential house in India.
3. Any other financial corporation Business of providing long-term finance
including a public company for development of infrastructure facility
in India.

11 Section 2(72) of the Companies Act, 2013

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 3.120 DIRECT TAX LAWS

(iv) Infrastructure facility has been defined to mean -

(a) (1) an infrastructure facility as defined in the Explanation to clause (i) of
sub-section (4) of section 80-IA i.e.
(i) a road including toll road, a bridge or a rail system;
(ii) a highway project including housing or other activities being an
integral part of the highway project;
(iii) a water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste
management system; and
(iv) a port, airport, inland waterway or inland port or a navigational
channel in the sea

(2) any other public facility of a similar nature as may be notified by the
CBDT in this behalf in the Official Gazette and which fulfils the
prescribed conditions;
Notification of public facilities as infrastructure facility for the
purpose of section 36(1)(viii) [Notification No. 188/2006, dated
20.7.2006]
The following public facilities have been notified by the CBDT as
infrastructure facility for purposes of section 36(1)(viii)-
(i) Inland Container Depot and Container Freight Station notified
under the Customs Act, 1962
(ii) Mass Rapid Transit system
(iii) Light Rail Transit system
(iv) Expressways
(v) Intra-urban or semi-urban roads like ring roads or urban by-
passes or flyovers

(vi) Bus and truck terminals

(vii) Subways
(viii) Road dividers

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.121

(ix) Bulk Handling Terminals which are developed or maintained or

operated for development of rail system

(x) Multilevel Computerized Car Parking.

Conditions to be fulfilled by a public facility to be eligible to be
notified as an infrastructure facility [Notification No.187/2006
dated 20.7.2006]:
Rule 6ABAA has been inserted in the Income-tax Rules, 1962 which
specifies the conditions to be fulfilled by a public facility to be eligible to
be notified as an infrastructure facility in accordance with the
provisions of clause (d) of the Explanation to clause (viii) of sub-
section (1) of section 36. The conditions specified therein are -

(i) it is owned by a company registered in India or by a consortium

of such companies or by an authority or a board or a corporation
or any other body established or constituted under any Central
or State Act;
(ii) it has entered into an agreement with the Central Government
or a State Government or a local authority or any other statutory
body for (a) developing or (b) operating and maintaining or (c)
developing, operating and maintaining a new infrastructure
facility similar in nature to an infrastructure facility referred to in
the Explanation to section 80-IA(4)(i);
(iii) it has started or starts operating and maintaining such
infrastructure facility on or after 1st April, 1995.
(b) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-
section (4) of section 80-IA (i.e. an undertaking providing telecommunication
services, an undertaking developing, developing and operating, maintaining
and operating an industrial park or SEZ notified by the Central Government,
an undertaking generating, distributing or transmitting power, substantial
renovation and modernization of existing network of transmission or
distribution lines); and
(c) an undertaking referred to in sub-section (10) of section 80-IB i.e. an
undertaking developing and building housing projects approved by a local
authority.

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(v) Long term finance - Long-term finance means any loan or advance where the terms
under which moneys are loaned or advanced provide for repayment along with
interest thereof during a period of not less than 5 years.
Amount withdrawal from special reserve [Section 41(4A)] - Where a deduction has been
allowed in respect of any special reserve created and maintain under section 36(1)(viii), and
subsequently the amount is withdrawn from such special reserve then such amount shall be
deemed to be the profits and gains of business or profession and will be chargeable as
income of the previous year in which such amount is withdrawn.

If the amount is withdrawn in a previous year in which the business is no longer in

existence, the taxability would arise in the above manner as though the business is in
existence in that previous year.
(14) Expenses on family planning by a company [Section 36(1)(ix)] - Any expenditure of
revenue nature bona fide incurred by a company for the purpose of promoting family
planning amongst its employees will be allowed as a deduction in computing the company’s
business income;
• Where, the expenditure is of a capital nature, one-fifth of such expenditure will be
deducted in the previous year in which it was incurred and in each of the four
immediately succeeding previous years.
• This deduction is allowable only to companies and not to other assessees.
• The assessee would be entitled to carry forward and set off the unabsorbed part
of the allowance in the same way as unabsorbed depreciation.
The capital expenditure on promoting family planning will be treated in the same way as
capital expenditure for scientific research for purposes of dealing with the profit or loss on
the sale or transfer of the asset including a transfer on amalgamation.
(15) Deduction for expenditure incurred by entities established under any Central, State or
Provincial Act [Section 36(1)(xii)] - Any expenditure (not being in the nature of capital
expenditure) incurred by a corporation or a body corporate, by whatever name called, if –
(i) it is constituted or established by a Central, State or Provincial Act;
(ii) such corporation or body corporate is notified by the Central Government in the
Official Gazette for this purpose having regard to the objects and purposes of the
Act;

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.123

(iii) the expenditure is incurred for the objects and purposes authorised by the Act under
which it is constituted and established.

Accordingly, the Central Government has notified the Oil Industry Development Board for
the purpose of deduction under section 36(1)(xii).
(16) Deduction of contribution by a public financial institution to Credit guarantee fund
trust for small industries [Section 36(1)(xiv)]
(i) Section 36(1)(xiv) provides for deduction of any sum paid by a public financial
institution by way of contribution to such credit guarantee fund trust for small
industries notified by the Central Government in the Official Gazette.
(ii) Public financial institution has the meaning assigned to it in section 4A 12 of the
Companies Act, 1956.
(17) Deduction of securities transaction tax paid [Section 36(1)(xv)] - The amount of
securities transaction tax paid by the assessee during the year in respect of taxable
securities transactions entered into in the course of business shall be allowed as deduction
under section 36 subject to the condition that such income from taxable securities
transactions is included under the head ‘Profits and gains of business or profession’.
Thus, securities transaction tax paid would be allowed as a deduction like any other
business expenditure.
(18) Deduction for commodities transaction tax paid in respect of taxable commodities
transactions [Section 36(1)(xvi)]
(i) Section, 36(1)(xvi) provides that an amount equal to the CTT paid by the assessee in
respect of the taxable commodities transactions entered into in the course of his
business during the previous year shall be allowable as deduction, if the income
arising from such taxable commodities transactions is included in the income
computed under the head “Profits and gains of business or profession”.
(ii) A ‘taxable commodities transaction’ means a transaction of sale of commodity
derivatives or sale of commodity derivatives based on prices or indices of prices of
commodity derivatives or option on commodity derivatives or option in goods in
respect of commodities, other than agricultural commodities, traded in recognised
stock exchange.

12 Section 2(72) of the Companies Act, 2013

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 3.124 DIRECT TAX LAWS

(iii) A “commodity derivative” means –

(a) A contract for delivery of goods which is not a ready delivery contract
(b) A contract for differences which derives its value from prices or indices of
prices -
(i) of such underlying goods; or

(ii) of related services and rights, such as warehousing and freight; or

(iii) with reference to weather and similar events and activities having a
bearing on the commodity sector.

(19) Amount of expenditure incurred by a co-operative society for purchase of sugarcane

at price fixed by the Government allowable as deduction [Section 36(1)(xvii)] - Section
36(xvii) provides for deduction of expenditure incurred by a co-operative society engaged in
the business of manufacture of sugar for purchase of sugarcane at a price equal to or less
than the price fixed or approved by the Government.

Expenditure By a Co-operative Engaged in the business

incurred society of manufacture of sugar

Such price should be ≤ price

fixed or approved by the for purchase of
Government. sugarcane at a
price

The CBDT has, vide Circular no. 18/2021 dated 25.10.2021, clarified that the phrase 'price
fixed or approved by the Government' includes price fixation by State Governments through
State-level Acts/Orders or other legal instruments that regulate the purchase price for
sugarcane, including State Advised Price, which may be higher than the Statutory Minimum
Price/ Fair and Remunerative Price fixed by the Central Government.
(20) Marked to market loss [Section 36(1)(xviii)] - Marked to market loss or other expected
loss as computed in accordance with the ICDS notified under section 145(2), shall be
allowed as deduction. ICDS I provides that marked to market losses would not be allowed
unless the same is in accordance with any other ICDS. Therefore, only marked to market
losses specifically permitted under any other ICDS would be allowable as deduction under
section 36.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.125

(18) Residuary Expenses [Section 37]

(1) Revenue expenditure incurred for purposes of carrying on the business, profession
or vocation - This is a residuary section under which only business expenditure is
allowable but not the business losses, e.g., those arising out of embezzlement, theft,
destruction of assets, misappropriation by employees etc. The deduction is limited only to
the amount actually expended and does not extend to a reserve created against a
contingent liability.
(2) Conditions for allowance: The following conditions should be fulfilled in order that a
particular item of expenditure may be deductible under this section:
(a) The expenditure should not be of the nature described in sections 30 to 36.
(b) It should have been incurred by the assessee in the accounting year.
(c) It should be in respect of a business carried on by the assessee the profits of which
are being computed and assessed.
(d) It must have been incurred after the business was set up.
(e) It should not be in the nature of any personal expenses of the assessee.
(f) It should have been laid out or expended wholly and exclusively for the purposes
of such business.
(g) It should not be in the nature of capital expenditure.
(h) The expenditure should not have been incurred by the assessee for any purpose
which is an offence or is prohibited by law.
This section is thus limited in scope. It does not permit an assessee to make all deductions
which a prudent trader would make in ascertaining his own profit. It might be observed that
the section requires that the expenditure should be wholly and exclusively laid out for
purpose of the business but not that it should have been necessarily laid out for such
purpose. Therefore, expenses wholly and exclusively laid out for the purpose of trade are,
subject to the fulfilment of other conditions, allowed under this section even though the
outlay is unnecessary.
(3) Expenditure incurred on Keyman insurance policy: CBDT Circular no. 762/1998 dated
18.02.1998 clarifies that the premium paid on the Keyman Insurance Policy is allowable as
business expenditure.

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Taking into account the Explanation to Section 10(10D) and the CBDT Circular no. 762
dated 18.02.1998, Courts have held that a Keyman Insurance Policy is not confined to a
policy taken for an employee but also extends to an insurance policy taken with respect to
the life of another person who is connected in any manner whatsoever with the business of
the subscriber (assessee).
The High Court of Punjab and Haryana has, in the case of M/s. Ramesh Steels, ITA No.
437 of 2015, vide judgement dated 2.2.2016, reiterating the above view, held that, “the said
policy when obtained to secure the life of a partner to safeguard the firm against a
disruption of the business is equally for the benefit of the partnership business which may
be effected as a result of premature death of a partner. Thus, the premium on the Keyman
Insurance Policy of partner of the firm is wholly and exclusively for the purpose of business
and is allowable as business expenditure”.
In view of the above, the CBDT has clarified that in case of a firm, premium paid by the firm
on the Keyman Insurance Policy of a partner, to safeguard the firm against a disruption of
the business, is an admissible expenditure under section 37 of the Act.
(4) Explanation 1 to section 37(1) - This Explanation provides that any expenditure incurred
by the assessee for any purpose which is an offence or is prohibited by law shall not be
allowed as a deduction or allowance.
(5) Explanation 3 to section 37(1) – It is clarified that the expression “expenditure incurred by
an assessee for any purpose which is an offence or which is prohibited by law” in (4) above
would include and would be deemed to have always included the expenditure incurred by
an assessee, -
(i) for any purpose which is an offence under any law for the time being in force, in India
or outside India or which is prohibited by any law for the time being in force, in India
or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not
carrying on a business or exercising a profession, and acceptance of such benefit or
perquisite by such person is in violation of any law or rule or regulation or guidelines,
as the case may be, for the time being in force, governing the conduct of such
person; or
(iii) to compound an offence under any law for the time being in force, in India or outside
India [Explanation 3 to section 37(1)].

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.127

(v) to settle proceedings initiated in relation to contravention under such law as may be
notified by the Central Government in this behalf.

W.e.f. 23.4.2025, the Central Government has, vide notification no. 38/2025 dated
23.4.2025, notified that any expenditure incurred to settle proceedings initiated in
relation to contravention or defaults under the following laws shall not be deemed to
have been incurred for the purpose of business or profession and no deduction or
allowance shall be made in respect of such expenditure –
(a) the Securities and Exchange Board of India Act, 1992;

(b) the Securities Contracts (Regulation) Act, 1956;

(c) the Depositories Act, 1996;
(d) the Competition Act, 2002.

For eg: expenses incurred in providing freebies to medical practitioner by pharmaceutical

and allied health sector industry are in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations. Hence, such expenditure is
considered to be expenses prohibited by the law and not allowed in the hands of such
pharmaceutical or allied health sector industry or other assessee which has provided
aforesaid freebies.

The Supreme Court, in Apex Laboratories Pvt. Ltd. v. DCIT (2022) 442 ITR 1, held that the
incentives (or "freebies") given by the pharmaceutical company, to the doctors, had a direct
result of exposing the recipients to the odium of sanctions, leading to a ban on their practice
of medicine. Those sanctions are mandated by law, as they are embodied in the code of
conduct and ethics, which are normative, and have legally binding effect. The conceded
participation of the assessee – Pharmaceutical company, i.e., the provider or donor, was
plainly prohibited, as far as their receipt by the medical practitioners was concerned. That
medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a
prohibition on the part of their giver, or donor, i.e., pharmaceutical company.

Thus, pharmaceutical companies’ gifting freebies to doctors is clearly “prohibited by law”

and not allowed to be claimed as a deduction under section 37(1). Doing so would wholly
undermine public policy.

Explanation 3 inserted in section 37(1) is in consonance with the above Supreme Court
judgement.

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(6) Disallowance of CSR expenditure [Explanation 2 to Section 37(1)]

(i) Section 135 of the Companies Act, 2013 read with Schedule VII thereto and
Companies (Corporate Social Responsibility) Rules, 2014 are the special provisions
under the new company law regime imposing mandatory CSR obligations in respect
of companies having net worth/turnover/net profit exceeding specified threshold
limits. Such companies have to spend a specified percentage of their average net
profits on CSR activities.
(ii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not covered
under sections 30 to 36, and incurred wholly and exclusively for the purposes of the
business is allowed as a deduction while computing taxable business income. The
issue under consideration is whether CSR expenditure is allowable as deduction
under section 37.
(iii) It has now been clarified that for the purposes of section 37(1), any expenditure
incurred by an assessee on the activities relating to corporate social responsibility
referred to in section 135 of the Companies Act, 2013 shall not be deemed to have
been incurred for the purpose of business and hence, shall not be allowed as
deduction under section 37.
(iv) The rationale behind the disallowance is that CSR expenditure, being an application
of income, is not incurred wholly and exclusively for the purposes of carrying on
business.
(v) However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that
CSR expenditure, which is of the nature described in sections 30 to 36, shall be
allowed as deduction under those sections subject to fulfillment of conditions, if any,
specified therein.
(7) Advertisements in souvenirs of political parties: Section 37(2B) disallows any deduction
on account of advertisement expenses representing contributions made by any person
carrying on business or profession in computing the profits and gains of the business or
profession. It has specifically been provided that this provision for disallowance would apply
notwithstanding anything to the contrary contained in section 37(1).
In other words, the expenditure representing contribution for political purposes would
become disallowable even in those cases where the expenditure is otherwise incurred by
the assessee in his character as a trader and the amount is wholly and exclusively incurred
for the purpose of the business.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.129

Accordingly, a taxpayer would not be entitled to any deduction in respect of expenses

incurred by him on advertisement in any souvenir, brochure, tract or the like published by
any political party, whether it is registered with the Election Commission of India or not.
(8) Deduction in respect of cost of production allowable under section 37 in the case of
Abandoned Feature Films [Circular No. 16, dated 6.10.2015]

The deduction in respect of the cost of production of a feature film certified for release by
the Board of Film Censors in a previous year is provided in Rule 9A.
In the case of abandoned films, however, since certificate of Board of Film Censors is not
received, in some cases no deduction was allowed by applying Rule 9A of the Rules or by
treating the expenditure as capital expenditure.
The CBDT has examined the matter in light of judicial decisions on this subject. The order
of the Hon’ble Bombay High Court dated 28.1.2015 in ITA 310 of 2013 in the case of Venus
Records and Tapes Pvt. Ltd. on this issue has been accepted and the aforesaid disputed
issue has not been further contested.
Consequently, it is clarified that Rule 9A does not apply to abandoned feature films and that
the expenditure incurred on such abandoned feature films is not to be treated as a capital
expenditure. The cost of production of an abandoned feature film is to be treated as
revenue expenditure and allowed as per the provisions of section 37 of the Income-tax
Act, 1961.
ILLUSTRATION 11
Isac limited is a company engaged in the business of biotechnology. The net profit of the
company for the financial year ended 31.03.2026 is ` 35,25,890 after debiting the following
items:

S. No. Particulars `
1. Purchase price of raw material used for the purpose of in-house 11,80,000
research and development
2. Purchase price of asset used for in-house research and
development
(a) Land 5,00,000
(b) Building 3,00,000
3. Expenditure incurred on notified agricultural extension project 25,50,000
4. Expenditure on notified skill development project:

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(a) Purchase of land 40,00,000

(b) Expenditure on training for skill development 32,50,000
5. Expenditure incurred on advertisement in the souvenir published 75,000
by a political party
6. Expenditure incurred on issue of right shares 80,000
7. Expenditure incurred on issue of debentures 50,000
8. Penalty paid under GST Act 35,000
9. Interest paid on loan taken from bank for payment of advance 60,000
income-tax
10. Provision for loss of subsidiary 85,000

Compute the income under the head “Profits and gains of business or profession” for the
A.Y. 2026-27 of Isac Ltd assuming that the company does not opt for the provisions of
section 115BAA.
SOLUTION
Computation of income under the head “Profits and gains of business or
profession” for the A.Y.2026-27

Particulars ` `
Net profit as per profit and loss account 35,25,890
Add: Items debited to profit and loss account, but to be
disallowed
Purchase price of raw material used for the purpose of in-
house research and development – qualifies for 100%
deduction u/s 35(2AB) -
Purchase price of Land used in in-house research and
development - being capital expenditure not allowable as
deduction under section 35 5,00,000
Purchase price of building used in in-house research and
development - being capital expenditure, 100% of which is
allowable as deduction u/s 35(1)(iv) read with section -
35(2)
Expenditure incurred on notified agricultural extension
project – 100% deduction is allowed under section 35CCC -
Expenditure incurred on notified skill development project
- Purchase of land - being capital expenditure not
qualifying for deduction under section 35CCD 40,00,000

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Expenditure incurred on notified skill development project

- Expenditure on training for skill development – 100%
deduction is allowed under section 35CCD -
Expenditure incurred on advertisement in the souvenir
published by a political party not allowed as deduction as
per section 37(2B) 75,000
Expenditure incurred on issue of right shares not allowed
as deduction since expenses is of capital nature 80,000
Expenditure incurred on issue of debentures [allowable] -
Penalty paid under GST Act - Not allowed as deduction 35,000
Interest paid on loan taken from bank for payment of 60,000
advance income-tax not allowed as deduction since the
same is not for the purpose of business or profession
Provision for loss of subsidiary not allowed as deduction 85,000 48,35,000
Profit and gains from business 83,60,890

Note: The expenditure incurred on advertisement in the souvenir published by a political

party is disallowed as per section 37(2B) while computing income under the head “Profit
and Gains of Business or Profession” but the same would be allowed as deduction under
section 80GGB from the gross total income of the company.
(9) In case of an assessee carrying on business, it is relevant to see whether an outlay
constitutes an expenditure “for the purpose of business” as used in section 37(1), for the
purpose of claiming deduction thereunder. The source of funds from which the expenditure
is made is not relevant. Every application of income towards the business objective of the
assessee is a business expenditure. There can be an amount treated as a capital receipt
while the same amount expended may be a revenue expenditure. [National Co-operative
Development Corporation v. CIT [2020] 427 ITR 288 (SC)]
(19) Clarification regarding treatment of expenditure incurred for development of roads/
highways in Build-Operate-Transfer (BOT) agreements under the Income-tax Act,
1961 [Circular No. 09/2014, dated 23.04.2014]
The CBDT has, vide this Circular, clarified the tax treatment of expenditure incurred on
development and construction of infrastructural facilities like roads/highways on Build-Operate-
Transfer (BOT) basis with right to collect toll - whether the same is entitled to depreciation under
section 32(1)(ii) or can be amortized by treating it as an allowable business expenditure under the
relevant provisions of the Income- tax Act, 1961.

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Generally, the BOT basis projects are entered into between the developer and the government or
the notified authority, on the following terms:

(i) In such projects, the developer, in terms of concessionaire agreement with Government or
its agencies, is required to construct, develop and maintain the infrastructural facility of
roads/highways which, inter alia, includes laying of road, bridges, highways, approach
roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified
period.
(ii) The possession of land is handed over to the assessee (i.e., the developer) by the
Government/ notified authority for the purpose of construction of the project without any
actual transfer of ownership. The assessee, therefore, has only a right to develop and
maintain such asset. It also enjoys the benefits arising from the use of asset through
collection of toll for a specified period, without having actual ownership over such asset.
Therefore, the rights in the land remain vested with the Government/notified agencies.
(iii) Since the assessee does not hold any rights in the project except recovery of toll fee to
recoup the expenditure incurred, it cannot be treated as an owner of the property, either
wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii). Thus,
claim of depreciation on toll ways is not allowable due to non-fulfillment of ownership
criteria in such cases.
(iv) Where the assessee incurs expenditure on a project for development of roads/highways, it
is entitled to recover cost incurred towards development of such facility (comprising of
construction cost and other pre-operative expenses) during construction period. Further,
expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit
in the form of right to collect the toll during the period of agreement.
The Supreme Court, in Madras Industrial Investment Corporation Ltd. vs. CIT [1997] 225 ITR 802,
allowed the spreading over of liability over a number of years on the ground that there was
continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on
an infrastructure project for development of roads/highways under BOT agreement may be treated
as having been made/ incurred for the purposes of business or profession of the assessee and
same shall be allowed to be spread during the tenure of concessionaire agreement.
In view of the above, the CBDT, in exercise of the powers conferred under section 119, clarifies
that the cost of construction on development of infrastructure facility, being roads/highways under
BOT projects, may be amortized and claimed as allowable business expenditure under the Act in
the following manner:

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(i) The amortization allowable may be computed at the rate which ensures that the whole of
the cost incurred in creation of infrastructural facility of road/highway is amortised evenly
over the period of concessionaire agreement after excluding the time taken for creation of
such facility.
(ii) Where an assessee has claimed any deduction out of initial cost of development of
infrastructure facility of roads/highways under BOT projects in earlier years, the total
deduction so claimed for the assessment years prior to assessment year under
consideration may be deducted from the initial cost of infrastructure facility of
roads/highways and the cost so reduced shall be amortised equally over the remaining
period of toll concessionaire agreement.
The clarification given in this Circular is applicable only to those infrastructure projects for
development of road/highways on BOT basis where ownership is not vested with the assessee
under the concessionaire agreement.

3.7 INADMISSIBLE DEDUCTIONS [SECTION 40]

By dividing the assessees into distinct groups, this section places absolute restraint on the
deductibility of certain expenses as follows:
In the case of any assessee, the following expenses are not deductible:
(1) Section 40(a)(i)
Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is
payable,-
(a) outside India;
(b) in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or,
after deduction, has not been paid on or before the due date of filing of return specified under
section 139(1).
It is also provided that where in respect of any such sum, where tax has been deducted in any
subsequent year, or has been deducted in the previous year but paid after the due date of filing of
return under section 139(1), such sum shall be allowed as a deduction in computing the income of
the previous year in which such tax has been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not deemed
as assessee in default under the first proviso to section 201(1) by reason that such payee –

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(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income, and the payer
furnishes a certificate to this effect from an accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum on the date on
which return of income has been furnished by the payee.
Since the date of furnishing the return of income by the payee is taken to be the date on which the
payer has deducted tax at source and paid the same, such expenditure/payment in respect of
which the payer has failed to deduct tax at source shall be disallowed under section 40(a)(i) in the
year in which the said expenditure is incurred. However, such expenditure will be allowed as
deduction in the subsequent year in which the return of income is furnished by the payee, since tax
is deemed to have been deducted and paid by the payer in that year.

Clarification regarding disallowance of ‘other sum chargeable’ under section 40(a)(i)

[Circular No. 3/2015, dated 12-02-2015]
If there has been a failure in deduction or in payment of tax deducted in respect of any interest,
royalty, fees for technical services or other sum chargeable under the Act either payable in India to
non-corporate non-resident or a foreign company or payable outside India, then, disallowance of
the related expenditure/ payment is attracted under section 40(a)(i) while computing income
chargeable under the head “Profits and gains of business or profession”.
The interpretation of the term ‘other sum chargeable’ in section 195 has been clarified in this
circular i.e. whether this term refers to the whole sum being remitted or only the portion
representing the sum chargeable to income-tax under the Act.
In its Instruction No. 2/2014, dated 26.02.2014, the CBDT has clarified that the Assessing Officer
shall determine the appropriate portion of the sum chargeable to tax as mentioned in section
195(1), to ascertain the tax liability on which the deductor shall be deemed to be an assessee in
default under section 201, in cases where no application is filed by the deductor for determining
the sum so chargeable under section 195(2).
In this circular, the CBDT has, in exercise of its powers under section 119, clarified that for the
purpose of making disallowance of ‘other sum chargeable’ under section 40(a)(i), the appropriate
portion of the sum which is chargeable to tax shall form the basis of disallowance. Further, the
appropriate portion shall be the same as determined by the Assessing Officer having jurisdiction
for the purpose of section 195(1). Also, where the determination of ‘other sum chargeable’ has
been made under sub-section (2), (3) or (7) of section 195 of the Act, such a determination will
form the basis for disallowance, if any, under section 40(a)(i).

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(2) Section 40(a)(ia)

Section 40(a)(ia) provides that 30% of any sum payable to a resident, on which tax is deductible
at source under Chapter XVII-B, shall be disallowed if –
(i) such tax has not been deducted; or
(ii) such tax, after deduction, has not been paid on or before the due date specified in section
139(1).
If in respect of such sum, tax has been deducted in any subsequent year or has been deducted
during the previous year but paid after the due date specified in section 139(1), 30% of such sum
shall be allowed as deduction in computing the income of the previous year in which such tax has
been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not deemed
as assessee in default under the first proviso to section 201(1) by reason that such payee –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and the payer
furnishes a certificate to this effect from an accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum.
The date of deduction and payment of taxes by the payer shall be deemed to be the date on which
return of income has been furnished by the payee.
Since the date of furnishing the return of income by the payee is taken to be the date on which the
payer has deducted tax at source and paid the same, 30% of such expenditure/payment in respect
of which the payer has failed to deduct tax at source shall be disallowed under section 40(a)(ia) in
the year in which the said expenditure is incurred. However, 30% of such expenditure will be
allowed as deduction in the subsequent year in which the return of income is furnished by the
payee, since tax is deemed to have been deducted and paid by the payer in that year.

Example: Tax on royalty paid to Mr. A, a resident, has been deducted during the previous year
2025-26, the same has to be paid by 31st July/ 31ts October 2026, as the case may be. Otherwise,
30% of royalty paid would be disallowed in computing the income for A.Y. 2026-27. If in respect of
such royalty, tax deducted during the P.Y.2025-26 has been paid after 31st July/ 31st October,
2026, 30% of such royalty disallowed in A.Y. 2026-27, would be allowed as deduction in the year
of payment, i.e. A.Y. 2027-28

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ILLUSTRATION 12
Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2026 without deduction of tax at source. What would be the consequence of non-deduction of tax
at source by Delta Ltd. on these amounts during the financial year 2025-26, assuming that the
resident payees in all the cases mentioned below, have not paid the tax, if any, which was required
to be deducted by Delta Ltd.?

Particulars Amount
(`)
(1) Salary to its employees (credited and paid in March, 2026) 13,00,000
(2) Directors’ remuneration (credited in March, 2026 and paid in April, 2026) 28,000
Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2026
at the time of payment and remitted the same in July, 2026?
SOLUTION
Non-deduction of tax at source on any sum payable to a resident on which tax is deductible at
source as per the provisions of Chapter XVII-B would attract disallowance under section 40(a)(ia).
Therefore, non-deduction of tax at source on any sum paid by way of salary on which tax is
deductible under section 192 or any sum credited or paid by way of directors’ remuneration on
which tax is deductible under section 194J, would attract disallowance@30% under section
40(a)(ia). Whereas in case of salary, tax has to be deducted under section 192 at the time of
payment, in case of directors’ remuneration, tax has to be deducted at the time of credit of such
sum to the account of the payee or at the time of payment, whichever is earlier. Therefore, in both
the cases i.e., salary and directors’ remuneration, tax is deductible in the P.Y.2025-26, since
salary was paid in that year and directors’ remuneration was credited in that year. Therefore, the
amount to be disallowed under section 40(a)(ia) while computing business income for A.Y.2026-27
is as follows –
Particulars Amount Disallowance
paid in ` u/s 40(a)(ia)@
30% (`)
(1) Salary 13,00,000 3,90,000
[tax is deductible under section 192]
(2) Directors’ remuneration 28,000 8,400
[tax is deductible under section 194J without any
threshold limit]
Disallowance under section 40(a)(ia) 3,98,400

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If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2026-27 at the time of
payment and remitted to the Government, the amount of ` 8,400 would be allowed as deduction
while computing the business income of A.Y.2027-28.

Disallowance of any sum paid to a resident at any time during the previous year without
deduction of tax under section 40(a)(ia) [Circular No.10/2013, dated 16.12.2013]
There have been conflicting interpretations by judicial authorities regarding the applicability of
provisions of section 40(a)(ia), with regard to the amount not deductible in computing the income
chargeable under the head ‘Profits and gains of business or profession’. Some court rulings have
held that the provisions of disallowance under section 40(a)(ia) apply only to the amount which
remained payable at the end of the relevant financial year and would not be invoked to disallow the
amount which had actually been paid during the previous year without deduction of tax at source.

Departmental View: The CBDT’s view is that the provisions of section 40(a)(ia) would cover not
only the amounts which are payable as on 31st March of a previous year but also amounts which
are payable at any time during the year. The statutory provisions are amply clear and in the
context of section 40(a)(ia), the term "payable" would include "amounts which are paid during the
previous year".

ILLUSTRATION 13
During the financial year 2025-26, the following payments/expenditure were made/incurred by
Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2025 was
` 99 lakhs):
(i) Interest of ` 45,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;
(ii) ` 15,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iii) Commission of ` 26,000 was paid to Mr. Vidyasagar on 2.7.2025 without deduction of tax at
source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of the
Income-tax Act, 1961 assuming that the payees in all the cases mentioned above, have not paid
the tax, if any, which was required to be deducted by Mr. Raja?
SOLUTION
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee
fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails to
remit the same to the credit of the Central Government within the stipulated time limit.

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(i) The obligation to deduct tax at source from interest paid to a resident arises under section
194A in the case of an individual, whose total turnover in the immediately preceding
previous year, i.e., P.Y.2024-25 exceeds ` 1 crore. Thus, in present case, since the
turnover of the assessee is less than ` 100 lakhs, he is not liable to deduct tax at source.
Hence, disallowance under section 40(a)(ia) is not attracted in this case.
(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be attracted in
respect of all sums on which tax is deductible under Chapter XVII-B. Section 192, which
requires deduction of tax at source from salary paid, is covered under Chapter XVII-B. The
obligation to deduct tax at source under section 192 arises, in the hands all assessee-
employer even if the turnover amount does not exceed ` 1 crore in the immediately
preceding previous year.
Therefore, in the present case, the disallowance under section 40(a)(ia) is attracted for
failure to deduct tax at source under section 192 from salary payment. However, only 30%
of the amount of salary paid without deduction of tax at source would be disallowed i.e.
` 4,50,000 (` 15 lakhs × 30%).
(iii) The obligation to deduct tax at source under section 194-H from commission paid in excess
of ` 20,000 to a resident arises in the case of an individual, whose total turnover in the
immediately preceding previous year, i.e., P.Y.2024-25 exceeds ` 1 crore. Thus, in present
case, since the turnover of the assessee is less than ` 1 crore, he is not liable to deduct tax
at source under section 194H. Mr. Raja is not required to deduct tax at source u/s 194M
also since the aggregate of such commission to Mr. Vidyasagar does not exceed ` 50 lakh
during the P.Y. 2025-26. Therefore, disallowance under section 40(a)(ia) is not attracted in
this case.
(3) Section 40(a)(ib)
Section 40(a)(ib) provides that where any consideration is paid or payable to a non-resident
for a specified service on which equalisation levy is deductible, and such levy has not been
deducted or after deduction, has not been paid on or before the due date under section
139(1), then, such expenses incurred by the assessee towards consideration for specified
service shall not be allowed as deduction.

However, where in respect of such consideration, if the equalisation levy has been
deducted in any subsequent year or has been deducted during the previous year but paid
after the due date specified under section 139(1), such sum shall be allowed as deduction
in computing the income of the previous year in which such levy has been paid.

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(4) Section 40(a)(ii)

Any sum paid on account of rate or tax levied on the profits or gains of any business or
profession or assessed at a proportion of, or on the basis of any such profits and gains is
not allowed as deduction from business income.
(a) Any sum paid outside India (on account of any rate or tax levied) which is eligible for
tax relief under section 90 or deduction from the income-tax payable under section
91 is not allowable and is deemed to have never been allowable as a deduction
under section 40(a).
(b) However, the tax payers will continue to be eligible for tax credit in respect of
income-tax paid in a foreign country in accordance with the provisions of section 90
or section 91, as the case may be.
(c) Any sum paid outside India (on account of any rate or tax levied) and eligible for
relief under section 90A will not be allowed as a deduction.
(d) The term “tax” would include and would be deemed to have always included any
surcharge or cess, by whatever name called, on such tax. Hence, tax including
surcharge and cess would be disallowed while computing business income.
(5) Section 40(a)(iib)

(i) any amount paid by way of royalty, licence fee, service fee, privilege fee, service
charge, etc., which is levied exclusively on, or
(ii) any amount appropriated, directly or indirectly, from a State Government
undertaking, by the State Government (SG)
A State Government undertaking includes –
(a) A corporation established by or under any Act of the State Government;
(b) A company in which more than 50% of the paid up equity share capital is held by the
State Government;
(c) A company in which more than 50% of the paid up equity share capital is held singly
or jointly by (a) or (b);
(d) A company or corporation in which the State Government has the right to appoint the
majority of directors or to control the management or policy decisions

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(e) An authority, a board or an institution or a body established or constituted by or

under any Act of the State Government or owned or controlled by the State
Government.
(6) Section 40(a)(iii)
Any sum which is chargeable under the head ‘Salaries’ if it is payable outside India or to a
non-resident and if the tax has not been paid thereon nor deducted therefrom under
Chapter XVII-B.
(7) Section 40(a)(iv)
Any contribution to a provident fund or the fund established for the benefit of employees of
the assessee, unless the assessee has made effective arrangements to make sure that tax
shall be deducted at source from any payments made from the fund which are chargeable
to tax under the head ‘Salaries’.
(8) Section 40(a)(v)
Tax paid on perquisites on behalf of employees is not deductible - In case of an
employee, deriving income in the nature of perquisites (other than monetary payments), the
amount of tax on such income paid by his employer is exempt from tax in the hands of that
employee.

Correspondingly, such payment is not allowed as deduction from the income of the
employer. Thus, the payment of tax on perquisites by an employer on behalf of employee
will be exempt from tax in the hands of employee but will not be allowable as deduction in
the hands of the employer.
In the case of any firm assessable as such or a limited liability partnership (LLP) the following
amounts shall not be deducted in computing the business income
Section 40(b)
(1) Remuneration to non-working partner - Any salary, bonus, commission, remuneration by
whatever name called, to any partner who is not a working partner. (In the following
discussion, the term ‘remuneration’ is applied to denote payments in the nature of salary,
bonus, commission);
(2) Remuneration to a working partner not authorized by deed - Any remuneration paid to
the working partner or interest to any partner which is not authorised by or which is incon-
sistent with the terms of the partnership deed

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(3) Remuneration to a working partner or interest to a partner authorized by deed but

relates to an earlier period - It is possible that the current partnership deed may authorise
payments of remuneration to any working partner or interest to any partner for a period
which is prior to the date of the current partnership deed. The approval by the current
partnership deed might have been necessitated due to the fact that such payment was not
authorised by or was inconsistent with the earlier partnership deed. Such payments of
remuneration or interest will also be disallowed. However, it should be noted that the
current partnership deed cannot authorise any payment which relates to a period prior to
the date of earlier partnership deed.
Next, by virtue of a further restriction contained in section 40(b)(iii), such remuneration paid
to the working partners will be allowed as deduction to the firm from the date of such
partnership deed and not for any period prior thereto.
Example: If a firm incorporates the clause relating to payment of remuneration to the
working partners, by executing an appropriate deed, say, on July 1, 2025 but effective from
April 1, 2025 the firm would get deduction for the remuneration paid to its working partners
from July 1, 2025 onwards, but not for the period from April 1 to June 30. It will not be
possible to give retrospective effect to oral agreements entered into vis-a-vis such
remuneration prior to putting the same in a written partnership deed.
(4) Interest to any partner in excess of 12% p.a.- Any interest payment authorised by the
partnership deed falling after the date of such deed to the extent such interest exceeds 12%
simple interest p.a.
(5) Remuneration to a working partner in excess of prescribed limits - Any remuneration
paid to a working partner, authorised by a partnership deed and falling after the date of the
deed in excess of the following limits:
Book Profits Quantum of deduction
On the first ` 6 lakh of book profit or in ` 3,00,000 or 90% of book profit, whichever
case of loss is higher
on the balance of book profit 60% of book profit

(6) Meaning of certain terms:

Term Meaning
Book Profit The net profit as shown in the profit and loss account for the relevant
previous year computed in accordance with the provisions for computing
income from profits and gains [Explanation 3 to section 40(b)].

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The above amount should be increased by the remuneration paid or

payable to all the partners of the firm if the same has been deducted while
computing the net profit.
Working An individual who is actively engaged in conducting the affairs of the business
partner or profession of the firm of which he is a partner [Explanation 4 to section
40(b)]

ILLUSTRATION 14
A firm assessed as such has paid ` 8,50,000 as remuneration to its partners for the
P.Y.2025-26, in accordance with its partnership deed, and it has a book profit of ` 10 lakh as
computed under section 40(b). What is the remuneration allowable as deduction?
SOLUTION
The allowable remuneration calculated as per the limits specified in section 40(b)(v) would be –
Particulars `
On first ` 6 lakh of book profit [` 6,00,000 × 90%] 5,40,000
On balance ` 4 lakh of book profit [` 4,00,000 × 60%] 2,40,000
7,80,000

The excess amount of ` 70,000 (i.e., ` 8,50,000 – ` 7,80,000) would be disallowed as per
section 40(b)(v).
(7) Explanations to section 40(b)
(i) Where an individual is a partner in a firm in a representative capacity:
(a) interest paid by the firm to such individual otherwise than as partner in a
representative capacity shall not be taken into account for the purposes of this
clause.
(b) interest paid by the firm to such individual as partner in a representative capacity
and interest paid by the firm to the person so represented shall be taken into
account for the purposes of this clause [Explanation 1 to section 40(b)]
(ii) Where an individual is a partner in a firm otherwise than in a representative capacity,
interest paid to him by the firm shall not be taken into account if he receives the
same on behalf of or for the benefit of any other person [Explanation 2 to section
40(b)].

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Example: Mr. A is a partner in ABC & Co. on behalf of Shah HUF. Interest to its partners @15% is
authorised by ABC & Co. ABC & Co. pays ` 7 lakhs as interest to Mr. A out of which ` 4 lakhs on
the funds advanced by Mr. A in his individual capacity and ` 3 lakhs on the funds advanced by him
in his representative capacity on behalf of Shah HUF. The interest of ` 4 lakhs paid to Mr. A in his
individual capacity is allowed as deduction subject to section 40A(2) and shall not be taken into
account for purpose of section 40(b). Whereas the interest paid to Mr. A in his representative
capacity would be allowed to the extent of ` 2.40 lakhs i.e., ` 3 lakhs/15% x 12%.

ILLUSTRATION 15
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ` 17,00,000 before
deduction of the following items:
(1) Salary of ` 40,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of
capital eligible for interest ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2026-27 as per section 40(b).

SOLUTION
(i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit
and loss account for the relevant previous year computed in the manner laid down in
Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to
the partners of the firm if the same has been already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation on plant and
machinery, interest on capital of partners and salary to the working partners. Therefore, the
book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars ` `
Net Profit (before deduction of depreciation, salary and 17,00,000
interest)
Less: Depreciation under section 32 1,50,000
Interest @ 12% p.a. [being the maximum allowable
as per section 40(b)] (` 5,00,000 × 12%) 60,000 2,10,000
Book Profit 14,90,000

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(ii) Salary actually paid to working partners = ` 40,000 × 2 × 12 = ` 9,60,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed
subject to the following limits -
On the first ` 6,00,000 of book profit or ` 3,00,000 or 90% of book profit, whichever is
in case of loss more
On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners’ salary for the A.Y. 2026-27 in this
case would be:
Particulars `
On the first ` 6,00,000 of book profit [(` 3,00,000 or 90% of ` 6,00,000) 5,40,000
whichever is more]
On the balance of book profit [60% of (` 14,90,000 - ` 6,00,000)] 5,34,000
Maximum allowable partners’ salary 10,74,000

Hence, allowable working partners’ salary for the A.Y. 2026-27 as per the provisions of
section 40(b)(v) is ` 9,60,000.
In the case of Association of persons or body of individuals, following amounts shall not be
deducted in computing the business income
Section 40(ba)
Any payment of interest, salary, commission, bonus or remuneration made by an association of
persons or body of individuals to its members will also not be allowed as a deduction in computing
the income of the association or body.
There are three Explanations to section 40(ba):

Explanation 1 - Where interest is paid by an AOP or BOI to a member who has paid interest to the
AOP/BOI, the amount of interest to be disallowed under clause (ba) shall be limited to the net
amount of interest paid by AOP/BOI to the partner.
Explanation 2 - Where an individual is a member in an AOP/BOI in a representative capacity,
interest paid by AOP/BOI to such individual or by such individual to AOP/ BOI otherwise than as
member in a representative capacity shall not be taken into account for the purposes of clause
(ba). But interest paid to or received from each person in his representative capacity shall be taken
into account.
Explanation 3 - Where an individual is a member in his individual capacity, interest paid to him in
his representative capacity shall not be taken into account.

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3.8 EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN

CERTAIN CIRCUMSTANCES [SECTION 40A]
(1) Payments to relatives and associates

Section 40A(2) provides that where the assessee incurs any expenditure in respect of which a
payment has been or is to be made to a specified person [See column (2) of Table below) so much
of the expenditure as is considered to be excessive or unreasonable shall be disallowed by the
Assessing Officer. While doing so he shall have due regard to:

(a) the fair market value of the goods, service of facilities for which the payment is made; or

(b) the legitimate needs of the business or profession carried on by the assessee; or

(c) the benefit derived by or accruing to the assessee from such a payment.

Assessee Specified Person

(1) (2)
Individual 1. Any relative of the individual assessee
2. Any person who carries on a business or profession, if
• the individual has a substantial interest in the business of that
person or
• any relative of the individual has a substantial interest in the
business of that person
Company, Firm, 1. Any director, partner of the firm or member of the family or
HUF or AOP association or any relative of such director, partner or member or
2. In case of a company assessee, any individual who has substantial
interest in the business or profession of the company or any relative
of such individual or
3. Any person who carries on a business or profession, in which the
Company/ Firm/ HUF/ AOP or director of the company, partner of
the firm or member of the family or association or any relative of
such director, partner or member has substantial interest in the
business of that person

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All assessees The following are specified persons:

Person who has Other related persons of such person, who has a
substantial substantial interest in the assessee’s business
interest in the
assessee’s
business
Company/ AOP/ • Any director of such company, partner of such
Firm/ HUF firm or the member of such family or association
or
• Any relative of such director, partner or member
or
• Any other company carrying on business or
profession in which the first mentioned company
has a substantial interest
A director, • Company/ Firm/ AOP/ HUF of which he is a
partner or director, partner or member or
member • Any other director/ partner/ member of the such
Company/ Firm/ AOP/ HUF or
• Any relative of such director, partner or member
Relative in relation to an Individual means the spouse, brother or sister or any lineal
ascendant or descendant of that individual [Section 2(41)].
Substantial interest in a business or profession
A person shall be deemed to have a substantial interest in a business or profession if -
- in a case where the business or profession is carried on by a company, such person is, at
any time during the previous year, the beneficial owner of equity shares carrying not less
than 20% of the voting power and
- in any other case, such person is, at any time during the previous year, beneficially entitled
to not less than 20% of the profits of such business or profession.

(2) Payments in excess of ` 10,000 made otherwise than through prescribed modes

According to section 40A(3), where the assessee incurs any expenditure, in respect of which
payment or aggregate of payments made to a person in a day otherwise than by an account payee
cheque drawn on a bank or by an account payee bank draft or use of electronic system through
bank account or through such other prescribed electronic modes exceeds ` 10,000, such
expenditure shall not be allowed as a deduction.
The prescribed electronic modes are credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT

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(National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [CBDT
Notification No. 8/2020 dated 29.01.2020].

The provision applies to all categories of expenditure involving payments for goods or services
which are deductible in computing the taxable income.

Example:
If, in respect of an expenditure of ` 32,000 incurred by X Ltd., 4 cash payments of ` 8,000 are made
on a particular day to one Mr. Y – one in the morning at 10 a.m., one at 12 noon, one at 3 p.m. and
one at 6 p.m., the entire expenditure of ` 32,000 would be disallowed under section 40A(3), since
the aggregate of cash payments made during a day to Mr. Y exceeds ` 10,000.

Payments in excess of ` 10,000 made otherwise than through prescribed modes deemed to
be the income of the subsequent year, if expenditure has been allowed as deduction in any
previous year on due basis:
In case of an assessee following mercantile system of accounting, if an expenditure has been
allowed as deduction in any previous year on due basis, and payment has been made in a
subsequent year otherwise than by account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account or through such other prescribed electronic
modes such as credit card, debit card, net banking, IMPS (Immediate payment Service), UPI
(Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic
Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay, then the payment so made
shall be deemed to be the income of the subsequent year if such payment or aggregate of payments
made to a person in a day exceeds ` 10,000 [Section 40A(3A)].
Increase in limit of cash payment, where payment made to transport operator: This limit of
` 10,000 has been raised to ` 35,000 in case of payment made to transport operators for plying,
hiring or leasing goods carriages. Therefore, payment or aggregate of payments up to ` 35,000 in
a day can be made to a transport operator otherwise than by way of account payee cheque or
account payee bank draft or use of electronic clearing system through a bank account or through
such other prescribed electronic modes such as credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money)
Aadhar Pay. In all other cases, the limit would continue to be ` 10,000.
Cases where disallowances would not be attracted:
(i) Loan transactions: It does not apply to loan transactions because advancing of loans or
repayments of the principal amount of loan does not constitute an expenditure deductible in

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computing the taxable income. However, interest payments of amounts exceeding ` 10,000
at a time are required to be made by account payee cheques or drafts or electronic clearing
system or through such other prescribed electronic modes such as credit card, debit card,
net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay as interest is a deductible expenditure.
(ii) Payment made by commission agents: This requirement does not apply to payment
made by commission agents for goods received by them for sale on commission or
consignment basis because such a payment is not an expenditure deductible in computing
the taxable income of the commission agent.
For the same reason, this requirement does not apply to advance payment made by the
commission agent to the party concerned against supply of goods.
However, where commission agent purchases goods on his own account but not on
commission basis, the requirement will apply. The provisions regarding payments by
account payee cheque or draft or electronic clearing system or through such other
prescribed electronic modes such as credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement),
NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar
Pay apply equally to payments made for goods purchased on credit.
Cases and circumstances in which a payment or aggregate of payments exceeding ten
thousand rupees may be made to a person in a day, otherwise than by an account payee
cheque/ account payee bank draft/ use of ECS through a bank account or through such
other prescribed electronic modes [Rule 6DD]:
As per this rule, no disallowance under section 40A(3) shall be made and no payment shall be
deemed to be the profits and gains of business or profession under section 40A(3A) where a
payment or aggregate of payments made to a person in a day, otherwise than by an account
payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system
through a bank account or through such other prescribed electronic modes such as credit card,
debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface),
RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay, exceeds `10,000 in the cases and circumstances
specified hereunder, namely:

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(a) where the payment is made to

(i) the Reserve Bank of India or any banking company;
(ii) the State Bank of India or any subsidiary bank;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society;
(v) the Life Insurance Corporation of India;
(b) where the payment is made to the Government and, under the rules framed by it, such
payment is required to be made in legal tender;
(c) where the payment is made by
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any
other bank;
(iv) a bill of exchange made payable only to a bank;
(d) where the payment is made by way of adjustment against the amount of any liability
incurred by the payee for any goods supplied or services rendered by the assessee to such
payee;

(e) where the payment is made for the purchase of -

(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy
or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products;
Notes -
(i) The expression ‘fish or fish products’ (iii) above would include ‘other marine products
such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.’.

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(ii) The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include,
besides the fishermen, any headman of fishermen, who sorts the catch of fish
brought by fishermen from the sea, at the sea shore itself and then sells the fish or
fish products to traders, exporters etc.
However, the above exception will not be available on the payment for the purchase
of fish or fish products from a person who is not proved to be a 'producer' of these
goods and is only a trader, broker or any other middleman, by whatever name called.
(f) where the payment is made for the purchase of the products manufactured or processed
without the aid of power in a cottage industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the date of such payment is not
served by any bank, to any person who ordinarily resides, or is carrying on any business,
profession or vocation, in any such village or town;
(h) where any payment is made to an employee of the assessee or the heir of any such
employee, on or in connection with the retirement, retrenchment, resignation, discharge or
death of such employee, on account of gratuity, retrenchment compensation or similar
terminal benefit and the aggregate of such sums payable to the employee or his heir does
not exceed ` 50,000;
(i) where the payment is made by an assessee by way of salary to his employee after
deducting the income-tax from salary in accordance with the provisions of section 192 of
the Act, and when such employee -
(i) is temporarily posted for a continuous period of fifteen days or more in a place other
than his normal place of duty or on a ship; and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment is made by any person to his agent who is required to make payment in
cash for goods or services on behalf of such person;
(k) where the payment is made by an authorised dealer or a money changer against purchase
of foreign currency or travelers cheques in the normal course of his business.
Note: Where any payment in respect of any expenditure is required to be made by an account
payee cheque/ account payee bank draft or use of electronic clearing system through a bank
account or through such other prescribed electronic modes in order that such expenditure may not
be disallowed as a deduction under section 40A(3), then the payment may be made by such
cheque or draft or electronic clearing system or through such other prescribed electronic modes.

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No person is allowed to raise, in any suit or other proceeding, a plea based on the ground that the
payment was not made or tendered in cash or in any other manner.

This is notwithstanding anything contained in any other law for the time being in force or in any
contract.
(3) Disallowance of provision for gratuity

Section 40A(7) provides that no deduction would be allowable to any taxpayer carrying on any
business or profession in respect of any provision (whether called as provision or by any other
names) made by him towards the payment of gratuity to his employers on their retirement or on
the termination of their employment for any reason.
The reason for this disallowance is that, under section 36(1)(v), deduction is allowable in
computing the profits and gains of the business or profession in respect of any sum paid by a
taxpayer in his capacity as an employer in the form of contributions made by him to an approved
gratuity fund created for the exclusive benefit of his employees under an irrevocable trust. Further,
section 37(1) provides that any expenditure other than the expenditure of the nature described in
sections 30 to 36 laid out or expended, wholly and exclusively for the purpose of the business or
profession must be allowed as a deduction in computing the taxable income from business.
A reading of these two provisions clearly indicates that the intention of the legislature has always
been that the deduction in respect of gratuity be allowable to the employer either in the year in
which the gratuity is actually paid or in the year in which contributions to an approved gratuity fund
are actually made by employer.
This provision, therefore, makes it clear that any amount claimed by the assessee towards
provision for gratuity, by whatever name called would be disallowable in the assessment of
employer even if the assessee follows the mercantile system of accounting.
However, no disallowance would be made as per section 40A(7) in the case where any provision is
made by the employer for the purpose of payment of sum by way of contribution to an approved
gratuity fund during the previous year or for the purpose of making payment of any gratuity that
has become payable during the previous year by virtue of the employee’s retirement, death,
termination of service etc.
Further, where any provision for gratuity for any reason has been allowed as a deduction to the
assessee for any assessment year, any sum paid out of such provision by way of contribution
towards an approved gratuity fund or by way to gratuity to employee shall not be allowed as
deduction to the assessee in the year in which it is paid.

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(4) Contributions by employers to funds, trust etc. [Sections 40A(9)]

This sub-section has been introduced to curb the growing practice amongst employers to claim
deductions from taxable profits of the business of contributions made apparently to the welfare of
employees from which, however, no genuine benefit flows to the employees.
Accordingly, no deduction will be allowed where the assessee pays in his capacity as an employer,
any sum towards setting up or formation of or as contribution to any fund, trust, company,
association of persons, body of individuals, society registered under the Societies Registration Act,
1860 or other institution for any purpose.
However, where such sum is paid in respect of funds covered by sections 36(1)(iv), 36(1)(iva) and
36(1)(v) or any other law, then the deduction will not be denied.
(5) Marked to market loss or other expected loss [Sections 40A(13)]
Section 40A(13) provides that no deduction or allowance in respect of any marked to market loss
or other expected loss shall be allowed except as allowable under section 36(1)(xviii). 36(1)(xviii)
provides that marked to market loss or other expected loss as computed in accordance with the
ICDS notified under section 145(2), would be allowed as deduction. ICDS I provide that marked to
market losses would not be allowed unless the same is in accordance with any other ICDS.
Therefore, only marked to market losses specifically permitted under any other ICDS would be
allowable as deduction under section 36. Other marked to market losses would not be allowed as
deduction as per section 40A(13). This amendment was effective from A.Y. 2017-18.

3.9 PROFITS CHARGEABLE TO TAX [SECTION 41]

This section enumerates certain receipts which are deemed to be income under the head
“business or profession.” Such receipts would attract charge even if the business from which they
arise had ceased to exist prior to the year in which the liability under this section arises. The
particulars of such receipts are given below:
(1) Remission or cessation of trading liability [Section 41(1)]
Suppose an allowance or deduction has been made in any assessment year in respect of loss,
expenditure or trading liability incurred by A. Subsequently, if A has obtained, whether in cash or in
any manner whatsoever, any amount in respect of such loss or expenditure of some benefit in
respect of such trading liability by way of remission or cessation thereof, the amount obtained by
A, or the value of benefit accruing to him shall be taxed as income of that previous year. It does
not matter whether the business or profession in respect of which the allowance or deduction has
been made is in existence in that year or not.

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It is possible that after the above allowance in respect of loss, expenditure, or trading liability has
been given to A, he could have been succeeded in his business by another person. In such a
case, the successor will be liable to be taxed in respect of any such benefit received by him during
a subsequent previous year.
Successor in business:
(i) Where there has been an amalgamation of a company with another company, the
successor will be the amalgamated company.
(ii) Where a firm carrying on a business or profession is succeeded by another firm the
successor will be the other firm.
(iii) In any other case, where one person is succeeded by any other person in that business or
profession the other person will be the successor.
(iv) In case of a demerger, the successor will be the resulting company.
Remission or cessation of a trading liability includes remission or cessation of liability by a
unilateral act of the assessee by way of writing off such liability in his accounts.
(2) Balancing charge, sale of capital asset used for scientific research, recovery of a bad
debt subsequently and withdrawal from reserves created [Section 41(2), (3), (4) & (4A)]
The provisions of section 41(2) relating to balancing charge, section 41(3) relating to sale of
capital assets acquired for scientific research, section 41(4) dealing with recovery of bad debts and
of section 41(4A) relating to withdrawal from special reserve created have been dealt with earlier
under the respective items.
(3) Brought forward losses of defunct business [Section 41(5)]
In cases where a receipt is deemed to be profit of a business under section 41 relating to a
business that had ceased to exist and there is an unabsorbed loss, not being a speculation loss,
which arose in that business during the previous year in which it had ceased to exist, it would be
set off against income that is chargeable under this section even after the expiry of 8 years.

3.10 OTHER PROVISIONS

(1) Special provisions for deduction in case of business for prospecting etc. for mineral
oil [Section 42]
This section enables an assessee to claim an allowance which may on general principles be
inadmissible, e.g., allowance in respect of expenditure which would be regarded as an accretion to
capital on the ground that it brings into existence an asset of enduring benefit or to constitute initial

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expenditure incurred on the setting up of a profit-earning machinery in motion. It must further be

noted that this concession can be availed of only in relation to contract or arrangements entered
into by the Central Government for prospecting for, or the extraction or production of mineral oils.
(i) Allowable expenses
The allowance permissible under this section shall be in relation to
(a) the expenditure by way of infructuous or abortive exploration expenses in respect of an
area surrendered prior to the beginning of commercial production by the assessee;
(b) after the beginning of commercial production, the expenditure incurred by the assessee,
whether before or after such commercial production in respect of drilling or exploration
activities or services or in respect of physical assets used in that connection; and
(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant
to the previous year in which commercial production is begun and for such succeeding
years as may be specified in the agreement.
(ii) Amount of deduction
The sum of those allowances should be computed and deduction should be made in the manner
specified in the agreement entered into by the Central Government with any person for the
association or participation of the Central Government or any authorized person by it in such
business for the prospecting or exploration of mineral oil.
It has been specifically provided that the other provisions of the Act are being deemed, for the purpose
of this allowance, to have been modified to the extent necessary to give effect to the terms of the
agreement. It may be noted that allowances in this regard are made in lieu of or in addition to the other
allowances permissible under the Act, depending upon the terms of the agreement.
(iii) Taxability in case of transfer

Transaction Manner of deduction

(1) Subject to the provisions of the agreement entered into by the Central Government,
where the business of assessee consisting of the prospecting for or extraction or
production of petroleum and natural gas is transferred or any interest therein is
transferred, wholly or partly, in accordance with the aforesaid agreement,
Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year
transfer are less than in which the business or interest has been transferred.
the expenditure Amount of deduction = Expenditure remain unallowed –
incurred remaining Sale proceeds
unallowed

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Case 2: Where the The excess amount or expenditure allowed till date (i.e.,
proceeds of the difference between expenditure incurred in connection
transfer of whole or with the business or to obtain interest therein and the
any part of the expenditure remaining unallowed), whichever is less,
business or interest shall be chargeable to tax as profits and gains of business
therein exceed the in the previous year in which the business or interest
amount of expenditure therein has been transferred.
remaining unallowed Taxable as profits and gains from business and profession
=
Sale proceeds – Expenditure remain unallowed
OR Whichever is
Expenditure allowed till date less
If the business or interest therein is transferred in a
previous year in which the business is no longer in
existence, the taxability would arise in the above manner
as though the business is in existence in that previous
year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which business or interest therein is
transfer are not less transferred or in respect of any subsequent previous year
than the amount of or years.
expenditure incurred Amount of deduction = NIL
remaining unallowed.
Case 4: Where Deduction of unallowed expenditure as reduced by the
transfer of the proceeds of transfer from the expenditure remaining
business or interest is unallowed
not covered under Allowable deduction = Unallowed expenditure – Sale
Case 2 above proceeds
(2) Transfer of business in a scheme of amalgamation
If the amalgamating The provisions of section 42 will apply to amalgamated
company sells or company as they would have applied to amalgamating
transfers the business company as if the latter has not transferred the business
to the amalgamated or interest therein.
company, being an The tax treatment in cases 1, 2, 3 & 4 given in (1) above
Indian company under will not apply to the amalgamating company.
the scheme of
amalgamation

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(3) Transfer of business in a scheme of demerger

If the demerged The provisions of section 42 will apply to resulting
company sells or company as they would have applied to demerged
transfers the business company as if the latter has not transferred the business
to the resulting or interest therein.
company, being an The tax treatment in cases 1, 2, 3 & 4 given in (1) above
Indian company under will not apply to the demerged company.
the scheme of
demerger

Note: Mineral oil includes petroleum and natural gas.

(2) Changes in the rate of exchange of currency [Section 43A]
(i) The section provides that where an assessee has acquired any asset from a foreign country
for the purpose of his business or profession, and due to a change thereafter in the
exchange rate of the two currencies involved, there is an increase or decrease in the
liability (expressed in Indian rupees) of the assessee at the time of making the payment,
the following values may be changed accordingly with respect to the increase or decrease
in such liability:
(a) the actual cost of the asset under section 43(1)
(b) the amount of capital expenditure incurred on scientific research under section
35(1)(iv)
(c) the amount of capital expenditure incurred by a company for promoting family
planning amongst its employees under section 36(1)(ix)
(d) the cost of acquisition of a non-depreciable capital asset falling under section 48.
The amount arrived at after making the above adjustment shall be taken as the amount of
capital expenditure or the cost of acquisition of the capital asset, as the case may be.
(ii) Where the whole or any part of the liability aforesaid is met, not by the assessee, but,
directly or indirectly, by any other person or authority, the liability so met shall not be taken
into account for the purposes of this section.
(iii) Where the assessee has entered into a contract with authorised dealer as defined in
section 2 of the Foreign Exchange Management Act, 1999 for providing him with a specified
sum in a foreign currency on or after a stipulated future date at the rate of exchange
specified in the contract to enable him to meet the whole or any part of the liability
aforesaid, the amount, if any, for adjustment under this section shall be computed with
reference to the rate of exchange specified therein.

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(3) Taxation of foreign exchange fluctuation [Section 43AA]

(i) Section 43AA provides that, subject to the provisions of section 43A, any gain or loss
arising on account of any change in foreign exchange rates shall be treated as income or
loss, as the case may be, which shall be computed in accordance with the notified ICDS
i.e., ICDS VI: The effects of changes in foreign exchange rates.
(ii) Gain or loss arising on account of the effects of change in foreign exchange rates shall be
in respect of all foreign currency transactions, including those relating to –
(a) monetary items and non-monetary items;
(b) translation of financial statements of foreign operations
(c) forward exchange contracts;
(d) foreign currency translation reserves.
(4) Certain Deductions to be made only on actual payment [Section 43B]
The following sums are allowed as deduction only in that previous year in which such sum is
actually paid i.e., on actual payment basis.
(a) Any sum payable by way of tax, duty, cess or fee, by whatever name called, under any law
for the time being in force, or
(b) Any sum payable by the assessee as an employer by way of contribution to any
provident fund or superannuation fund or gratuity fund or any other fund for the welfare
of employees, or
(c) Bonus or Commission for services rendered payable to employees, or

(d) Any sum payable by the assessee as interest on any loan or borrowing from any public
financial institution or a State Financial Corporation or a State Industrial Investment
Corporation, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from notified
class of non-banking financial companies, in accordance with the terms and conditions
of the agreement governing such loan or borrowing, or
(e) Interest on any loan or advance from a scheduled bank or co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural
development bank, in accordance with the terms and conditions of the agreement governing
such loan or borrowing, or

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(f) Any sum paid by the assessee as an employer in lieu of earned leave of his employee,
or

(g) Any sum payable by the assessee to the Indian Railways for use of Railway assets.
For the purpose of claiming deduction of the sums referred to above in clauses (a) to (g) in the
relevant previous year in which the expenditure is incurred, the above sums have to be paid by
the assessee on or before the due date for furnishing the return of income under section
139(1) in respect of the previous year in which the liability to pay such sum was incurred and the
evidence of such payment is furnished by the assessee along with such return.
Conversion of interest into a loan or borrowing or debenture or any other instrument
Explanation 3C, 3CA & 3D clarifies that if any sum payable by the assessee as interest on any
such loan or borrowing or advance referred to in (d), (da) and (e) above, is converted into a loan or
borrowing or advance or debenture or any other instrument by which the liability to pay is deferred
to a future date, the interest so converted and not “actually paid” shall not be deemed as actual
payment, and hence would not be allowed as deduction. The clarificatory explanations only
reiterate the rationale that conversion of interest into a loan or borrowing or advance or debenture
or any other instrument by which the liability to pay is deferred to a future date does not amount to
actual payment.
The manner in which the converted interest will be allowed as deduction has been clarified in
Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever actually paid to the bank or
financial institution, will be in the nature of revenue expenditure deserving deduction in the
computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed
in the previous year in which the converted interest is actually paid.
Meaning of Non-banking financial company:
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending
in any manner;
(iii) such other non-banking institution or class of such institutions, as the bank may, specify
with the previous approval of the Central Government and by notification in the Official
Gazette.

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ILLUSTRATION 16
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation (APSFC)
and Indian Bank and has not paid interest as detailed hereunder:

`
(i) Andhra Pradesh State Financial Corporation (P.Y. 2024-25 & 2025-26) 15,00,000
(ii) Indian Bank (P.Y. 2025-26) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2025-
26, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments. During the year ended 31.3.2026, Hari paid 5 installments to APSFC and 3
installments to Indian Bank.
Hari claimed the entire interest of ` 45,00,000 as an expenditure while computing the income from
business of purchase and sale of agricultural commodities. Discuss whether his claim is valid and
if not what is the amount of interest, if any, allowable.

SOLUTION
According to section 43B, any interest payable on the term loans to specified financial institutions
and any interest payable on any loans and advances to, inter alia, scheduled banks shall be
allowed only in the year of payment of such interest irrespective of the method of accounting
followed by the assessee. Where there is default in the payment of interest by the assessee, such
unpaid interest may be converted into loan. Such conversion of unpaid interest into loan shall not
be construed as payment of interest for the purpose of section 43B. The amount of unpaid interest
so converted as loan shall be allowed as deduction only in the year in which the converted loan is
actually paid.
In the given case of Hari, the unpaid interest of ` 15,00,000 due to APSFC and of
` 30,00,000 due to Indian Bank was converted into loan. Such conversion would not amount to
payment of interest and would not, therefore, be eligible for deduction in the year of such
conversion. Hence, claim of Hari that the entire interest of ` 45,00,000 is to be allowed as
deduction in the year of conversion is not tenable. The deduction shall be allowed only to the
extent of repayment made during the financial year. Accordingly, the amount of interest eligible for
deduction for the A.Y.2026-27 shall be calculated as follows:

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Interest Number of Amount per Instalments Interest

outstanding Instalments instalment paid allowable (`)
(`) (`)
APSFC 15 lakh 60 25,000 5 1,25,000
Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000

Clarification on non-applicability of section 43B in respect of employee's Contribution to

welfare funds [Explanation 5 to section 43B]
As per section 2(24)(x), any sum received by an assessee, being an employer from his employee
as contribution to any provident fund or superannuation fund or any fund set up under Employee’s
State Insurance Act, 1948 or any other fund for the welfare of employees would be considered as
the income of an employer.
The deduction in respect of above sum will be allowed to the assessee under section 36(1)(va)
only if such sum is credited by the assessee to the employee’s account in the relevant fund on or
before the due date, being the date specified under the relevant Act, Rule, order or notification
issued thereunder.
As per section 43B, any sum payable by the assessee as an employer by way of contribution to
any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of
employees, would be allowable during any P.Y. if the same has been paid on or before the 'due
date' applicable in his case for furnishing the return of income under section 139(1) in respect of
that P.Y.

Explanation 5 clarifies that the provisions of section 43B regarding allowability of certain
expenditure in a previous year only on actual payment basis (i.e., payment on or before the due
date of filing of return of income for relevant assessment year), does not apply and would deemed
never to be applied to employee’s contribution received by employer towards any welfare fund. In
effect, clause (b) of section 43B covers only employer’s contribution to provident fund,
superannuation fund, gratuity fund or any other fund for welfare of employees, for remittance of
which extended time limit upto due date of filing return u/s 139(1) is available; however, it does not
include within its scope, employees’ contribution to such funds received by the employer, which
has to be credited to the employee’s account in the relevant fund on or before the due date
specified under the relevant Act, Rule etc. Amount credited after the said due date but on or before
the due date under section 139(1) would not be eligible for deduction.

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Section 43B [Clause (h)]

Any sum payable by the assessee to a micro or small enterprise beyond the time-limit specified in
section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 would be allowed
as deduction only in that previous year in which such sum is actually paid.
Section 15 of the of the Micro, Small and Medium Enterprises Development Act, 2006 mandates
payment of goods or services to supplier, being a micro or small enterprises by the buyer on or
before the date agreed upon between them in writing i.e., as per the written agreement, which
cannot be more than 45 days from the day of acceptance or the day of deemed acceptance of any
goods or services by a buyer from a supplier. If there is no such written agreement, the payment
shall be made before the appointed day i.e., within 15 days.
If the sum payable by the assessee to a micro or small enterprise is paid as per written agreement
(maximum within 45 days) or within 15 days in case of no agreement, the deduction can be
claimed on accrual basis if mercantile method of accounting is followed by the assessee.
However, if the sum payable by the assessee to a micro or small enterprise is not paid as per
written agreement or within 15 days in case of no agreement, the deduction would be allowed in
the previous year in which it is actually paid.

Example: Mr. A has purchased goods of ` 10,000 from A & Co., a micro enterprise on 1.3.2026.
As per the written agreement between them, the payment has to be made by 5.4.2026. Mr. A
follows mercantile method of accounting.

(i) If Mr. A paid the sum on 2.4.2026

Since Mr. A paid the sum on or before 5.4.2026, the deduction would be allowed in P.Y. 2025-26.
(ii) If Mr. A paid the sum on 20.4.2026

Since Mr. A paid the sum beyond the time limit, the deduction would be allowed in the year of
actual payment i.e., P.Y. 2026-27.

Example: Suppose Mr. Raju has purchased goods of ` 10,000 from A & Co., a medium enterprise
on 1.3.2026. As per the written agreement between them, the payment has to be made by
5.4.2026, however Mr. Raju paid the sum on 10.4.2026. Mr. Raju follows mercantile method of
accounting.
In such case, since disallowance under section 43B(h) is not applicable on sum payable to
medium enterprise, the deduction would be allowed in P.Y. 2025-26 on due basis.

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Meaning of Micro and Small enterprise

S. No. Meaning
(1) Micro Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ` 10 crore
Equipment ≤ ` 2.5 crore
(2) Small Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ` 100 crore
Equipment ≤ ` 25 crore
Any sum payable means a sum for which the assessee incurred liability in the previous year even
though such sum might not have been payable within that year under the relevant law.
(5) Special provision for computation of cost of acquisition of certain assets [Section 43C]

(i) Where an asset acquired under a scheme of amalgamation is sold by an amalgamated

company as its stock-in-trade then in computing the profits and gains derived from sale of
such stock-in-trade, the cost of acquisition of stock-in-trade to the amalgamated company
shall be the cost of acquisition of the asset to the amalgamating company as increased by
the cost, if any, of any improvement thereto and the expenditure incurred wholly and
exclusively in connection with such a transfer.

(ii) The provisions of section 43C will thus apply to the following cases of revaluation:

(a) When the stock-in-trade of the amalgamating company is taken over at revalued
price by the amalgamated company under the scheme of amalgamation.

(b) Where a capital asset of the amalgamating company is taken over as stock-in-trade
by the amalgamated company after revaluation under the scheme of amalgamation.

(iii) The situation referred to at (b) above will in turn cover three situations:

(a) When the capital asset is converted to stock-in-trade by the amalgamating company
with revaluation and the revalued asset is taken over by the amalgamated company
under the scheme of amalgamation.
(b) Where the capital asset is taken over as stock-in-trade by the amalgamated
company at revalued price at the time of amalgamation.
(c) Where the capital asset of the amalgamating company is taken over by the
amalgamated company as a capital asset and has been converted into stock-in-trade
and revalued.

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(iv) In a case referred to (c) above, where the revaluation and conversion of capital asset into
stock-in-trade takes place in the hands of the amalgamated company, the provisions of
section 45(2) will apply. In such a case, the provisions of section 43C will not apply. This
has been done with a view to ensure that a tax payer does not face double taxation in
respect of the same transaction. However, when the stock-in-trade referred to in item (ii)(a)
as well as at (a) and (b) of (iii) above are sold, the provisions of section 43C will apply.
(v) A similar provision in section 43C has also been made to cover cases where the asset sold
as stock-in-trade has been acquired by the assessee either by way of full or partial partition
of HUF or under a gift or will or an irrevocable trust and such asset is sold as stock-in-trade.
(6) Stamp Duty Value of land and building to be taken as the full value of consideration
in respect of transfer, even if the same are held by the transferor as stock-in-trade
[Section 43CA]
(i) Section 43CA has been inserted as an anti-avoidance measure to provide that where the
consideration for the transfer of an asset (other than capital asset), being land or building or
both, is less than the stamp duty value, the value so adopted or assessed or assessable
(i.e., the stamp duty value) shall be deemed to be the full value of the consideration for the
purposes of computing income under the head “Profits and gains of business of profession”.
However, if the stamp duty value does not exceed 110% of the consideration received or
accruing then, such consideration shall be deemed to be the full value of consideration for
the purpose of computing profits and gains from transfer of such asset.
(ii) Further, where the date of an agreement fixing the value of consideration for the transfer of
the asset and the date of registration of the transfer of the asset are not same, the stamp
duty value may be taken as on the date of the agreement for transfer instead of on the date
of registration for such transfer, provided at least a part of the consideration has been
received by way of an account payee cheque/account payee bank draft or use of ECS
through a bank account or through such other prescribed electronic modes on or before the
date of the agreement.
The prescribed electronic modes include credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
(iii) The Assessing Officer may refer the valuation of the asset to a valuation officer as defined in
section 2(r) of the Wealth-tax Act, 1957 in the following cases -

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(1) Where the assessee claims before any Assessing Officer that the value adopted or
assessed or assessable by the authority for payment of stamp duty exceeds the fair
market value of the property as on the date of transfer and
(2) the value so adopted or assessed or assessable by such authority has not been
disputed in any appeal or revision or no reference has been made before any other
authority, court or High Court.
(iv) Where the value ascertained by the Valuation Officer exceeds the value adopted or
assessed or assessable by the Stamp Valuation Authority, the value adopted or assessed
or assessable shall be taken as the full value of the consideration received or accruing as a
result of the transfer.
The term “assessable” covers transfers executed through power of attorney.
The term ‘assessable’ has been defined to mean the price which the stamp valuation authority
would have, notwithstanding anything to the contrary contained in any other law for the time being
in force, adopted or assessed, if it were referred to such authority for the purposes of the payment
of stamp duty.

Date of Actual Stamp duty Stamp duty Full value of Remark

transfer consideration value on the value on consideration
of land / date of the date of
building agreement registration
held as ` in lakhs
stock-
in-trade
Example:
1/9/2025 100 120 210 120 As part of the
(` 10 lakhs (1/7/2025) (1/9/2025) consideration is
received by received by A/c payee
A/c payee cheque on the date of
cheque on agreement, Stamp
1/7/2025) duty value (SDV) on
the date of agreement
to be adopted as full
value of consideration,
since the SDV
exceeds 110% of
consideration i.e.,
` 110 lakhs.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.165

Example:
1/9/2025 100 109 130 130 SDV on the date of
(` 10 lakhs (1/7/2025) (1/9/2025) registration to be
received by adopted as full value
cash on of consideration and
1/7/2025) such SDV exceeds
110% of consideration
i.e.,` 110 lakhs. Since
part of consideration is
received by cash on
the date of agreement,
the SDV on the date of
agreement cannot be
considered vis-à-vis
actual consideration.
Example:
31/1/2026 100 109 130 100 Actual sales
(` 10 lakhs (1/7/2025) (31/1/2026) consideration would be
received by A/c the full value of
payee cheque consideration, since
on 1/7/2025) SDV on the date of
agreement does not
exceed 110% of actual
consideration. SDV on
the date of agreement
can be considered vis-
à-vis actual
consideration, since
part of the
consideration has been
received by account
payee cheque on the
date of agreement.
Example:
31/3/2026 100 120 130 130 Stamp duty value of the
(Full amount (1/5/2025) (31/3/2026) date of registration
received in would be the full value
cash on the of consideration since
date of the stamp duty value
registration) exceeds 110% of
consideration i.e.,
` 110 lakhs.

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(7) Income from construction and service contracts [Section 43CB]

The profits and gains arising from a construction contract or a service contract shall be computed
on the basis of percentage of completion method (POCM) in accordance with the notified ICDS
i.e., ICDS III: Construction Contracts.
However, the profits and gains arising from a service contract shall be computed on the basis of -
Method Condition
Project completion method If the duration of the contract is not more than 90 days
Straight line method If the contract involves indeterminate number of acts over a
specific period of time

For the purpose of percentage of completion method, project completion method or straight line
method –
(i) the contract revenue shall include retention money;
(ii) the contract cost shall not be reduced by any incidental income in the nature of interest,
dividends or capital gains.
(8) Special Provision in case of income of Public Financial Institutions [Section 43D]
In the case of
- a public financial institution or

- a scheduled bank or
- a co-operative bank other than primary agricultural credit society or a primary co-operative
agricultural and rural development bank or
- a State financial corporation or
- a State industrial investment corporation or
- notified class of non-banking financial companies,
the income by way of interest on such categories of bad and doubtful debts, as may be prescribed
having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall
be chargeable to tax in the previous year in which it is credited to the profit and loss account by
the said institutions for that year or in the previous in which it is actually received by it, whichever
is earlier.

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3.11 COMPULSORY MAINTENANCE OF ACCOUNTS

[SECTION 44AA]
(1) Maintain the books of account and other documents by notified profession [Section
44AA(1)]: This section provides that every person carrying on the legal, medical, engi-
neering or architectural profession or accountancy or technical consultancy or interior
decoration or any other profession as has been notified by the CBDT in the official gazette
must statutorily maintain such books of accounts and other documents as may enable
the assessing officer to compute his total income in accordance with the provisions
of the Income-tax Act, 1961.

Notified professions: The professions notified so far are as the profession of authorised
representative; the profession of film artist (actor, camera man, director, music director, art
director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue
writer and dress designer); the profession of Company Secretary; and information
technology professionals.

Prescribed books of accounts & other documents: The CBDT has been authorised,
having due regard to the nature of the business or profession carried on by any class of
persons, to prescribe by rules the books of account and other documents including
inventories, wherever necessary, to be kept and maintained by the taxpayer, the particulars
to be contained therein and the form and manner in which and the place at which they
must be kept and maintained.

Rules pertaining to maintenance of books of accounts & other documents:

Rule 6F of the Income-tax Rules contains the details relating to the books of account and
other documents to be maintained by certain professionals under section 44AA(1).

Prescribed class of persons: As per Rule 6F, every person carrying on legal, medical,
engineering, or architectural profession or the profession of accountancy or technical
consultancy or interior decoration or authorised representative or film artist shall keep and
maintain the books of account and other documents specified in Rule 6F(2) in the following
cases :
– if his gross receipts exceed ` 1,50,000 in all the 3 years immediately preceding
the previous year; or
– if, where the profession has been newly set up in the previous year, his gross
receipts are likely to exceed ` 1,50,000 in that year.

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Note: Students may note that professionals whose gross receipts are less than the
specified limits given above are also required to maintain books of account but these have
not been specified in the Rule.
In other words, they are required to maintain (as per point (1) above) such books of account
and other documents as may enable the Assessing Officer to compute the total income in
accordance with the provisions of this Act.

Prescribed books of accounts and other documents [Sub-rule (2) of Rule 6F]: The
following books of account and other documents are required to be maintained.
(i) a cash book;
(ii) a journal, if accounts are maintained on mercantile basis;
(iii) a ledger;
(iv) Carbon copies of bills and receipts issued by the person whether machine numbered
or otherwise serially numbered, in relation to sums exceeding ` 25;
(v) Original bills and receipts issued to the person in respect of expenditure incurred by
the person, or where such bills and receipts are not issued, payment vouchers
prepared and signed by the person, provided the amount does not exceed ` 50.
Where the cash book contains adequate particulars, the preparation and signing of
payment vouchers is not required.

In case of a person carrying on medical profession, he will be required to maintain the

following in addition to the list given above:
(i) a daily case register in Form 3C.

(ii) an inventory under broad heads of the stock of drugs, medicines and other
consumable accessories as on the first and last day of the previous year used for his
profession.

Place at which books to be kept and maintained: The books and documents shall be
kept and maintained at the place where the person is carrying on the profession, or where
there is more than one place, at the principal place of his profession. However, if he
maintains separate set of books for each place of his profession, such books and
documents may be kept and maintained at the respective places.
Period for which the books of account and other documents are required to be kept
and maintained: The Central Board of Direct Taxes has also been empowered to

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.169

prescribe, by rules, the period for which the books of account and other documents are
required to be kept and maintained by the taxpayer.

Prescribed period: The above books of account and documents shall be kept and
maintained for a minimum of 6 years from the end of the relevant assessment year.
ILLUSTRATION 17
Vinod is a person carrying on profession as film artist. His gross receipts from profession
are as under:
`
Financial year 2022-23 1,15,000
Financial year 2023-24 1,80,000
Financial year 2024-25 2,10,000
What is his obligation regarding maintenance of books of accounts for Assessment Year
2026-27 under section 44AA of Income-tax Act, 1961?

SOLUTION
Section 44AA(1) requires every person carrying on any profession, notified by the Board in
the Official Gazette (in addition to the professions already specified therein), to maintain
such books of account and other documents as may enable the Assessing Officer to
compute his total income in accordance with the provisions of the Income-tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required to maintain
specified books of accounts, only if:
(i) his gross receipts in all the three years immediately preceding the relevant previous
year has exceeded ` 1,50,000; or
(ii) it is a new profession which is setup in the relevant previous year, it is likely to
exceed ` 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a
notified profession. Since his gross receipts have not exceeded ` 1,50,000 in financial year
2022-23, the requirement under section 44AA to compulsorily maintain the prescribed
books of account is not applicable to him for A.Y. 2026-27.
Mr. Vinod, however, required to maintain such books of accounts as would enable the
Assessing Officer to compute his total income.

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(2) Maintenance of books of account and other documents by persons carrying on

business or profession [other than notified professions referred to in section
44AA(1)] [Section 44AA(2)]:
I. In case of Individual or HUF: An Individual or HUF carrying on any business or
profession (other than notified professions specified in section 44AA(1)) must
maintain such books of account and other documents as may enable the Assessing
Officer to compute his total income in accordance the provisions of the Income-tax
Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income from the
existing business or profession exceeds ` 2,50,000 or the total sales,
turnover or gross receipts, as the case may be, in the business or
profession exceed ` 25,00,000 in any one of three years immediately
preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the business or
profession is newly set up in any previous year, if his income from business
or profession is likely to exceed ` 2,50,000 or his total sales, turnover or
gross receipts, as the case may be, in the business or profession are likely
to exceed ` 25,00,000 during the previous year.
II. Person (other than individual or HUF): Every person (other than individual or HUF)
carrying on any business or profession (other than the notified professions referred
to in section 44AA(1)) must maintain such books of account and other documents as
may enable the Assessing Officer to compute his total income in accordance the
provisions of the Income-tax Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income from the business
or profession exceeds ` 1,20,000 or the total sales, turnover or gross
receipts, as the case may be, in the business or profession exceed ` 10,00,000
in any one of three years immediately preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the business or
profession is newly set up in any previous year, if his income from business or
profession is likely to exceed ` 1,20,000 or his total sales, turnover or
gross receipts, as the case may be, in the business or profession are likely
to exceed ` 10,00,000 during the previous year;

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III. Showing lower income as compared to income computed on presumptive basis

under section 44AE or (section 44BB or section 44BBB) 13: Where profits and
gains from the business are calculated on a presumptive basis under section 44AE
or section 44BB or section 44BBB and the assessee has claimed that his income is
lower than the profits or gains so deemed to be the profits and gains of his business.
IV. Where the provisions of section 44AD(4) are applicable in his case and his
income exceeds the basic exemption limit in any previous year: In cases, where
an assessee not eligible to claim the benefit of the provisions of section 44AD(1) for
five assessment years subsequent to the assessment year relevant to the previous
year in which the profit has not been declared in accordance with the provisions of
44AD(1) and his income exceeds the basic exemption limit during the previous year.
(3) Penalty for failure to maintain books of account [Section 271A]: If a person fails to
keep and maintain any such books of account and other documents as required by section
44AA in respect of any previous year or to retain such books of account and other
documents for the specified period, the Assessing Officer or the Joint Commissioner
(Appeals) or the Commissioner (Appeals) may direct a penalty of ` 25,000 would be
leviable under section 271A.

3.12 AUDIT OF ACCOUNTS OF CERTAIN PERSONS

CARRYING ON BUSINESS OR PROFESSION
[SECTION 44AB]
(1) Requirement of Tax Audit: It is obligatory for the persons mentioned in column (2) of the
table below, carrying on business or profession, to get his accounts audited before the
“specified date” by a Chartered Accountant, if the conditions mentioned in the
corresponding row of column (3) are satisfied
Persons When tax audit is required?
(1) (2) (3)
I In case of a person carrying on
business
(a) In case of a person carrying on If his total sales, turnover or gross
business receipts in business > ` 1 crore in the
relevant PY

13Section 44BB and 44BBB will be discussed in Chapter 21: Non-resident taxation in Module 4 of the Study
Material.

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Note – The requirement of audit u/s 44AB

does not apply to a person who declares
profits and gains for the previous year on
presumptive basis u/s 44AD(1).
If in case of such person carrying on If his total sales, turnover or gross
business - receipts in business > ` 10 crore in the
(i) Aggregate cash receipts in the relevant PY
relevant PY ≤ 5% of total receipts
(including receipts for sales,
turnover, gross receipts); and
(ii) Aggregate cash payments in the
relevant PY ≤ 5% of total
payments (including amount
incurred for expenditure)
Note – For this purpose, the payment or receipt, as the case may be, by a cheque
drawn on a bank or by a bank draft, which is not account payee, would be deemed
to be the payment or receipt, as the case may be, in cash.
(b) In case of an assessee covered u/s If such assessee claims that the profits and
44AE i.e., an assessee engaged in gains from business in the relevant P.Y. are
the business of plying, hiring or lower than the profits and gains computed
leasing goods carriages who owns on a presumptive basis u/s 44AE [i.e.,
not more than 10 goods carriages at ` 1000 per ton of gross vehicle weight or
any time during the P.Y. unladen weight in case of each heavy
goods vehicle and ` 7,500 for each vehicle,
other than heavy goods vehicle, for every
month or part of the month for which the
vehicle is owned by the assessee].
(c) In case of an eligible assessee If he declares profit for any of the five
carrying on business, whose total successive PYs (say, P.Y.2025-26) not in
turnover, sales, gross receipts accordance with section 44AD (i.e., he
≤ ` 200 lakhs, and who has opted declares profits lower than 8% or 6% of
for section 44AD in any earlier PY total turnover, sales or gross receipts, as
(say, P.Y. 2024-25) the case may be, in that year), then, he
In case of an eligible assessee cannot opt for section 44AD for five
carrying on business, whose successive PYs after the year of such
aggregate cash receipts in the default (i.e., from P.Y.2026-27 to
relevant PY ≤ 5% of total turnover or P.Y.2030-31). For the year of default
gross receipts and whose total (i.e., P.Y.2025-26) and five successive
turnover, sales, gross receipts previous years (i.e., P.Y.2026-27 to
≤ ` 300 lakhs, and who has opted P.Y.2030-31), he has to maintain books of
for section 44AD in any earlier PY account u/s 44AA and get them audited
(say, P.Y. 2024-25) u/s 44AB, if his income exceeds the basic
exemption limit.

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II In case of persons carrying on

profession
(a) In case of a person carrying on If his gross receipts in profession > ` 50
profession lakh in the relevant PY.
Note – The requirement of audit u/s 44AB
does not apply to a person who declares
profits and gains for the previous year on
presumptive basis u/s 44ADA(1).
(b) In case of an assessee carrying on a If such resident assessee claims that the
notified profession under section profits and gains from such profession in
44AA(1) i.e., legal medical, the relevant PY are lower than the profits
engineering, accountancy, and gains computed on a presumptive
architecture, interior decoration, basis u/s 44ADA (50% of gross receipts)
technical consultancy, whose gross and his income exceeds the basic
receipts ≤ ` 50 lakhs exemption limit in that PY.
In case of an assessee carrying on a
notified profession under section
44AA(1) i.e., legal medical,
engineering, accountancy,
architecture, interior decoration,
technical consultancy, whose
aggregate cash receipts in the
relevant PY ≤ 5% of total gross
receipts and whose gross receipts
≤ ` 75 lakhs

(2) Audit Report: The persons mentioned above would have to furnish by the specified date a
report of the audit in the prescribed forms. For this purpose, the Board has prescribed under
Rule 6G, Forms 3CA/3CB/3CD containing forms of audit report and particulars to be
furnished therewith. The audit report furnished may be revised by the person by getting
revised report of audit from a chartered accountant, duly signed and verified by such
chartered accountant, if there is payment by such person after furnishing of report which
necessitates recalculation of disallowance under section 40 or section 43B. The said
revised audit report has to be furnished before the end of the relevant assessment year for
which the report pertains.
(3) Accounts audits under other statutes are considered: In cases where the accounts of a
person are required to be audited by or under any other law before the specified date, it will
be sufficient if the person gets his accounts audited under such other law before the
specified date and also furnish by the said date the report of audit in the prescribed form in
addition to the report of audit required under such other law.

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 3.174 DIRECT TAX LAWS

Thus, for example, the provision regarding compulsory audit does not imply a second or
separate audit of accounts of companies whose accounts are already required to be audited
under the Companies Act, 2013. The provision only requires that companies should get their
accounts audited under the Companies Act, 2013 before the specified date and in addition to the
report required to be given by the auditor under the Companies Act, 2013 furnish a report for tax
purposes in the form to be prescribed in this behalf by the CBDT.
(4) Specified date: The expression “specified date” in relation to the accounts of the previous
year or years relevant to any assessment year means the date one month prior to the due date
for furnishing the return of income under section 139(1).
The due date for filing return of income in case of assessees (other than companies) who are
required to get their accounts audited is 31st October of the relevant assessment year. Hence,
the specified date for tax audit would be 30th September of the relevant assessment year. 14
(5) Non-applicability: The requirement of audit under section 44AB does not apply to a person
who derives income of the nature referred to in (sections 44B and 44BBA) 15 .
(6) Penal provision: If any person fails to get his accounts audited in respect of any previous year
or furnish the audit report by the specified date, penalty of lower of (a) and (b) mentioned below
would be leviable on such person –
(a) ½% of total sales, turnover or gross receipts, as the case may be, in business or of the
gross receipts in profession, in such previous year; or
(b) ` 1,50,000 [Section 271B].

3.13 SPECIAL PROVISIONS FOR COMPUTING PROFITS

AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS
[SECTION 44AD/ 44ADA/ 44AE]
Particulars Section 44AD Section 44ADA Section 44AE
(1) Eligible Assessee Resident individual, Resident individual An assessee
HUF or Partnership or resident owning not more
firm (but not LLP) partnership firm (but than 10 goods
engaged in eligible not LLP) engaged in carriages at any
business and who has any profession time during the
not claimed deduction specified u/s 4AA(1), P.Y.

14 In case of a person whose due date for filing return of income is 30th November of the relevant
assessment year, the specified date for tax audit would be 31st October of the relevant assessment year.
15 Section 44B and 44BBA will be discussed in Chapter 21: Non-resident taxation in Module 4 of the Study

Material.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.175

under section 10AA or namely, legal,

Chapter VIA under “C medical,
– Deductions in engineering,
respect of certain architectural
incomes” profession or
Non-applicability of profession of
section 44AD in accountancy or
respect of the technical
following persons: consultancy or
interior decoration or
- A person
notified profession
carrying on
(authorized
profession
representative, film
specified u/s
artist, company
44AA(1);
secretary, profession
- A person earning of information
income in the technology)
nature of
commission or
brokerage;
- A person
carrying on any
agency
business.
(2) Eligible business/ Any business, other Any profession Business of
profession than business specified under plying, hiring or
referred to in section section 44AA(1), leasing goods
44AE, whose total whose gross carriages
turnover/ gross receipts ≤ ` 50
receipts in the P.Y. ≤ lakhs in the
` 200 lakhs relevant P.Y.
Any business, other Any profession
than business specified u/s
referred to in section 44AA(1), whose
44AE, whose total gross receipts
turnover/gross ≤ ` 50 lakhs in the
receipts in the P.Y. relevant P.Y., if
≤ ` 300 lakhs in the aggregate cash
relevant P.Y., if receipts in the
aggregate cash relevant PY ≤ 5% of
receipts in the total gross
relevant PY ≤ 5% of receipts.
total turnover or
gross receipts.

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 3.176 DIRECT TAX LAWS

In effect, if the In effect, if the gross

turnover of business receipts from
is > ` 200 lakhs profession is > ` 50
≤ ` 300 lakhs, the lakhs ≤ ` 75 lakhs,
benefit of section the benefit of section
44AD can be availed 44ADA can be
only if aggregate cash availed only if
receipts in relevant aggregate cash
P.Y. ≤ 5% of total receipts in relevant
turnover or gross P.Y. ≤ 5% of total
receipts. gross receipts.
Note: For this purpose, the receipt of amount or
aggregate of amounts by a cheque drawn on a
bank or by a bank draft, which is not account
payee, would be deemed to be the receipt in
cash.
(3) Presumptive 8% of total turnover/ 50% of gross For each heavy
income sales/gross receipts receipts of such goods vehicle
or a sum higher than profession or a sum ` 1,000 per ton
the aforesaid sum higher than the of gross vehicle
claimed to have been aforesaid sum weight or
earned by the claimed to have unladen weight,
assessee. been earned by the as the case may
6% of total turnover/ assessee. be, for every
gross receipts in month or part of
respect of the amount a month;
of total turnover/ For each
sales/ gross receipts vehicle, other
received by A/c payee than heavy
cheque/ bank draft/ goods vehicle:
ECS through a bank ` 7,500 per
account or through month or part of
such other prescribed a month during
electronic modes which such
(credit card, debit vehicle is owned
card, net banking, by the assessee
IMPS, UPI, RTGS, or an amount
NEFT, and BHIM claimed to have
Aadhar Pay) during been actually
the P.Y. or before earned from such
due date of filing of vehicle,
return u/s 139(1) in whichever is
respect of that P.Y. higher.
(or) such higher sum

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.177

claimed to have been

earned by the
assessee.
(4) Non-allowability Deductions allowable under sections 30 to 38 shall be deemed
of deductions to have been given full effect to and no further deduction shall
while computing be allowed.
presumptive
Even in case of a firm, Even in case of a In case of a firm,
income
salary and interest firm, salary and salary and
paid to partners is not interest paid to interest paid to
deductible. partners is not partners is
deductible. deductible
subject to the
conditions and
limits specified in
section 40(b).
(5) Written down WDV of any asset of an eligible business/profession shall be
value of asset deemed to have been calculated as if the eligible assessee had
claimed and had been actually allowed depreciation for each of
the relevant assessment years.
(6) Requirement of If eligible assessee If eligible assessee If eligible
maintenance of declares profits and declares profits and assessee
books of account gains in accordance gains in accordance declares profits
u/s 44AA and with the provisions of with the provisions of and gains in
audit u/s 44AB section 44AD, he is section 44ADA, he is accordance with
not required to not required to the provisions of
maintain books of maintain books of section 44AE, he
account u/s 44AA or account u/s 44AA or is not required to
get them audited u/s get them audited u/s maintain books
44AB. 44AB. of account u/s
However, if after However, if the 44AA or get them
declaring profits on assessee claims his audited u/s
presumptive basis u/s profits to be lower 44AB.
44AD, say, for than the profits However, if the
A.Y.2026-27, non- computed by assessee claims
declaration of profits applying the his profits to be
on presumptive basis presumptive rate, he lower than the
for any of the 5 has to maintain profits computed
successive A.Y.s books of account by applying the
thereafter (i.e., from and other documents presumptive rate,
A.Y.2027-28 to u/s 44AA(1) and get he has to
A.Y.2031-32), say, for his accounts maintain books
A.Y. 2028-29, would audited u/s 44AB, if of account u/s
disentitle the his total income > 44AA(2) and get

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 3.178 DIRECT TAX LAWS

assessee from basic exemption his accounts

claiming profits on limit for that year. audited u/s
presumptive basis for 44AB.
five successive AYs
subsequent to the AY
relevant to the PY of
such non-declaration
(i.e., from
A.Y.2029-30 to
A.Y. 2033-34). In
such a case, the
assessee would have
to maintain books of
account and other
documents u/s
44AA(2) and get his
accounts audited u/s
44AB, if his total
income exceeds the
basic exemption
limit in those years.
(7) Advance tax The eligible assessee The eligible The eligible
obligation opting for section assessee opting for assessee has to
44AD is required to section 44ADA is pay advance tax
pay advance tax by required to pay in four
15th March of the advance tax by 15th installments [See
financial year (F.Y.). March of the F.Y. Chapter 13 in
Module 3 for
details].
Meaning of certain terms for the purpose of section 44AE:
[Link] Term Meaning
(1) Heavy goods vehicle any goods carriage, the gross vehicle weight of which
exceeds 12,000 kilograms.
(2) Gross vehicle weight total weight of the vehicle and load certified and registered
by the registering authority as permissible for that vehicle.
(3) Unladen weight the weight of a vehicle or trailer including all equipment
ordinarily used with the vehicle or trailer when working but
excluding the weight of driver or attendant and where
alternative parts or bodies are used the unladen weight of
the vehicle means the weight of the vehicle with the heaviest
such alternative body or part

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.179

The CBDT clarified that in respect of a “heavy goods vehicle” i.e. any goods carriage vehicle
whose gross vehicle weight exceeds 12.000 kilograms, the profits and gains from each goods
carriage would be at the rate of ` 1,000 per ton of gross vehicle weight for every month or part of
the month.
However, in respect of a tractor or a road-roller. where the gross vehicle weight is not applicable,
and unladen weight exceeds 12,000 Kilograms. the profits and gains from each goods carriage
shall be at the rate of ` 1,000 per ton of unladen weight for every month or part of the month
[Clarification dated 14.8.2019].

Example:
Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible
assessee carrying on retail trade business whose total turnover do not exceed ` 2 crore in any of
the previous years relevant to A.Y.2026-27 to A.Y.2028-29

Particulars A.Y.2026-27 A.Y.2027-28 A.Y.2028-29

Total turnover (`) 1,80,00,000 1,90,00,000 2,00,00,000
Amount received through prescribed electronic 1,60,00,000 1,45,00,000 1,80,00,000
modes on or before 31st October of the A.Y.
Income offered for taxation (`) 11,20,000 12,30,000 10,00,000
% of gross receipts 6% on ` 1.60 6% on ` 1.45 5% on ` 2
crore and 8% crore and 8% crore
on ` 20 lakhs on ` 45 lakhs
Offered income as per presumptive taxation Yes Yes No
scheme u/s 44AD

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for
A.Y.2026-27 and A.Y.2027-28 and offers income of ` 11.20 lakhs and ` 12.30 lakhs on gross receipts
of ` 1.80 crore and ` 1.90 crore, respectively.
However, for A.Y.2028-29, he offers income of only ` 10 lakhs on turnover of ` 2 crores, which
amounts to 5% of his gross receipts. He needs to maintain books of account under section 44AA
and gets the same audited under section 44AB. Since he has not offered income in accordance
with the provisions of section 44AD(1) for five consecutive assessment years, after A.Y. 2026-27,
he will not be eligible to claim the benefit of section 44AD for next five assessment years
succeeding A.Y.2028-29 i.e., from A.Y.2029-30 to 2033-34.

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 3.180 DIRECT TAX LAWS

ILLUSTRATION 18
Mr. Praveen engaged in retail trade, reports a turnover of ` 2,98,50,000 for the financial year
2025-26. Amount received in cash during the P.Y. 2025-26 is ` 14,00,000 and balance through
prescribed electronic modes on or before 31st July 2026. His income from the said business as per
books of account is ` 15,00,000 computed as per the provisions of Chapter IV-D “Profits and gains
from business or Profession” of the Income-tax Act, 1961. Retail trade is the only source of income
for Mr. Praveen. A.Y. 2025-26 was the first year for which he declared his business income in
accordance with the provisions of presumptive taxation u/s 44AD.
(i) Is Mr. Praveen also eligible for presumptive determination of his income chargeable to tax
for the assessment year 2026-27?
(ii) If so, determine his income from retail trade as per the applicable presumptive provision.
(iii) In case Mr. Praveen wants to declare profits as per books of account from retail trade, what
are his obligations under the Income-tax Act, 1961?
(iii) What is the due date for filing his return of income under both the options?
SOLUTION
(i) Yes. Since his cash receipts during the P.Y. does not 5% of the total turnover
(14,00,000/2,98,50,000 x 100) and his total turnover for the F.Y.2025-26 is below ` 300
lakhs, he is eligible for presumptive taxation scheme under section 44AD in respect of his
retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under section 44AD,
would be ` 18,19,000 (` 1,12,000, being 8% of ` 14,00,000 + ` 17,07,000, being 6% of
` 2,84,50,000).
(iii) Mr. Praveen had declared profit for the previous year 2024-25 in accordance with the
presumptive provisions and if he wants to declare profits as per books of account which is
lower than the presumptive income for any of the five consecutive assessment years i.e.,
A.Y. 2026-27 to A.Y. 2030-31, he would not be eligible to claim the benefit of presumptive
taxation for five assessment years subsequent to the assessment year relevant to the
previous year in which the profit has not been declared in accordance the presumptive
provisions i.e. if he declares profits lower than the presumptive income in say P.Y. 2025-26
relevant to A.Y.2026-27, then, he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2027-28 to A.Y. 2031-32.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.181

Consequently, Mr. Praveen is required to maintain the books of accounts and get them
audited under section 44AB, since his income exceeds the basic exemption limit.

(iv) In case he declares presumptive income under section 44AD, the due date would be 31st
July, 2026.
In case he declares profits as per books of account which is lower than the presumptive
income, he is required to get his books of account audited, in which case the due date for
filing of return of income would be 31st October, 2026.
ILLUSTRATION 19
Mr. X commenced the business of operating goods vehicles on 1.4.2025. He purchased the following
vehicles during the P.Y.2025-26. Compute his income under section 44AE for A.Y.2026-27.

Gross Vehicle Weight Number Date of purchase

(in kilograms)
(1) 7,000 2 10.04.2025
(2) 6,500 1 15.03.2026
(3) 10,000 3 16.07.2025
(4) 11,000 1 02.01.2026
(5) 15,000 2 29.08.2025
(6) 15,000 1 23.02.2026

Would your answer change if the two goods vehicles purchased in April, 2025 were put to use only
in July, 2025?
SOLUTION
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2025-26, he
is eligible to opt for presumptive taxation scheme under section 44AE. ` 1,000 per ton of gross
vehicle weight or unladen weight per month or part of the month for each heavy goods vehicle and
` 7,500 per month or part of month for each goods carriage other than heavy goods vehicle,
owned by him would be deemed as his profits and gains from such goods carriage.

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 3.182 DIRECT TAX LAWS

Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kg.
(1) (2) (3) (4)
Number of Date of No. of months for which No. of months × No. of
Vehicles purchase vehicle is owned vehicles [(1) × (3)]
Heavy goods vehicle
2 29.08.2025 8 16
1 23.02.2026 2 2
18
Goods vehicle other than heavy goods vehicle
2 10.4.2025 12 24
1 15.3.2026 1 1
3 16.7.2025 9 27
1 02.1.2026 3 3
55

The presumptive income of Mr. X under section 44AE for A.Y.2026-27 would be -
` 6,82,500, i.e., 55 × ` 7,500, being for other than heavy goods vehicle + 18 x ` 1,000 x 15 ton
being for heavy goods vehicle.

The answer would remain the same even if the two vehicles purchased in April, 2025 were put to
use only in July, 2025, since the presumptive income has to be calculated per month or part of the
month for which the vehicle is owned by Mr. X.

3.14 METHOD OF COMPUTING DEDUCTION IN THE CASE

OF BUSINESS REORGANISATION OF CO-
OPERATIVE BANKS [SECTION 44DB]
(1) This section provides the manner in which the deduction under the following sections are to
be allowed in a case where business reorganisation of a co-operative bank has taken place
during the financial year –

(i) Section 32 (Depreciation);

(ii) Section 35D (Amortisation of certain preliminary expenses);
(iii) Section 35DD (Amortisation of expenses in case of amalgamation or demerger);

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.183

(iv) Section 35DDA (Amortisation of expenditure incurred under voluntary retirement

scheme).
(2) Quantum of Deduction to predecessor co-operative bank: The amount of deduction
allowable to the predecessor co-operative bank under the above-mentioned sections has to
be determined in accordance with the following formula-
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank if the
business reorganisation had not taken place;
B= the number of days comprised in the period beginning with the 1st day of the
financial year and ending on the day immediately preceding the date of business
reorganisation; and
C= the total number of days in the financial year in which the business reorganisation
has taken place.
(3) Quantum of Deduction to successor co-operative bank or to the converted banking
company: The amount of deduction allowable to the successor co-operative bank or to the
converted banking company under the above-mentioned sections has to be determined in
accordance with the formula -
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank if the
business reorganisation had not taken place;
B= the number of days comprised in the period beginning with the date of business
reorganisation and ending on the last day of the financial year; and
C= the total number of days in the financial year in which the business reorganisation has
taken place.

Example:
Let us take a case where the deduction allowable under section 32 to the predecessor co-
operative bank is, say, ` 1,20,000 and the business re-organisation took place on
1.11.2025. Then, the deduction allowable to the predecessor co-operative bank under
section 32 would be ` 70,356 i.e., ` 1,20,000 x 214/365. The deduction allowable to the
successor co-operative bank or to the converted banking company would be ` 49,644 i.e.,
` 1,20,000 x 151/365.

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 3.184 DIRECT TAX LAWS

(4) Manner for computing deduction: In a case where an undertaking of the predecessor co-
operative bank entitled to the deduction under sections 35D, 35DD or 35DDA is transferred
before the expiry of the period specified therein to a successor co-operative bank or to a
converted banking company on account of business reorganisation, the provisions of
section 35D, section 35DD or section 35DDA shall apply to the successor co-operative
bank or to converted banking company in the financial years subsequent to the year of
business reorganisation as they would have applied to the predecessor co-operative bank,
as if the business reorganisation had not taken place.
(5) Meaning of certain terms:
Term Meaning
Business The reorganisation of business involving the amalgamation or
reorganisation demerger of a co-operative bank or conversion of a primary co-
operative bank.
Conversion Transition of a primary co-operative bank to a banking company
under the scheme of the RBI as notified vide its circular no.
DCBR. CO. LS. PCB. Cir. No. 5/07.01.000/2018-19, dated
27.09.2018.
Converted A banking company formed as a result of conversion from primary
banking company co-operative bank.
Co-operative The meaning assigned to it in clause (cci) of section 5 of the
bank Banking Regulation Act, 1949 i.e., a primary co-operative bank or
Central Co-operative bank or a State co-operative bank.
Banking company The meaning assigned to it in clause (c) of section 5 of the
Banking Regulation Act, 1949 i.e., any company which transacts
the business of banking in India.
Predecessor co- The amalgamating co-operative bank or the demerged co-
operative bank operative bank or primary co-operative bank which has been
succeeded as a result of conversion, as the case may be.
Primary co- The meaning assigned to it in clause (ccv) of section 5 of the
operative bank Banking Regulation Act, 1949 i.e., a co-operative society, other
than a primary agricultural credit society –
(i) the primary object or principal business of which is the
transaction of banking business;
(ii) the paid-up share capital and reserves of which are not less
than ` 1 lakh; and
(iii) The bye-laws of which do not permit admission of any other
co-operative society as a member. However, it shall not

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.185

apply to the admission of a co-operative bank as a member

by reason of such co-operative bank subscribing to the
share capital of such co-operative society out of funds
provided by the State Government for this purpose.
Successor co- the amalgamated co-operative bank or the resulting bank, as the
operative bank case may be.
Amalgamated co- (1) a co-operative bank with which one or more amalgamating
operative bank co-operative banks merge; or
(2) a co-operative bank formed as a result of merger of two or
more amalgamating co-operative banks.
Amalgamating co- (1) a co-operative bank which merges with another co-
operative bank operative bank; or
(2) every co-operative bank merging to form a new co-
operative bank.
Amalgamation the merger of an amalgamating co-operative bank or banks with
an amalgamated co-operative bank, in such a manner that –
(1) all the assets and liabilities of the amalgamating co-
operative bank or banks immediately before the merger
(other than the assets transferred, by sale or distribution
on winding up, to the amalgamated co-operative bank)
become the assets and liabilities of the amalgamated co-
operative bank;
(2) the members holding 75% or more voting rights in the
amalgamating co-operative bank become members of the
amalgamated co-operative bank; and
(3) the shareholders holding 75% or more in value of the
shares in the amalgamating co-operative bank (other than
the shares held by the amalgamated co-operative bank or
its nominee or its subsidiary, immediately before the
merger) become shareholders of the amalgamated co-
operative bank.
Demerger The transfer by a demerged co-operative bank of one or more of
its undertakings to any resulting co-operative bank, in such
manner that-
(1) all the assets and liabilities of the undertaking or
undertakings immediately before the transfer become the
assets and liabilities of the resulting co-operative bank;
(2) the assets and the liabilities are transferred to the resulting
co-operative bank at values (other than change in the
value of assets consequent to their revaluation) appearing
in its books of account immediately before the transfer;

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 3.186 DIRECT TAX LAWS

(3) the resulting co-operative bank issues, in consideration of

the transfer, its membership to the members of the
demerged co-operative bank on a proportionate basis;
(4) the shareholders holding 75% or more in value of the
shares in the demerged co-operative bank (other than
shares already held by the resulting bank or its nominee or
its subsidiary immediately before the transfer), become
shareholders of the resulting co-operative bank, otherwise
than as a result of the acquisition of the assets of the
demerged co-operative bank or any undertaking thereof by
the resulting co-operative bank;
(5) the transfer of the undertaking is on a going concern basis;
and
(6) the transfer is in accordance with the conditions specified
by the Central Government, by notification in the Official
Gazette, having regard to the necessity to ensure that the
transfer is for genuine business purposes.
Demerged co- the co-operative bank whose undertaking is transferred, pursuant
operative bank to a demerger, to a resulting bank.
Resulting co- (1) one or more co-operative banks to which the undertaking
operative bank of the demerged co-operative bank is transferred in a
demerger; or
(2) any co-operative bank formed as a result of demerger.

ILLUSTRATION 20
Alpha Co-operative Bank amalgamated with Beta Co-operative Bank on 1.12.2025. The
depreciation for the year ended 31.3.2026 calculated as per Income-tax Rules, 1962, allowable to
Alpha Co-operative Bank had the amalgamation had not taken place amounts to ` 2,40,000.
Compute the deduction on account of depreciation allowable in the hands of Alpha Co-operative
Bank and Beta Co-operative Bank for A.Y. 2026-27.
SOLUTION
(i) The amount of deduction allowable to the amalgamating co-operative bank (i.e. Alpha Co-
operative bank, in this case) under section 32 has to be determined in accordance with the
following formula -
B
A×
C

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.187

A= the amount of deduction allowable to the predecessor co-operative bank (i.e. Alpha
Co-operative bank, in this case) if the business reorganisation had not taken place.
In this case, the amount of deduction is ` 2,40,000.
B= the number of days comprised in the period beginning with the 1st day of the
financial year (i.e., 1.4.2025, in this case) and ending on the day immediately
preceding the date of business reorganization (i.e., 30.11.2025, in this case); and
C= the total number of days in the financial year in which the business reorganisation
has taken place (i.e., 365 days).
(ii) The amount of deduction allowable to the amalgamated co-operative bank (i.e. Beta Co-
operative bank, in this case) under section 32 has to be determined in accordance with the
formula -
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank (i.e. Alpha
Co-operative bank, in this case) if the business reorganisation had not taken place.
In this case, the amount of deduction is ` 2,40,000.
B= the number of days comprised in the period beginning with the date of business
reorganisation (i.e. 1.12.2025, in this case) and ending on the last day of the
financial year (i.e. 31.3.2026); and
C= the total number of days in the financial year in which the business reorganisation
has taken place (i.e. 365 days).
(iii) In this case, the deduction that would have been allowable under section 32 to Alpha co-
operative bank had the business reorganization had not taken place is ` 2,40,000 and the
business re-organisation took place on 1.12.2025. Therefore, the deduction allowable to Alpha
co-operative bank under section 32 would be `1,60,438 i.e., ` 2,40,000 x 244/365. The
deduction allowable to Beta co-operative bank would be ` 79,562 i.e., ` 2,40,000 x 121/365.

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 3.188 DIRECT TAX LAWS

3.15 COMPUTATION OF BUSINESS INCOME IN CASES

WHERE INCOME IS PARTLY AGRICULTURAL AND
PARTLY BUSINESS IN NATURE
(1) Income from the manufacture of rubber [Rule 7A]
(i) Income derived from the sale of centrifuged latex or cenex or latex based crepes or
brown crepes or technically specified block rubbers manufactured or processed from
field latex or coagulum obtained from rubber plants grown by the seller in India shall
be computed as if it were income derived from business, and 35% of such income
shall be deemed to be income liable to tax.
(ii) In computing such income, an allowance shall be made in respect of the cost of
planting rubber plants in replacement of plants that have died or become
permanently useless in an area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost, no deduction shall be
made in respect of the amount of any subsidy which, under the provisions of clause
(31) of section 10, is not includible in the total income.
(2) Income from the manufacture of coffee [Rule 7B]
(i) Income derived from the sale of coffee grown and cured by the seller in India shall
be computed as if it were income derived from business, and 25% of such income
shall be deemed to be income liable to tax.
(ii) Income derived from the sale of coffee grown cured, roasted and grounded by the
seller in India, with or without mixing of chicory or other flavouring ingredients, shall
be computed as if it were income derived from business, and 40% of such income
shall be deemed to be income liable to tax.

(iii) In computing such income, an allowance shall be made in respect of the cost of
planting coffee plants in such replacement of plants that have died or become
permanently useless in an area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost, no deduction shall be
made in respect of the amount of any subsidy which, under the provisions of section
10(31), is not includible in the total income.

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(3) Income from the manufacture of tea [Rule 8]

(i) Income derived from the sale of tea grown and manufactured by the seller in India
shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax.
(ii) In computing such income, an allowance shall be made in respect of the cost of
planting bushes in replacement of bushes that have died or become permanently
useless in an area already planted, if such area has not previously been abandoned,
and for the purpose of determining such cost, no deduction shall be made in respect
of the amount of any subsidy which, under the provision of section 10(30), is not
includible in the total income.
Taxability in case of composite income: A Summary
Rule Nature of composite income Business Agricultural
income Income
(Taxable) (Exempt)
7A Income from sale of rubber products 35% 65%
derived from rubber plants grown by the
seller in India
7B Income from sale of coffee
- grown and cured by the seller in 25% 75%
India
- grown, cured, roasted and grounded 40% 60%
by the seller in India
8 Income from sale of tea grown and 40% 60%
manufactured by the seller in India

ILLUSTRATION 21
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended
31-3-2026:
S. No. Particulars `
(i) Income from sale of centrifuged latex processed from rubber plants 3,00,000
grown in Darjeeling.
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in 2,50,000
Colombo. Sale consideration was received at Chennai.

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(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic 80,000
operations were not carried out by her on land.

You are required to compute the business income and agricultural income of Miss Vivitha for the
assessment year 2026-27.
SOLUTION
Computation of business income and agricultural income of Ms. Vivitha for the A.Y.2026-27
Sr. Source of income Gross Business Agricultural
No. (`) income income
% ` `
(i) Sale of centrifuged latex from rubber 3,00,000 35% 1,05,000 1,95,000
plants grown in India.
(ii) Sale of coffee grown and cured in India. 1,00,000 25% 25,000 75,000
(iii) Sale of coffee grown, cured, roasted and 2,50,000 100% 2,50,000 -
grounded outside India. (See Note 1
below)
(iv) Sale of tea grown and manufactured in 4,00,000 40% 1,60,000 2,40,000
India
(v) Saplings and seedlings grown in nursery
in India (See Note 2 below) 80,000 Nil 80,000
Total 5,40,000 5,90,000
Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo,
Sri Lanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily resident, the
income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or seedlings
grown in a nursery would be deemed to be agricultural income whether or not the basic
operations were carried out on land.

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PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.191

SIGNIFICANT SELECT CASES

S. No. Case Law
1. Frontier Information Tech Ltd. v DCIT (ITA 239/2008, Judgment, Telangana High
Court)
Issue Facts, Analysis and Decision
Whether conversion of interest Facts of the Case: The assessee-company, a
due on loan into equity of the developer of software, had converted the interest
company amounts to actual due of ` 75.75 lakhs to Andhra Pradesh Industrial
payment of the interest and is to Development Corporation Limited, being a State
be allowed as deduction as per industrial investment corporation and interest of
section 43B of the Act? ` 39.94 lakhs to Andhra Pradesh State Financial
Corporation into equity shares. The Assessing
Officer held that actual payment of the amount
was sine qua non for allowing deduction under
section 43B. It was further held that conversion of
outstanding interest liability into loan i.e., funding
interest or into equity did not amount to actual
payment. Accordingly, the amount was disallowed
under section 43B on the ground that the same
was not actually paid.
Analysis and Decision: The High Court held that
as the liability of the assessee to pay interest
ceased to exist on issue of shares, the same
would tantamount to actual payment within the
meaning of section 43B. The assessee, therefore,
is entitled to claim the benefit of deduction under
section 43B.
2. Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC);
Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500 (SC); and
Raj Dadarkar and Associates v. ACIT (2017) 394 ITR 592 (SC)
Issue Analysis & Decision
Would rental income from the In Chennai Properties and Investments Ltd. v. CIT
business of leasing out (2015) 373 ITR 673, the Supreme Court observed
properties be taxable under the that holding of the properties and earning income
head “Income from house by letting out of these properties is the main
property” or “Profits and gains objective of the company. Further, in the return of
from business or profession”? income filed by the company and accepted by the
Assessing Officer, the entire income of the
company comprised of income from letting out of

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such properties. The Supreme Court, accordingly,

held that such income was taxable as business
income. Likewise, in Rayala Corporation (P) Ltd. v.
Asst. CIT (2016) 386 ITR 500, the Supreme Court
noted that the assessee was engaged only in the
business of renting its properties and earning
rental income therefrom and accordingly, held that
such income was taxable as business income.
However, in Raj Dadarkar and Associates v. ACIT
(2017) 394 ITR 592, on account of lack of
sufficient material to prove that substantial income
of the assessee was from letting out of property,
the Supreme Court held that the rental income has
to be assessed as “Income from house property”.
Note: The Finance (No. 2) Act, 2024 inserted an
Explanation 3 to section 28 and clarified that the
income from letting out of a residential house or
a part of the house by the owner would be
chargeable to tax under the head “Income from
house property” and will no longer be considered
under the head “Profits and gains of business
or profession” even though the main business
of the assessee is to let out the residential
house properties. Accordingly, the rationale of
the above rulings hold good only in respect of
letting out of commercial properties.
3. CIT v. K and Co. (2014) 364 ITR 93 (Del)
Issue Analysis & Decision
Whether interest income on The interest income from the deposits made by the
margin money deposited with assessee is inextricably linked to the business of
bank for obtaining bank the assessee and such income, therefore, cannot
guarantee to carry on business, be treated as income under the head ‘Income from
taxable the head ‘Profits and other sources’. The margin money requirement
Gains from Business or was an essential element for obtaining the bank
Profession’ or under the head guarantee. If the assessee had not furnished bank
‘Income from other sources? guarantee, it would not have got the contract.
Therefore, the interest income received on funds
kept as margin money for obtaining the bank
guarantee would be taxable under the head
“Profits and gains of business or profession”.

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4. I.C.D.S. Ltd. v. CIT (2013) 350 ITR 527 (SC)

Issue Analysis & Decision
Can depreciation on leased Section 32 imposes a twin requirement of
vehicles be denied to the lessor “ownership” and “usage for business” as
on the ground that the vehicles conditions for claim of depreciation thereunder.
are registered in the name of the As far as usage of the asset is concerned, the
lessee and that the lessor is not section requires that the asset must be used in the
the actual user of the vehicles? course of business. It does not mandate actual
usage by the assessee itself. In this case, the
assessee did use the vehicles in the course of
its leasing business. Hence, this requirement
of section 32 has been fulfilled,
notwithstanding the fact that the assessee was
not the actual user of the vehicles.
As long as the assessee-lessor has a right to
retain the legal title against the rest of the world,
he would be the owner of the asset in the eyes of
law. In this regard, the following provisions of the
lease agreement are noteworthy –
• The assessee is the exclusive owner of the
vehicle at all points of time;
• The assessee is empowered to repossess
the vehicle, in case the lessee committed a
default;
• At the end of the lease period, the lessee
was obliged to return the vehicle to the
assessee;
• The assessee had a right of inspection of
the vehicle at all times.
The proof of ownership lies in the lease agreement
itself, which clearly points in favour of the
assessee. The assessee-lessor was, therefore,
entitled to claim depreciation in respect of
vehicles leased out since it has satisfied both
the requirements of section 32, namely,
ownership of the vehicles and its usage in the
course of business.

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5. CIT v. BSES Yamuna Powers Ltd (2013) 358 ITR 47 (Delhi)

CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 0049 (Delhi)
Federal Bank Ltd. v. ACIT (2011) 332 ITR 319 (Kerala)
Issue Analysis & Decision
What is the eligible rate of Computer accessories and peripherals such as
depreciation in respect of printers, scanners and server etc. form an
computer accessories, integral part of the computer system and they
peripherals and UPS under the cannot be used without the computer. Since
Income-tax Act, 1961? they are part of the computer system, they would
be eligible for depreciation at the higher rate of
40% applicable to computers including
computer software.
Depreciation on UPS is allowable@40%, being
the eligible rate of depreciation on computers
including computer software, and not at the
general rate of 15% applicable to plant and
machinery.
Can EPABX and mobile phones EPABX and mobile phones are not computers
be treated as computers to be and therefore, are not entitled to higher
entitled to higher depreciation? depreciation@40%.
6. CIT v. Ceebros Hotels Private Limited [2018] 409 ITR 423 (Mad)
Issue Analysis & Decision
Can an assessee setting up a As the application for three star category
hotel claim deduction under classification was granted with no discrepancy
section 35AD for the relevant during inspection, the assessee could not be
previous year, on the basis that it penalised for the delay on the part of the
had commenced its operations concerned authority (the Hotel and Restaurant
and made an application for Approval and Classification Committee, in the
three-star category classification instant case) to complete inspection before the
in beginning of the said previous end of the financial year. Under section 35AD,
year, even though the same was deduction is available from the previous year in
granted by the authority only in which the assessee commences operation of the
the next year due to the specified business i.e., hotel business, in this
requirement of completion of case. Section 35AD does not mandate that the
inspection? date of the certificate has to be with effect from a
particular date.
Thus, the assessee is entitled to claim the
deduction under section 35AD for the relevant
previous year, since the provision which was

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PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.195

introduced to encourage the establishment of

hotels of a particular category is a beneficial
provision, and hence, should be read and
interpreted liberally.
7. Berger Paints India Ltd v. CIT (2017) 393 ITR 113 (SC)
Issue Analysis & Decision
Whether “premium” on Share premium collected by the assessee on its
subscribed share capital is subscribed issued share capital could not be part
“capital employed in the of “capital employed in the business of the
business of the company” u/s company” for the purpose of section 35D(3)(b). If it
35D to be eligible for a were the intention of the legislature to treat share
deduction? premium as being “capital employed in the
business of the company”, it would have been
explicitly mentioned. Moreover, Sl. No. IV(i) in
Form MGT- 7 read with section 92 of the
Companies Act, 2013 dealing with capital structure
of the company provides the break-up of “issued
share capital” and “subscribed share capital”
which does not include share premium at the time
of subscription. Hence, in the absence of the
reference in section 35D, share premium is not
a part of the capital employed. Also, section 52
of the Companies Act, 2013 requires a company to
transfer the premium amount to be kept in a
separate account called “securities premium
account”. The assessee is, therefore, not
entitled to claim deduction u/s 35D in relation
to the premium amount received from
shareholders at the time of share subscription.
8. Shasun Chemicals & Drugs Ltd v. CIT (2016) 388 ITR 1 (SC)
Issue Analysis & Decision
In a case where payment of The embargo contained in section 43B(b) or
bonus due to employees is paid section 40A(9) does not come in the way of the
to a trust and such amount is assessee’s claim, since the bonus was
subsequently paid to the ultimately paid to the employees before the
employees before the stipulated due date as per the statutory requirement.
due date, would the same be Therefore, the payment in respect of bonus is
allowable u/s 36(1)(ii) while allowable as deduction.
computing business income?

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9. CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Delhi)
Issue Analysis & Decision
What is the nature of expenditure The expenditure on glow sign boards displayed at
incurred on glow-sign boards dealer outlets is revenue in nature due to the
displayed at dealer outlets - following reasons-
capital or revenue? (i) The expenditure incurred by the assessee
on glow sign boards does not bring into
existence an asset or advantage for the
enduring benefit of the business, which is
attributable to the capital.
(ii) The glow sign board is not an asset of
permanent nature. It has a short life.
(iii) The materials used in the glow sign boards
decay with the effect of weather. Therefore,
it requires frequent replacement.
Consequently, the assessee has to incur
expenditure on glow sign boards regularly
in almost each year.
(iv) The assessee incurred expenditure on the
glow sign boards with the object of
facilitating the business operation and not
with the object of acquiring asset of
enduring nature.
10. CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Kar.)
Issue Decision
Would the expenditure incurred The expenditure incurred on the issue and
on issue and collection of collection of debentures would be treated as
convertible debentures be revenue expenditure even in case of convertible
treated as revenue expenditure debentures, i.e., the debentures which had to be
or capital expenditure? converted into shares at a later date.
11. CIT v. Priya Village Roadshows Ltd. (2011) 332 ITR 594 (Delhi)
Issue Analysis & Decision
Would expenditure incurred on Since the feasibility studies were conducted by the
feasibility study conducted for assessee for the existing business with a common
examining proposals for administration and common fund and the studies
technological advancement were abandoned without creating a new asset, the
relating to the existing business expenses were of revenue nature.
be classified as a revenue

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expenditure, where the project

was abandoned without creating
a new asset?
12. National Co-operative Development Corporation v. CIT (2020) 427 ITR 288 (SC)
Issue Analysis & Decision
Is source of funds from which In case of an assessee carrying on business, it is
expenditure is incurred for the relevant to see whether an outlay constitutes an
purpose of business relevant for expenditure “for the purpose of business” as used
the purpose of allowability of in section 37(1), for the purpose of claiming
deduction u/s 37(1)? deduction thereunder. The source of funds from
which the expenditure is made is not relevant.
Every application of income towards the business
objective of the assessee is a business
expenditure. There can be an amount treated as a
capital receipt while the same amount expended
may be a revenue expenditure.

13. CIT v. Kap Scan and Diagnostic Centre P. Ltd. (2012) 344 ITR 476 (P&H)
Issue Analysis & Decision
Can the commission paid to As per the Indian Medical Council (Professional
doctors by a diagnostic centre for Conduct, Etiquette and Ethics) Regulations, 2002,
referring patients for diagnosis no physician shall give, solicit, receive, or offer to
be allowed as a business give, solicit or receive, any gift, gratuity,
expenditure u/s 37 or would it be commission or bonus in consideration of a return
treated as illegal and against for referring any patient for medical treatment.
public policy to attract
The demanding as well as paying of such
disallowance?
commission is bad in law. It is not a fair practice
and is opposed to public policy and should be
discouraged. Thus, the commission paid to
doctors for referring patients for diagnosis is
not allowable as business expenditure.

14. Shanti Bhushan v. CIT (2011) 336 ITR 26 (Delhi)

Issue Analysis & Decision
Can the expenditure incurred on Though the definition of “plant” as per the
heart surgery of an assessee, provisions of section 43(3) is inclusive in nature,
being a lawyer by profession, be such plant must have been used as a business
allowed as business expenditure tool which is not true in case of heart. Therefore,
u/s 31, by treating it as current the heart cannot be said to be plant for the
repairs considering heart as business or profession of the assessee.

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plant and machinery, or u/s 37, Therefore, the expenditure on heart surgery is
by treating it as expenditure not allowable as repairs to plant u/s 31.
incurred wholly and exclusively Also, there is no direct nexus between the
for the purpose of business or expenses incurred by the assessee on the
profession? heart surgery and his efficiency in the
professional field. Therefore, the claim for
allowing the said expenditure u/s 37 is also not
tenable. Hence, the heart surgery expenses shall
not be allowed as a business expenditure of the
assessee under the Income-tax Act, 1961.
15. CIT v. Neelavathi & Others (2010) 322 ITR 643 (Karn)
Issue Analysis & Decision
Can payment to police personnel Any payment made to the police illegally amounts
and gundas to keep away from to bribe and such illegal gratification cannot be
the cinema theatres run by the considered as an allowable deduction. Similarly,
assessee be allowed as any payment to a gunda as a precautionary
deduction? measure so that he shall not cause any
disturbance in the theatre run by the assessee is
an illegal payment for which no deduction is
allowable under the Act.
16. Millennia Developers (P) Ltd. v. DCIT (2010) 322 ITR 401 (Karn.)
Issue Analysis & Decision
Is the amount paid by a The assessee, a private limited company carrying
construction company as on business activity as a developer and builder,
regularization fee for violating claimed the amount paid by way of regularization
building bye-laws allowable as fee for the deviations made while constructing a
deduction? structure and for violating the plan sanctioned in
terms of the building bye-laws, approved by the
municipal authorities as per the provisions of the
Karnataka Municipal Corporations Act, 1976.
As per the provisions of the Karnataka Municipal
Corporations Act, 1976, the amount paid to
compound an offence is obviously a penalty
and hence, does not qualify for deduction u/s
37. Merely describing the payment as a
compounding fee would not alter the character of
the payment.

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17. CIT v. Maruti Suzuki India Limited (2018) 407 ITR 165 (Del)
Issue Analysis & Decision
Can payments made by an The non-resident agent who operated outside
assessee to a non-resident India did not have any income arising in India.
agent who does not have any Accordingly, the commission earned by a non-
income assessable in India be resident agent who was in the business of
disallowed u/s 40(a)(i) for non- selling Indian goods abroad, did not accrue or
deduction of tax at source on the arise in India, and hence, no tax was
ground that no application was deductible on such commission payment to a
made by the assessee u/s 195(2) non-resident agent.
for making deduction of tax at Since the assessee has made payment to a non-
source at Nil rate? resident agent and such income is not chargeable
to tax in India, section 40(a)(i) could not be
invoked to disallow deduction of such payment for
non-deduction of tax at source while computing
the business income of the assessee.
18. CIT v. Great City Manufacturing Co. (2013) 351 ITR 156 (All)
Issue Analysis & Decision
Can remuneration paid to Section 40(b)(v) prescribes the limit of
working partners as per the remuneration to working partners, and
partnership deed be considered deduction is allowable up to such limit while
as unreasonable and excessive computing the business income. If the
for attracting disallowance u/s remuneration paid is within the ceiling limit
40A(2)(a), even though the same provided u/s 40(b)(v), then, recourse to
is within the statutory limit provisions of section 40A(2)(a) cannot be
prescribed u/s 40(b)(v)? taken.
The Assessing Officer is only required to ensure
that the remuneration is paid to the working
partners mentioned in the partnership deed, the
terms and conditions of the partnership deed
provide for payment of remuneration to the
working partners and the remuneration is within
the limits prescribed u/s 40(b)(v). If these
conditions are complied with, then, the Assessing
Officer cannot disallow any part of the
remuneration on the ground that it is excessive by
invoking the provisions of section 40A(2)(a).

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TEST YOUR KNOWLEDGE

Questions
1. Examine critically the following cases in the context of provisions contained in the Income-
tax Act, 1961 relevant for Assessment Year 2026-27. Support the answers with relevant
case laws and workings.
(a) Mr. Janak is proprietor of M/s. Yash Texnit which is engaged in garment
manufacturing business. The entire block of Plant & Machinery chargeable to
depreciation @ 15%, has 20 different machinery items as at 31-03-2026. One of the
machineries used for packing had become obsolete and was discarded by Mr. Janak
in July 25.

Assessee filed its return for A.Y. 2026-27 claiming total depreciation of ` 40 lakhs
which includes ` 4 lakhs being the depreciation claimed on the machinery item
discarded by Mr. Janak. The A.O. disallowed the claim of depreciation of ` 4 lakhs
during the course of scrutiny assessment.
Comment on the validity of action taken by A.O.
(b) X. Ltd. issued debentures in the previous year 2025-26, which were to be matured at
the end of 5 years. The debenture holder was given an option of one time upfront
payment of ` 60 per debenture on account of interest which was to be immediately
paid by the company. As per the option exercised by the debenture holders,
company paid interest upfront to them in the first year itself and the same was
claimed as deduction in the return of the company. But in the accounts, the interest
expenditure was shown as deferred expenditure to be written off over a period of 5
years. During the course of assessment, the Assessing Officer spread the upfront
interest paid over a period of five year term of debentures and allowed only one-fifth
of the amount in the previous year 2025-26. Examine the correctness of the action of
Assessing Officer.
2. Compute the quantum of depreciation available under section 32 of the Income-tax Act,
1961 in respect of the following items of Plant and Machinery purchased by PQR Textile
Ltd., by paying through account payee cheque, which is engaged in the manufacture of
textile fabrics, for the year ended 31-3-2026. Assume company does not opt for the
provisions of section 115BAA:

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(` in crores)
New machinery installed on 1-5-2025 84
New Windmill purchased and installed on 18-6-2025 22
Lorries for transporting goods to sales depots (purchased and put to 3
use in July, 2025)
Items purchased after 30th November 2025:
Fork-lift-trucks, used inside factory 4
Computers installed in office premises 1
Computers installed in factory 2
New imported machinery 12

The new imported machinery arrived at Chennai port on 30-03-2026 and was installed on
3-4-2026. All other items were installed during the year ended 31-3-2026.
The company was newly started during the year.
Also, compute the WDV of the various blocks of assets as on 1.4.2026 after charging
depreciation for P.Y. 2025-26.
3. (A) Examine the taxability and/ or allowability of the following receipts or expenditures
under the provisions of the Income-tax Act, 1961, for the assessment year 2026-27:
(i) Secret commission was paid during the previous year 2025-26.
(ii) P Ltd. paid dollars equivalent to ` 50 lakhs as sales commission for the year
ended 31.03.2026, without deducting tax at source, to Mr. Rodrigues, a citizen
of UK and non-resident who acted as agent for booking orders, from various
customers who are outside India.
(B) Can the following transactions be covered under section 43B for disallowance?
(i) A bank guarantee given by a company towards disputed tax liabilities.
(ii) Interest payable to Goods and Services Tax Department but not paid before
the due date specified in section 139(1).
4. ILT Limited is engaged in manufacturing of pipes and tubes. The profit and loss account of
the company for the year ended 31st March, 2026 shows a net profit of ` 405 lakhs. The
following information and particulars are furnished to you. You are required to compute total
income of the company for Assessment Year 2026-27 indicating reasons for treatment of
each item, assuming that the company has not opted for special provisions under section
115BAA or 115BAB.

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(i) A group free air ticket was provided by a supplier for reaching a certain volume of
purchase during the financial year 2025-26. The same is encashed by the company
for ` 10 lakhs in April 2025 and credited to General Reserve Account.
(ii) A regular supplier of raw materials agreed for settlement of ` 8 lakhs instead of ` 10
lakhs for poor quality of material supplied during the previous year which was not
given effect in the running account of the supplier.
(iii) Andhra Bank sanctioned and disbursed a term loan in the financial year 2022-23 for a
sum of ` 50 lakhs. Interest of ` 8 lakhs was in arrears. The bank has converted the
arrear interest into a new loan repayable in 10 equal instalments. During the year, the
company has paid 2 instalments and the amount so paid has been reduced from Funded
Interest in the Balance Sheet.

(iv) The company remitted ` 5 lakhs as interest to a company incorporated in USA on a

loan taken 2 years ago. Tax deducted under section 195 from such interest has been
deposited by the company on 15th July, 2026. The said interest was debited to profit
and loss account.
(v) Sandeep, a sales executive stationed at HO at Delhi, was on official tour in
Bangalore from 31st May, 2025 to 18th June, 2025 and 28th September, 2025 to 15th
October, 2025 for the business development. The company has paid Sandeep's
salary in cash, from its local office at Bangalore for the month of May, 2025 (payable
on 1st June) and September 2025 (payable on 1st October), amounting to ` 45,000
and ` 47,000 respectively (net of TDS and other deduction), as Sandeep has no
bank account at Bangalore. These were included in the amount of “salary” debited to
Profit and Loss Account.
(vi) The company has contributed ` 50,000 by account payee cheque to an electoral
trust and the same stands included under the head "General Expenses".
5. G Ltd., a company in which public are substantially interest, is engaged in the business of
growing and manufacturing tea in India. For the previous year ended 31.03.2025, its
composite business profits before allowing deduction u/s 33AB is ` 60,00,000. On
01.09.2025, it deposited a sum of ` 11,00,000 in the Tea Development Account. During the
previous year 2023-24, G Ltd. had incurred a business loss of ` 14,00,000 which has been
carried forward. On 25.01.2026, it withdrew ` 10 lakhs, from deposit account which is
utilized as under:

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` 6,00,000 for purchase on non-depreciable asset as per the scheme specified.

` 3,00,000 for purchase of machinery to be installed in the office premises.
` 1,00,000 was spent for the purpose of scheme on 5.4.2026.
(i) You are required to determine business income of G Ltd. and the tax consequences
that may arise from the above transactions in the A.Y. 2026-27.
(ii) What will be the consequence if the asset which was purchased for ` 6,00,000 is
sold for ` 8,00,000 in April, 2026.
6. The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of
agricultural produce, consumer items and other products for the year ended 31.03.2026 is
as under:
Trading Account

Particulars ` Particulars `
Opening Stock 3,75,000 Sales 1,55,50,000
Purchases 1,25,75,000 Closing Stock 4,50,000
Freight & Cartage 1,26,000
Gross profit 29,24,000
1,60,00,000 1,60,00,000

Profit and Loss Account

Particulars ` Particulars `
Bonus to staff 47,500 Gross profit 29,24,000
Rent of premises 53,500 Income-tax refund 20,000
Advertisement 5,000 Warehousing charges 15,00,000
Bad Debts 75,000
Interest on loans 1,67,500
Depreciation 71,500
Goods and Services tax 1,08,350
demand paid
Miscellaneous expenses 5,25,650
Net profit of the year 33,90,000
44,44,000 44,44,000

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On scrutiny of records, the following further information and details were extracted/
gathered:

(i) There was a survey under section 133A on the business premises on 31.3.2026 in
which it was revealed that the value of closing stocks of 31.3.2025 was ` 8,75,000
and a sale of ` 75,000 made on 13.3.2026 was not recorded in the books. The value
of closing stocks after considering these facts and on the basis of inventory prepared
by the department as on 31.3.2026 worked out at ` 12,50,000, which was accepted
to be correct and not disputed.
(ii) Income-tax refund includes amount of ` 4,570 of interest allowed thereon.
(iii) Bonus to staff includes an amount of ` 7,500 paid in the month of December 2025,
which was provided in the books on 31.03.2025.
(iv) Rent of premises includes an amount of ` 5,500 incurred on repairs. The assessee
was under no obligation to incur such expenses as per rent agreement.
(v) Advertisement expenses include an amount of ` 2,500 paid for advertisement
published in the souvenir issued by a political party. The payment is made by way of
an account payee cheque.
(vi) Miscellaneous expenses include:
(a) amount of ` 15,000 paid towards penalty for non-fulfillment of delivery
conditions of a contract of sale for the reasons beyond control,
(b) amount of ` 1,00,000 paid to the wife of a director, who is working as junior
lawyer for taking an opinion on a disputed matter. The junior advocate of High
Courts normally charge only ` 25,000 for the same opinion,
(c) amount of ` 1,00,000 paid to an Electoral Trust by cheque.

(vii) Goods and Services Tax demand paid includes an amount of ` 5,300 charged as
penalty for delayed filing of returns and ` 12,750 towards interest for delay in deposit
of tax.

(viii) The company had made an investment of ` 25 lakhs on the construction of a

warehouse in rural area for the purpose of storage of agricultural produce. This was
made available for use from 15.09.2025 and the income from this activity is credited
in the Profit and Loss account under the head “Warehousing charges”.
(ix) Depreciation under the Income-tax Act, 1961 works out at ` 65,000.

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(x) Interest on loans includes an amount of ` 80,000 paid to Mr. X, a resident, on which
tax was not deducted.

Compute the income chargeable to tax for assessment year 2026-27 of Pingu Trading Pvt.
Ltd, ignoring MAT and provisions of section 115BAA. Support your answer with working
notes.

7. (a) A Ltd. paid IDBI (a public financial institution) a lump sum pre-payment premium of
` 1.2 lakhs on 7.4.2025 for restructuring its debts and reducing its rate of interest. It
claimed the entire sum as business expenditure for the P.Y.2025-26. The Assessing
Officer, however, held that the pre-payment premium should be amortised over a
period of 10 years (being the tenure of the restructured loan), and thus, allowed only
10% of the pre-payment premium in the P.Y.2025-26. Discuss, with reasons, whether
the contention of A Ltd. is correct or that of the Assessing Officer.
(b) Explain the tax treatment of emergency spares (of plant and machinery) acquired
during the year which, even though kept ready for use, have not actually been used
during the relevant previous year.
8. “Easy Call Ltd.”, to provide telecom services in Mumbai, obtained a licence on 1.4.2023 for
a period of 10 years ending on 31.3.2033 against a fee of ` 27 lakhs to be paid in 3
installments of ` 9 lakhs each by April, 2023, April, 2024 and April, 2025, respectively. The
company has commenced business on 1.4.2024.
Explain, how the payment made for licence fee shall be dealt with under the Income-tax
Act, 1961 and the amount, if any, deductible for A.Y. 2026-27.
9. Alpha Ltd., a manufacturing company, has disclosed a net profit of ` 12.50 lakhs for the
year ended 31st March, 2026. You are required to compute the taxable income (ignore the
provisions of section 115BAA) of the company for the Assessment year 2026-27, after
considering the following information, duly explaining the reasons for each item of
adjustment:

(i) Advertisement expenditure debited to profit and loss account includes the sum of
` 60,000 paid in cash to the sister concern of a director, the market value of which is
` 52,000.
(ii) Repairs of plant and machinery debited to profit and loss account includes ` 1.80
lakhs towards replacement of worn out parts of machineries. Such expenditure does
not increase the future benefit from the asset beyond its previously assessed
standard of performance.

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(iii) A sum of ` 6,000 on account of liability foregone by a creditor has been taken to
general reserve. The original purchases was debited to the Profit & Loss Account in
the A.Y.2021-22.
(iv) Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to
Profit & Loss Account, which the company claims as capital receipt not chargeable to
income-tax.
(v) Being also engaged in the biotechnology business, the company incurred the
following expenditure on in-house research and development as approved by the
prescribed authority:
(a) Research equipments purchased ` 1,50,000.
(b) Remuneration paid to scientists ` 50,000.

The total amount of ` 2,00,000 is debited to the profit and loss account.
10. (i) A corporation was set up by the State Government transferring all the buses owned
by it for a consideration of ` 75 lakhs, which was discharged by the Corporation by
issue of equity shares. The Corporation in its assessment claimed depreciation. Can
the depreciation be denied in the Corporation’s hands on the ground that there was
no registration of the buses in favour of the Corporation?

(ii) Ravi succeeded to his father’s business in the year 2023. In the previous year ended
31.3.2026, Ravi has written off the balance in the name of ‘Y’ which relates to supply
made by his father, when he carried on business. Ravi desires to know whether the
write off could be eligible for deduction.
Answers
1. (a) The issue under consideration is whether disallowance of depreciation made by the
Assessing Officer with regard to the discarded asset, in arriving at the written down
value of the block of assets, is justified.

One of the conditions for claim of depreciation under section 32 is that the eligible
asset must have been put to use for the purpose of business or profession.
The other aspect to considered is whether merely discarding an obsolete machinery,
which is physically available, will attract the expression “moneys payable” appearing
in section 43(6), so as to deduct its value from the written down value of the block.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.207

The facts in the present case are similar to facts in the case of CIT v. Yamaha Motor
India Pvt. Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed that the
expression "used for the purposes of the business" in section 32 when used with
respect to discarded machinery would mean the use in the business, not only in the
relevant financial year/previous year, but also in the earlier financial years.
The discarded machinery may not be actually used in the relevant previous year but
depreciation can be claimed as long as it was used for the purposes of business in
the earlier years provided the block continues to exist in the relevant previous year.
Therefore, the condition for claiming depreciation in respect of the discarded
machine would be satisfied if it was used in the earlier previous years for the
business.
For the purpose of section 43(6), “moneys payable” means the sale price, in case of
sale, or the insurance, salvage or compensation moneys payable in respect of the
asset. In this case, the machinery has not been sold as machinery or scrap or
disposed off, and it continues to exist. Hence, there is no “moneys payable” in this
case, which alone is deductible while computing the WDV of the block to which it
belongs.
Applying the rationale of the above case, the action of the Assessing Officer in
disallowing ` 4 lakhs, being the depreciation claim attributable to discarded
machinery, on the ground that the same was not put to use in the relevant previous
year, is invalid, since the said machinery was put to use in the earlier previous years.
(b) The issue under consideration is whether, in a case where debentures are issued
with maturity at the end of five years, and the debenture holders are given an option
of upfront payment of interest in the first year itself, can the entire upfront interest
paid, be claimed as deduction by the company in the first year or should the same be
deferred over a period of five years; and would the treatment of such interest as
deferred revenue expenditure in the books of account have any impact on the tax
treatment.
The facts of the case are similar to the facts in Taparia Tools Ltd. v. JCIT (2015) 372
ITR 605, wherein the above issue came up before the Supreme Court. In that case,
it was observed that under section 36(1)(iii), the amount of interest paid in respect of
capital borrowed for the purposes of business or profession, is allowable as
deduction.

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The moment the option for upfront payment was exercised by the subscriber, the
liability of X Ltd. to make the payment in that year had arisen. Not only had the
liability arisen in the previous year in question, it was even quantified and discharged
as well in that very year.
As per the rationale of the Supreme Court ruling in Taparia Tools Ltd.’s case, when
the deduction of entire upfront payment of interest is allowable as per the Income-tax
Act, 1961, the fact that a different treatment was given in the books of account could
not be a factor which would bar the company from claiming the entire expenditure as
a deduction.
Accordingly, the action of the Assessing Officer in spreading the upfront interest paid
over the five year term of debentures and restricting the deduction in the P.Y.2025-26
to one-fifth of the upfront interest paid is not correct. The company is eligible to claim
the entire amount of interest paid upfront as deduction under section 36(1)(iii) in the
P.Y.2025-26.
2. Computation of depreciation allowance under section 32 for the A.Y. 2026-27
Particulars Normal Additional
Depreciati- Depreciati-
on [u/s on [u/s
32(1)(ii)] 32(1)(iia)]
(` in crores)
(A) Plant and Machinery (15% block) (Put to use for
180 days or more)
- New machinery installed on 01.05.2025 84.00 84.00
- Lorries for transporting goods to depots 3.00 -
87.00 84.00
Normal Depreciation @15% & additional deprecation 13.05 16.80
@20%
(B) Plant and Machinery (15% block) (Put to use for
less than 180 days – hence, depreciation is
restricted to 7.5%, being 50% of 15%)
- Fork-lift trucks, used inside a factory 4.00 4.00
Normal Depreciation @ 7.5% & additional 0.30 0.40
depreciation @10%

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.209

(C) Plant and Machinery (40% block) (Put to use for

less than 180 days, hence depreciation
restricted to 20%, i.e., 50% of 40%)
- Computers installed in office premises 1.00 -
- Computers installed in factory 2.00 2.00
3.00 2.00
Normal depreciation @20% & additional 0.60 0.20
depreciation@10%
(D) Plant and Machinery (40% block) (Put to use for
180 days or more) (See Note 1)
- New windmill purchased and installed on 22.00 22.00
18.06.2025
Normal Depreciation @ 40% & additional 8.80 4.40
depreciation @ 20%
Total depreciation and additional depreciation
- Plant and Machinery (15% block) (A +B) 13.35 17.20
- Plant and Machinery (40% block) (C + D) 9.40 4.60
Depreciation available under section 32 = ` 44.55
crores

Computation of Written Down Value (WDV)

after charging depreciation for P.Y. 2025-26
Particulars Plant & Machinery
15% 40%
(` in crores)
WDV as on 01.04.2025 (The company was started during Nil Nil
the year – as given in question)
Add: Plant and Machinery acquired during the year
- New Machinery installed on 84.00
01.05.2025
- Lorries for transporting 3.00
goods to sales depots
- Fork-lift trucks, used inside 4.00
factory

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 3.210 DIRECT TAX LAWS

- New imported machinery 12.00 103.00 -

- New Windmill purchased - 22.00
and installed on 18.6.2025
- Computers installed in office - 1.00
premises
- Computers installed in factory - 2.00
103.00 25.00
Less: Asset sold during the year Nil Nil
WDV as on 31.3.2026 (before charging depreciation) 103.00 25.00
Less: Depreciation for the P.Y.2025-26
- Normal depreciation 13.35 9.40
- Additional depreciation 17.20 4.60
WDV as on 1.4.2026 (after charging depreciation for 72.45 11.00
P.Y. 2025-26)

Notes:
(1) Windmills and any specially designed devices which run on windmills installed on or
after 1.4.2014 would be eligible for depreciation @ 40%.

(2) New imported machinery was not installed during the previous year 2025-26. Hence,
it would not be eligible for additional depreciation for A.Y. 2026-27. It would also not
be eligible for normal depreciation for A.Y 2026-27, since it was not put to use in the
P.Y.2025-26 being the year of acquisition.
(3) It may be noted that investment in the following plant and machinery would not be
eligible for additional depreciation under section 32(1)(iia):

(a) Lorries for transporting goods to sales depots, being vehicles/road transport
vehicles; and
(b) Computers installed in office premises.

(4) As per section 2(28) of the Motor Vehicles Act, 1988, the definition of a “vehicle”
excludes, inter alia, a vehicle of special type adopted for use only in a factory or in
any enclosed premises. Therefore, fork-lift trucks used inside the factory would not
fall within the definition of “vehicle”. Hence, it is eligible for additional deprecation
under section 32(1)(iia).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.211

3. (A) (i) Secret commission is one of the forms of commission payment generally
made by business organizations. Secret commission is a payment for
obtaining business orders or contracts from parties and /or customers and
paid to employees and / or officials of those parties and / or customers or
companies from whom business orders are obtained by the assessee.
Explanation 1 below section 37(1) of Income-tax Act, 1961 provides that any
expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law, shall not be deemed to have been incurred for the
purpose of business and no deduction or allowance shall be made in respect
of such expenditure. In view of the Explanation, any expenditure incurred for a
purpose which is an offence and prohibited by law cannot be allowed as
expenditure. Therefore, since secret commission payment is a payment for an
offence prohibited by law, the same cannot be allowed as deduction.
(ii) A foreign agent of an Indian exporter operates in his own country and no part
of his income accrues or arises in India. His commission is usually remitted
directly to him and is, therefore, not received by him or on his behalf in India.
The commission paid to the non-resident agent for services rendered outside
India is, thus, not chargeable to tax in India.
Since commission income for booking orders by non-resident who remains
outside India is not subject to tax in India, disallowance under section 40(a)(i)
is not attracted in respect of payment of commission to such non-resident
outside India even though tax has not been deducted at source. Thus, the
amount of ` 50 lakhs remitted to Mr. Rodrigues outside India in foreign
currency towards commission would not attract disallowance under section
40(a)(i) for non-deduction of tax at source.
(B) (i) For claiming deduction of any expense enumerated under section 43B, the
requirement is, the actual payment and not deemed payment. Furnishing of
bank guarantee cannot be equated with actual payment. Actual payment
requires that money must flow from the assessee to the public exchequer as
specified in section 43B. Therefore, deduction of an expense covered under
section 43B cannot be claimed by merely furnishing a bank guarantee [CIT v.
McDowell & Co Ltd (2009) 314 ITR 167 (SC)]
(ii) Interest payable to Goods and Services Tax department is part of Goods and
Services Tax.

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Therefore, interest payable to Goods and Services Tax department, which is not
paid before the “due date” of filing of return of income, would attract disallowance
under section 43B [Mewar Motors v. CIT (2003) 260 ITR 218 (Raj)]
4. Computation of total income of ILT Ltd. for the A.Y.2026-27

Particulars ` (in lakhs)

Profits and gains from business or profession

Net profit as per profit and loss account 405.00

Add: Items debited to profit and loss account, but to be

disallowed and items not considered in accounts but to be
taxed

Value of group free air ticket provided by a supplier is taxable as 10

business income under section 28(iv), as the value of any benefit,
whether convertible into money or not, arising from business is
taxable as business income.

Amount waived by the supplier of raw materials is a deemed 2

income under section 41(1), as the expenditure was allowed as
deduction in the last year and there is a benefit by way of
remission or cessation of a trading liability. The fact that effect was
not given in the running account of supplier is not relevant.

Interest payable outside India to a foreign company is allowable -

[See Note 1 below]

Salary paid to employee Sandeep is eligible for deduction.

Disallowance under section 40A(3) will not apply [See Note 2 -
below]

Contribution to electoral trust is not an allowable expenditure while

computing business income. Hence, the same has to be added
back, since it is included in general expenses. 0.50 12.50

417.50

Less: Amount of deduction allowable

Under section 43B, interest on loan due to any scheduled bank,

etc. is allowed as deduction, if such interest is actually paid
irrespective of the method of accounting followed by the assessee.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.213

Conversion of arrear interest into a fresh loan by a bank cannot be

considered as actual payment of interest. However, the amount of
funded interest (i.e., converted loan) actually paid is allowable as
deduction. Hence, ` 1,60,000, being two instalments of ` 80,000 1.60
each, actually paid is deductible.

Business Income 415.90

Gross total income 415.90

Less: Deduction under Chapter VI-A

Deduction under section 80GGB in respect of contribution by the

assessee company to an electoral trust. 0.50

Total Income 415.40

Notes:
1. Since tax has been deducted on interest payable outside India to a foreign company
during the previous year 2025-26 and the same has been deposited before the due
date of filing return of income under section 139(1), disallowance under section
40(a)(i) is not attracted. Since the interest has already been debited to profit and loss
account, no further adjustment is required.
2. In respect of payment of salary to sales executive in cash, no disallowance under
section 40A(3) is to be made as the payments fall within the scope of Rule 6DD(i).
Salary paid to him in cash is allowable as the executive was temporarily posted for a
continuous period of more than 15 days in Bangalore which is not the place of his
normal duty. Further tax was deducted from such salary under section 192 and he
does not maintain any bank account in Bangalore. No disallowance under section
40A(3) is attracted in respect of such salary.
5. (i) Computation of Business Income of G Ltd.
and tax consequences for the A.Y. 2026-27
Particulars `
` 10,00,000 being the amount withdrawn from Tea Development
Account has to be utilized in the prescribed manner, otherwise, the
withdrawn amount would be chargeable to tax as business income.
In the given case, the taxability of withdrawal amount based on their
utilization is as follows:
- ` 6,00,000, out of the amount withdrawn from the deposit Not
account, utilised for purchase of non-depreciable asset as per taxable
the specified scheme.

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[As per section 33AB(6), no deduction would be allowed

under section 33AB since amount is spent out of ` 11 lakh
deposited in Tea Development Account, which has already
been allowed as deduction in A.Y.2025-26 (See Working
Note below)].
- ` 3,00,000, being the amount utilized for purchase of 3,00,000
machinery to be installed in the office premises is not a
permissible utilization. Hence, the amount would be deemed
as profits and gains of business of the previous year 2025-26
as per section 33AB(4).
- ` 1,00,000 was spent for the purpose of scheme on 1,00,000
05.04.2026. As per section 33AB(7), this amount would be
taxable since the same is not utilized during the same
previous year (i.e., P.Y. 2025-26) in which the amount is
withdrawn from the deposit account.
When any part of withdrawal amount becomes taxable, the agricultural and non-
agricultural portions of income must be segregated.
Accordingly, ` 1,60,000, being 40% of ` 4,00,000 (` 3,00,000 + ` 1,00,000)
would be chargeable to tax as business income and the balance ` 2,40,000,
being 60% of ` 4,00,000 would be agricultural income exempt from tax.

Working Note:
Computation of Business Income of G Ltd. for the A.Y. 2025-26

Particulars `
Composite business profits before allowing deduction under 60,00,000
section 33AB
Less: Deduction under section 33AB(1) would be the lower of:
- Amount deposited in Tea Development Account on or
before 30.9.2025 [i.e., ` 11,00,000]
- 40% of profits of such business [i.e., ` 24,00,000, being 11,00,000
40% of ` 60,00,000]
49,00,000
Less: 60% of ` 49,00,000, being agricultural income [as per Rule 8] 29,40,000
Business income 19,60,000
Less: Brought forward business loss of A.Y.2024-25 set-off as per 14,00,000
section 72
Business income chargeable to tax 5,60,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.215

(ii) Consequences, if asset purchased out of deposit account is sold during the
previous year 2026-27

As per section 33AB(8), if the asset is sold before the expiry of eight years from the end
of the previous year in which it was acquired, then, the cost of such asset shall be
deemed to be the profits and gains from business or profession of the previous year in
which asset is sold.
Therefore, ` 6,00,000 would be deemed to be the business income (composite) for
the A.Y.2027-28. However, since the full cost of the asset was deducted in the
assessment year 2025-26 (being part of ` 11 lakh deposited in Tea Development
Account) before segregation of agricultural income and non-agricultural income, the
agricultural and non-agricultural portions of income should be segregated in the year
in which such amount becomes taxable on account of sale of asset before the expiry
of eight years. Therefore, ` 3,60,000, being 60% of ` 6,00,000 would represent
agricultural income. The balance ` 2,40,000 being 40% of ` 6,00,000 would be
chargeable to tax as business income.
Moreover, the difference between the sale consideration and purchase price of the
asset would be chargeable to tax as “Short term capital gains”, which is computed as
follows:
Sales consideration 8,00,000
Less: Cost of acquisition 6,00,000

Short term capital gain 2,00,000

6. Computation of Income of Pingu Trading Pvt. Ltd.
chargeable to tax for the A.Y.2026-27
Particulars `
Net profit as per profit and loss account 33,90,000
Less: Income-tax refund credited in the profit and loss account, out
of which interest is to be considered separately under the
head “Income from other sources” 20,000
33,70,000
Add: Expenses either not allowable or to be considered
separately but charged in the profit & loss account
- Repair expenses on rented premises where assessee is -
under no obligation to incur such expenses are not

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allowable as per section 30(a)(i). However, if such

expenses are required for carrying on the business
efficiently, the same are allowable under section 37. In this
case, assuming that such expenses are required for
carrying on business efficiently, the same are allowable
under section 37.
- Advertisement in the souvenir of political party not 2,500
allowable as per section 37(2B) (See Note 2)
- Payment made to the wife of a director examined as per
section 40A(2) and the excess payment made to be 75,000
disallowed (See Note 4)
- Payment made to electoral trust by cheque (See Note 5) 1,00,000
- Penalty levied by the Goods and Services tax department 5,300
for delayed filing of returns not allowable as being paid for
infraction of law (See Note 6)
- Depreciation as per books 71,500
- 30% of interest paid on loan paid to Mr. X, a resident,
without deduction of tax at source not allowable as per 24,000
section 40(a)(ia)
36,48,300
Less: Depreciation allowable as per Income-tax Act, 1961 65,000
35,83,300
Less: Income from specified business (warehousing charges)
credited to profit and loss account, to be considered 15,00,000
separately (See Note 7)
Income from business (other than specified business) 20,83,300
Add: Difference in the value of stocks detected on survey under section 3,75,000
133A on 31.03.2026 chargeable as income (See Note 8)
24,58,300
Computation of income/ loss from specified business (See Note 7)
Income from specified business ` 15,00,000
Less: Deduction under section 35AD @ 100% of ` 25 ` 25,00,000
lakhs
Loss from specified business to be carried forward
as per section 73A (` 10,00,000)
Income from Other Sources
Interest on income-tax refund 4,570
Gross Total Income 24,62,870

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.217

Less: Deduction under section 80GGB

Contribution to political party (See Note 2) ` 2,500
Contribution to an Electoral trust (See Note 5) ` 1,00,000 1,02,500
Total Income 23,60,370
Notes:

(1) Bonus for the previous year 2024-25 paid after the due date for filing return for that
year would have been disallowed under section 43B for the P.Y.2024-25. However,
when the same has been paid in December 2025, it should be allowed as deduction
in the P.Y.2025-26 (A.Y.2026-27). Since it is already included in the figure of bonus
to staff debited to profit and loss account of this year, no further adjustment is
required.

(2) The amount of ` 2,500 paid for advertisement in the souvenir issued by a political
party attracts disallowance under section 37(2B). However, such expenditure falls
within the meaning assigned to “contribute” under section 293A of the Companies
Act, 1956, and is hence, eligible for deduction under section 80GGB. Any
contribution to the political party or electoral trust made by way of cash is not allowed
as deduction under section 80GGB. Since in the present case, the payment to the
political party is made by way of an account payee cheque, it is allowed as deduction
under section 80GGB.
(3) The penalty of ` 15,000 paid for non-fulfilment of delivery conditions of a contract for
reasons beyond control is not for the breach of law but was paid for breach of
contractual obligations and therefore, is an allowable expense.
(4) It has been assumed that ` 25,000 is the reasonable payment for the wife of
Director, working as a junior lawyer, since junior advocates of High Courts normally
charge only ` 25,000 for the same opinion and therefore, the balance ` 75,000 has
been disallowed.
(5) Payment to an electoral trust qualifies for deduction under section 80GGB since the
payment is made by way of a cheque. However, since the amount has been debited to
profit and loss account, the same has to be added back for computing business income.
(6) The interest of ` 12,750 paid on the delayed deposit of goods and services tax is for
breach of contract and hence, is allowable as deduction. However, penalty of
` 5,300 for delay in filing of returns is not allowable since it is for breach of law.

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(7) Deduction @ 100% of the capital expenditure is available under section 35AD in
respect of specified business of setting up and operating a warehouse facility for
storage of agricultural produce which commences operation on or after 1.04.2012. It
is presumed that ` 25 lakhs does not include expenditure on acquisition of any land.
The loss from specified business under section 35AD (warehousing) should be
segregated from the income from other businesses, since, as per section 73A(1), any
loss computed in respect of any specified business referred to in section 35AD shall not
be set off except against profits and gains, if any, of any other specified business.
In view of the provisions of section 73A(1), the loss of ` 10 lakhs from the specified
business cannot be set-off against income from other businesses. Such loss has to
be carried forward to be set-off against profit from specified business in the next
assessment year. The return should be filed on or before the due date under section
139(1) for carry forward of such losses.
(8) The business premises were surveyed and differences in the figures of opening and
closing stocks and sales were found which have not been disputed and accepted by
the assessee. Therefore, the trading account for the year is to be re-cast to arrive at
the correct amount of the gross profit/ net profit for the purpose of return of income
to be filed for the previous year ended on 31.3.2026.
Revised Trading Account
Particular ` Particular `
Opening Stock 8,75,000 Sales 1,56,25,000
(` 1,55,50,000 + ` 75,000)
Purchases 1,25,75,000 Closing Stock 12,50,000
Freight and Cartage 1,26,000
Gross Profit 32,99,000
1,68,75,000 1,68,75,000

The difference of gross profit of ` 32,99,000 - ` 29,24,000 = ` 3,75,000 is to be

added as income of the business for the year as undisclosed income 16.
7. (a) This issue came up before the Delhi High Court in CIT v. Gujarat Guardian Ltd
(2009) 177 Taxman [Link] Court observed that the assessee company’s claim for
deduction has to be allowed in one lump sum keeping in view the provisions of

16
No loss (whether brought forward or otherwise) or unabsorbed depreciation under section 32(2) can be
set-off against undisclosed income.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.219

section 43B(d), which provide that any sum payable by the assessee as interest on
any loan or borrowing from any financial institution shall be allowed to the assessee
in the year in which the same is paid, irrespective of the periods, in which the liability
to pay such sum is incurred by the assessee according to the method of accounting
regularly followed by the assessee. The High Court concurred with the Tribunal’s
view supporting the assessee that in terms of section 36(1)(iii) read with section
2(28A), the deduction for pre-payment premium was allowable. Since there was no
dispute that the pre-payment premium was nothing but interest and that it was paid
to a public financial institution i.e. IDBI, the Court held that, in terms of section
43B(d), the assessee’s claim for deduction has to be allowed in the year in which the
payment has actually been made.

Therefore, applying the ratio of the above case, the contention of A Ltd. is correct
and not that of the Assessing Officer.
Note – Section 36(1)(iii) provides for deduction of interest paid in respect of capital
borrowed for the purposes of business or profession. Section 2(28A) defines interest
to include, inter alia, any other charge in respect of the moneys borrowed or debt
incurred. Section 43B provides for certain deductions to be allowed only on actual
payment. From a combined reading of these three sections, it can be inferred that –
(i) pre-payment premium represents interest as per section 2(28A);
(ii) such interest is deductible as business expenditure as per section 36(1)(iii);
(iii) such interest is deductible in one lump-sum on actual payment as per section
43B(d).
(b) As per ICDS V on Tangible Fixed Assets, machinery spares shall be charged to the
revenue as and when consumed. When such spares can be used only in connection
with an item of tangible fixed asset and their use is expected to be irregular, they shall
be capitalised. Where the spares are capitalised as per the above requirement, the
issue as to provision of depreciation arises – whether depreciation can be provided
where such spares are kept ready for use or is it necessary that they are actually put to
use. This issue was dealt with by the Delhi High Court in CIT v. Insilco Ltd (2010) 320
ITR 322. The Court observed that the expression “used for the purposes of business”
appearing in section 32 also takes into account emergency spares, which, even though
ready for use, yet are not consumed or used during the relevant period. This is
because these spares are specific to a fixed asset, namely plant and machinery, and

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form an integral part of the fixed asset. These spares will, in all probability, be useless
once the asset is discarded and will also have to be disposed of. In this sense, the
concept of passive use which applies to standby machinery will also apply to
emergency spares. Therefore, once the spares are considered as emergency spares
required for plant and machinery, the assessee would be entitled to capitalize the
entire cost of such spares and claim depreciation thereon.
Note – One of the conditions for claim of depreciation is that the asset must be “used
for the purpose of business or profession”. In the past, courts have held that, in
certain circumstances, an asset can be said to be in use even when it is “kept ready
for use”. For example, depreciation can be claimed by a transport company on spare
engines kept in store in case of need, though they have not actually been used by
the company. Hence, in such cases, the term “use” embraces both active use and
passive use for business purposes.
8. The payment made for acquiring the licence to operate telecom services in Mumbai shall be
subject to deduction as per the scheme in section 35ABB. As per section 35ABB, any
amount actually paid for obtaining licence to operate telecommunication services shall be
allowed as deduction in equal instalments during the number of years for which the license
is in force.
If the payment is made before the commencement of business: The deduction shall be
allowed beginning with the year of commencement of business.
In any other case: It will be allowed commencing from the year of payment. Deduction
shall be allowed up to the year in which the license shall cease to be in force.
The amount of deduction available for A.Y. 2026-27 is worked out below:-
(1) (2) (3) (4) = (3)/(2)
Previous year of Unexpired period Instalment Deduction in respect
payment of license paid (`) of each instalment (`)
2023-24 9 years 9,00,000 1,00,000
2024-25 9 years 9,00,000 1,00,000
2025-26 8 years 9,00,000 1,12,500
27,00,000 3,12,500

The deduction under section 35ABB from assessment year 2026-27 shall be ` 3,12,500.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.221

9. Computation of taxable income of Alpha Ltd. for the A.Y.2026-27

Particulars `
Net profit as per profit and loss account 12,50,000
Add: Items debited to profit and loss A/c but not deductible or income
to be taxed
1. Payment of advertisement expenditure of `60,000
(i) ` 8,000, being the excess payment to a relative disallowed
under section 40A(2) 8,000
(ii) As the payment is made in cash and since the remaining
amount of ` 52,000 exceeds ` 10,000, 100% shall be 52,000
disallowed under section 40A(3)
2. Under section 31, expenditure relatable to current repairs regarding
plant, machinery or furniture is allowed as deduction.
The test to determine whether replacement of parts of machinery
amounts to repair or renewal is whether the replacement is one
which is in substance replacement of defective parts or replacement
of the entire machinery or substantial part of the entire machinery
[CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 (Pat)].
Here expenditure on repairs does not bring in any new asset into
existence. Such replacement can only be considered as current
repairs. Hence, no adjustment is required.
Further, as per ICDS V on Tangible Fixed Assets, only an
expenditure that increases the future benefits from the existing asset
beyond its previously assessed standard of performance has to be
added to the actual cost.
3. Liability foregone by creditor chargeable as business income but not 6,000
credited to profit and loss account [taxable under section 41(1)]
4. Sale proceeds of import entitlements. The sale of the rights gives -
rise to profits or gains taxable under section 28(iiia). As the amount
has already been credited to profit and loss account, no further
adjustment is necessary.
5. Expenditure on in-house research and development is entitled to a
weighted deduction of 100% of the expenditure (both capital and
revenue) so incurred under section 35(2AB)(1). As the amount has
already been debited to profit and loss account, no further -
adjustment is necessary
Taxable Income 13,16,000

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10. (i) The decision of the Supreme Court in Mysore Minerals Ltd v. CIT (1999) 239 ITR
775 is relevant in the context of the facts stated. The term “asset used” in section 32
must be assigned a wider meaning and anyone in possession of property in his own
title, exercising dominion over the property, to the exclusion of others and having the
right to use and enjoy it, must be taken to be the owner.
Registration of the buses is only a formality to perfect the title and does not bar
enjoyment. The Corporation cannot, therefore, be denied depreciation on the buses.
A similar decision was also taken in CIT v. J & K Tourism Development Corporation
(2001) 248 ITR 94 (J&K).
(ii) The deduction of bad debt is allowed if it is written off in the books of account of the
assessee. In this case, Ravi has succeeded to the business carried on by his father.
Under clause (vii) of section 36(1) the amount has been written off in the books of
account as irrecoverable is eligible for deduction provided the debt has been taken
into account in computing the income of the business in an earlier previous year
[vide section 36(2)].
Therefore, Ravi is eligible for deduction in respect of the amount due in the name of
Y which is written off in the books of account as bad debt, even though the debt
represents the amount due for the supplies made by previous owner viz. deceased
father of Ravi.[CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co (1985) 155 ITR
152 (SC)].

© The Institute of Chartered Accountants of India

CHAPTER a 4

CAPITAL GAINS

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ appreciate the scope of income chargeable under this head;
❑ examine the provisions of section 2(42A), relating to period of holding, for classification of a
capital asset as short-term capital asset and long-term capital asset;
❑ analyse and apply the provisions of section 47 to determine whether a particular transaction
would be considered/not be considered as transfer for the purpose of capital gains taxation;
❑ determine the cost of acquisition/ improvement for the purpose of computing the capital
gains;
❑ compute capital gains on transfer of depreciable assets;
❑ compute capital gains in case of market linked debenture and other specified securities;
❑ compute capital gains in case of slump sale;
❑ determine the quantum of exemption available on investment of capital gains/ net
consideration arising on transfer of certain assets and appreciate the conditions to be satisfied
to avail such exemption;
❑ compute the capital gains chargeable to tax applying the charging and deeming provisions
and giving effect to the exemptions available in respect of capital gains;
❑ identify the cases where an Assessing Officer can make a reference to the Valuation Officer;
❑ appreciate the concessional tax treatment available for short-term capital gains and for long
term capital gains on transfer of listed equity shares/ units of an equity oriented fund/ units of
a business trust;
❑ compute the tax liability applying the special rates of tax on long-term capital gains and
short-term capital gains arising on transfer of listed equity shares/ units of an equity oriented
fund and the normal rates of tax on capital gains arising on transfer of other short-term capital
assets and other long-term capital assets.

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 4.2 DIRECT TAX LAWS

4.1 INTRODUCTION
Section 45 provides that any profits or gains arising from the transfer of a capital asset effected
in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital
gains will be deemed to be the income of the previous year in which the transfer took place. In this
charging section, two terms are important. One is “capital asset” and the other is “transfer”.
Hence, in this chapter on capital gains, we begin our discussion with the definition of “capital
asset” and “transfer”. Thereafter, we will proceed to discuss the various circumstances under
which capital gains tax is levied. There are certain transactions which are not to be regarded as
transfer for the purposes of capital gains. These transactions have also been discussed in this
chapter. There is a separate method of computation of capital gains in respect of depreciable
assets. Also, there are exemptions in cases where capital gains/net sales consideration are
invested in specified assets. All these aspects are being discussed in this chapter.

4.2 CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by
- a Foreign Institutional Investor which has invested in such securities in accordance
with the SEBI regulations; or
- an investment fund specified in section 115UB which has invested such securities in
accordance with the provisions of the regulations made under the SEBI Act, 1992 or
under the IFSC Authority Act, 2019.
(c) any unit linked insurance policy (ULIP) to which exemption under section 10(10D) does not
apply.
However, it does not include—
(i) Stock-in trade: Any stock-in-trade [other than securities referred to in (b) above],
consumable stores or raw materials held for the purpose of the business or profession of
the assessee;
Whether a particular asset is stock-in-trade or capital asset does not depend upon the
nature of the item, but the manner in which the same is held. The item would be

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 CAPITAL GAINS 4.3 a

stock-in-trade in the hands of the assessee who deals or trades in that item; however, the
same item would be capital asset for the assessee who holds it as an investment.
Example: A dealer in real estate holds a piece of land as stock-in-trade. But the same will
be capital asset for an assessee who holds it as an investment.

The exclusion of stock-in-trade from the definition of capital asset is only in respect of sub -
clause (a) above and not sub-clause (b). This implies that even if the nature of such
security in the hands of the Foreign Portfolio Investor is stock in trade, the same would be
treated as a capital asset and the profit on transfer would be taxable as capital gains.

Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that the
income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be
in the nature of capital gain, irrespective of the presence or otherwise in India, of the Fund
manager managing the investments of the assessee.

(ii) Personal effects: 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.
EXCLUSIONS:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.

Definition of Jewellery - Jewellery is a capital asset and the profits or

gains arising from the transfer of jewellery held for personal use are chargeable to tax under
the head “capital gains”. For this purpose, the expression ‘jewellery’ includes the following:

(i) Ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious
or semi-precious stones and whether or not worked or sewn into any wearing apparel;

(ii) Precious or semi-precious stones, whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel.

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 4.4 DIRECT TAX LAWS

(iii) Rural agricultural land in India i.e., agricultural land in India which is not situated in any
specified area.

As per the definition that only rural agricultural lands in India are excluded from the purview
of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets.
Accordingly, the agricultural land described in (a) and (b) below, being land situated within
the specified urban limits, would fall within the definition of “capital asset”, and transfer of
such land would attract capital gains tax -

(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand , or

(b) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder -

Shortest aerial distance Population according to the last

from the local limits of a preceding census of which the relevant
municipality or cantonment figures have been published before the
board referred to in item (a) first day of the previous year.

(i) ≤ 2 kms > 10,000

(ii) > 2 kms ≤ 6 kms > 1,00,000

(iii) > 6 kms ≤ 8 kms > 10,00,000

Example

Area Shortest aerial Population according to the Is the land

distance from the last preceding census of situated in
local limits of a which the relevant figures this area a
municipality or have been published before capital
cantonment board the first day of the previous asset?
referred to in item (a) year.

(i) A 1 km 9,000 No

(ii) B 1.5 kms 12,000 Yes

(iii) C 2 kms 11,00,000 Yes

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 CAPITAL GAINS 4.5 a

(iv) D 3 kms 80,000 No

(v) E 4 kms 3,00,000 Yes

(vi) F 5 kms 12,00,000 Yes

(vii) G 6 kms 8,000 No

(viii) H 7 kms 4,00,000 No

(ix) I 8 kms 10,50,000 Yes

(x) J 9 kms 15,00,000 No

Explanation regarding gains arising on the transfer of urban agricultural land -

Explanation 1 to section 2(1A) clarifies that capital gains arising from transfer of any
agricultural land situated in any non-rural area (as explained above) will not constitute
agricultural revenue within the meaning of section 2(1A).
In other words, the capital gains arising from the transfer of such urban agricultural lands
would not be treated as agricultural income for the purpose of exemption under section
10(1). Hence, such gains would be exigible to tax under section 45.
(iv) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991 issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2018
notified by the Central Government.

Note – ‘Property’ includes and shall be deemed to have always included any rights in or in relation
to an Indian company, including rights of management or control or any other rights whatsoever.

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 4.6 DIRECT TAX LAWS

CAPITAL ASSET
[Section 2(14)]

Property of any kind held Any securities held by a FII which Any unit linked
by an assessee, whether has invested in such securities as per insurance policy
or not connected with his SEBI Regulations or an investment (ULIP) which is not
business or profession fund specified in section 115UB exempt by virtue of
which has invested such securities in section 10(10D)
accordance with the SEBI regulations
or IFSC regulations

EXCLUSIONS

Stock-in- Personal Effects Rural 6½ Gold Bonds, Gold Deposit

trade, [i.e., movable Agricultural 1977, 7% Gold Bonds issued
consumable property including Land Bonds, 1980, under Gold
stores, raw wearing apparel and National Deposit Scheme,
materials furniture held for Defence Gold 1999/ Deposit
held for personal use by the Bonds, 1980, Certificates issued
business or assessee or his Special Bearer under the Gold
profession family] Bonds, 1991 Monetisation
issued by the Scheme, 2015/
Central Govt. 2018 notified by
the Central Govt.

EXCLUSIONS FROM PERSONAL

EFFECTS

Jewellery Archaeological Drawings Paintings & Any work

collections Sculptures of art

These assets are hence, capital assets u/s 2(14)

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 CAPITAL GAINS 4.7 a

4.3 SHORT TERM AND LONG TERM CAPITAL ASSETS

• Definition – As per section 2(42A), short-term capital asset means a capital asset held by
an assessee for not more than 24 months immediately preceding the date of its transfer.

As per section 2(29A), long-term capital asset means a capital asset which is not a short-
term capital asset.
Accordingly, based on the period of holding capital assets would be classified as short -term
or long-term capital asset as follows:
Capital Asset STCG, if held for LTCG, if held for
• Security listed in a recognized ≤ 12 months immediately > 12 months
stock exchange including listed preceding the date of its immediately
units of a business trust transfer preceding the date
• Unit of equity-oriented fund/unit of its transfer
of UTI
• Zero Coupon bond
• Other capital assets ≤ 24 months immediately > 24 months
preceding the date of its immediately
transfer preceding the date
of its transfer

Note – As per section 50AA, capital gains arising from transfer of the following assets
would always be capital gains arising from transfer of short-term capital assets
irrespective of the period of holding of such assets -
- units of a specified mutual fund acquired on or after 1.4.2023,
- market linked debentures,
- unlisted bond and unlisted debenture.
Meaning of certain terms:

Term Meaning
Equity A fund set up under a scheme of a mutual fund specified under section
oriented 10(23D) or under a scheme of an insurance company unit linked
fund insurance policies which are not exempt under section 10(10D) and
[Clause (a) (i) in a case where the fund invested in the units of another fund which
of is traded on a recognised stock exchange –
Explanation
I. a minimum of 90% of the total proceeds of such fund is
to section
invested in the units of such other fund; and
112A]

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 4.8 DIRECT TAX LAWS

II. such other fund also invests a minimum of 90% of its total
proceeds in the equity shares of domestic companies listed on
a recognised stock exchange; and
(ii) in any other case, a minimum of 65% of the total proceeds of such
fund is invested in the equity shares of domestic companies listed on
a recognised stock exchange.
However, the percentage of equity shareholding or unit held in respect of
the fund, as the case may be, shall be computed with reference to the
annual average of the monthly averages of the opening and closing figures.
In case of a scheme of an insurance company comprising ULIPs to which
exemption u/s 10(10D) does not apply, the minimum requirement of 90%
or 65%, as the case may be, mentioned in (i) and (ii) above, is required to
be satisfied throughout the term of such insurance policy.
Zero A bond
Coupon - issued by any infrastructure capital company or infrastructure capital
Bond fund or infrastructure debt fund notified by the Central Government
[Section under section 10(47) or a public sector company or a scheduled bank
2(48)] on or after 1 st June, 2005,
- in respect of which no payment and benefit is received or receivable
before maturity or redemption from such issuing entity and
- which the Central Government may notify in this behalf.

Note: The income from transfer of a Zero coupon bond (not being held as stock-in-trade) is
to be treated as capital gains. Section 2(47)(iva) provides that maturity or redemption of a
Zero coupon bond shall be treated as a transfer for the purposes of capital gains tax.
The definitions of the terms “infrastructure capital company” and “infrastructure capital fund”
have already been discussed in Chapter 3 – “Profits and gains from business and
profession”.

Applicability of tax on capital gains in the hands of the unit holders where the term of
the units of Mutual Funds under the Fixed Maturity Plans has been extended [Circular
No. 6/2015, dated 09-04-2015]
Fixed Maturity Plans (FMPs) are closed ended funds having a fixed maturity date wherein
the duration of investment is decided upfront.
Some Asset Management Companies (AMCs) administering mutual funds have offered
extension of the duration of the FMPs by providing to the investor an option of roll -over of
FMPs in accordance with the provisions of Regulation 33(4) of the SEBI (Mutual Funds)
Regulation, 1996.

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 CAPITAL GAINS 4.9 a

The CBDT has, vide this Circular, clarified that the roll over in accordance with the aforesaid
regulation will not amount to transfer as the scheme remains the same.
Accordingly, no capital gains will arise at the time of exercise of the option by the investor to
continue in the same scheme. The capital gains will, however, arise at the time of
redemption of the units or opting out of the scheme, as the case may be.

• Determination of period of holding [Clause (i) of Explanation 1 to section 2(42A)]: In

determining period of holding of any capital asset by the assessee in the circumstances
stated in column (1), the period shall be determined by considering the period specified in
Column (2).
Determination of period of holding
S. Circumstances Period to be
No. (Column 1) reckoned/included/excluded, as the
case may be
(Column 2)
1 Where shares held in a company in The period subsequent to the date of
liquidation liquidation of company shall be
excluded.
2 Where asset becomes the property of The period for which the capital asset
an assessee by virtue of section was held by the previous owner shall be
49(1) included.
3 Where inventory of business is Period from the date of conversion or
converted into or treated as a capital treatment as a capital asset shall be
asset by the assessee considered.
4 Where share(s) in the Indian The period for which the share(s) was
company (amalgamated company), held by the assessee in the
becomes the property of an assessee in amalgamating company shall be
lieu of share(s) held by him in the included.
amalgamating company at the time of
transfer referred under section 47(vii).
5 Where the share or any other security Period from the date of allotment of such
is subscribed by the assessee on the share or security shall be reckoned.
basis of right to subscribe to any
share or security or by the person in
whose favour such right is renounced
by the assessee
6 Where the right to subscribe to any Period from the date of offer of such right
share or security, which is renounced in by the company or institution shall be
favour of any other person reckoned.

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 4.10 DIRECT TAX LAWS

7 Where any financial asset is allotted Period from the date of allotment of such
without any payment and on the basis financial asset shall be reckoned.
of holding of any other financial asset
8 Where share(s) in the Indian The period for which the share(s) were
company being a resulting company held by the assessee in demerged
becomes the property of an assessee in company shall be included.
consideration of demerger.
9 Where trading or clearing rights of a The period for which the person was a
recognised stock exchange in India is member of the recognised stock
acquired by a person pursuant to exchange immediately prior to such
demutualisation or corporation of a demutualisation or corporatisation shall
recognised stock exchange in India as be included.
referred to in section 47(xiii)
10 Where equity share(s) in a company The period for which the person was a
allotted pursuant to demutualisation or member of the recognised stock
corporation of a recognised stock exchange immediately prior to such
exchange in India as referred to in demutualisation or corporatisation shall
section 47(xiii) be included.
11 Where unit of a business trust, The holding period for which the share(s)
allotted pursuant to transfer of share(s) held by the assessee shall be included.
as referred to in section 47(xvii)
12 Where unit(s) becomes the property of The period for which the unit(s) in the
the assessee in consideration of consolidating scheme of the mutual fund
transfer of unit(s) in the consolidated were held by the assessee shall be
scheme of the mutual fund referred to included.
in section 47(xviii)
13 Where share(s) of a company is Period from the date on which a request
acquired by the non-resident for such redemption was made shall be
assessee on redemption of Global reckoned.
Depository Receipts referred to in
section 115AC(1)(b) held by such
assessee
14 Where equity share in a company The period for which the preference
becomes the property of the assessee by shares were held by the assessee shall
way of conversion of preference shares be included.
into equity shares referred under section
47(xb)
15 Where unit(s) becomes the property of The period for which the unit(s) in the
the assessee in consideration of consolidating plan of a mutual fund
transfer of unit(s) in the consolidated scheme was held by the assessee shall
plan of a mutual fund scheme as be included.
referred to in section 47(xix)

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 CAPITAL GAINS 4.11 a

16 In case of a unit or units in a Period for which the original unit or units
segregated portfolio referred under in the main portfolio were held by the
section 49(2AG) assessee shall also be reckoned.
17 (i) Electronic Gold Receipt [EGR] The period for which such gold was held
issued by a Vault Manager in by the assessee prior to conversion into
respect of gold deposited as the Electronic Gold Receipt
referred to in section 47(viid)
[Conversion of gold into EGR not
regarded as transfer by virtue of
section 47(viid)]
(ii) Gold released in respect of an The period for which such Electronic
Electronic Gold Receipt as referred Gold Receipt was held by the assessee
to in section 47(viid) [Conversion of prior to its conversion into gold.
EGR into Gold not regarded as
transfer by virtue of section 47(viid)]
18 Where any specified security or Period from the date of allotment or
sweat equity shares allotted or transfer of such specified security or
transferred, directly or indirectly, by the sweat equity shares shall be reckoned.
employer free of cost or at concessional
rate to his employees (including former
employees)
“Specified security” means the securities as defined in section 2(h) of the
Securities Contracts (Regulation) Act, 1956 and, where employees’ stock option
has been granted under any plan or scheme therefor, includes the securities
offered under such plan or scheme.
“Sweat equity shares” means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever name called.

• Period of holding in respect of other capital assets [Clause (ii) of Explanation 1 to

section 2(42A)] - The period for which any capital asset is held by the assessee shall be
determined in accordance with any rules made by the CBDT in this behalf.

Accordingly, the CBDT has inserted Rule 8AA in the Income-tax Rules, 1962 to provide for
method of determination of period of holding of capital assets, other than the capital assets
mentioned in clause (i) of Explanation 1 to section 2(42A).

- In the case of a capital asset, being a share or debenture of a company, which

becomes the property of the assessee in the circumstances mentioned in section
47(x), there shall be included the period for which the bond, debenture, debenture-

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stock or deposit certificate, as the case may be, was held by the assessee prior to
the conversion.
Note: Section 47(x) provides that any transfer by way of conversion of bonds or
debentures, debenture-stock or deposit certificates in any form, of a company into
shares or debentures of that company shall not be regarded as transfer for the
purposes of levy of capital gains tax.
- In case of a capital asset which became the property of the Indian subsidiary
company in consequence to conversion of a branch of a foreign company referred to
in section 115JG(1), the period for which the asset was held by the said branch of
the foreign company and by the previous owner, if any, who has acquired the capital
asset by a mode of acquisition referred to in clause (i)/(ii)/(iii)/(iv) of section 49(1) or
section 115JG(1) shall be included. Section 115JG has been discussed in detail in
Chapter 21: Non-resident Taxation in Module 4.
- In case of the amount which is chargeable to tax as income of specified entity under
section 45(4) under the head - "Capital gains", the amount or a part of it shall be
deemed to be from transfer of short-term capital asset or long term capital asset, as
the case may be, mentioned in column (2), if it is attributed to capital asset
mentioned in the corresponding row in column (3) –
Deemed capital gains from Type of capital asset of specified entity
transfer of capital asset
(2) (3)
1. Capital gains from transfer of (a) capital asset which is short term capital
a short term capital asset asset at the time of taxation of amount
under section 45(4); or
(b) capital asset forming part of block of
asset; or
(c) capital asset being self-generated asset
and self-generated goodwill as defined
in section 45(4)
2. Capital gains from transfer of Capital asset which is not covered in 1.
a long term capital asset above and is long term capital asset at the
time of taxation of amount under section
45(4).

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 CAPITAL GAINS 4.13 a

4.4 TRANSFER: WHAT IT MEANS? [SECTION 2(47)]

The Act contains an inclusive definition of the term ‘transfer’. Accordingly, transfer in relation to a
capital asset includes the following types of transactions:—

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

Example: Acquisition of industrial undertaking under the Industries (Development and

Regulation) Act, 1951.

(iv) the owner of a capital asset may convert/treated the same into/as the stock-in-trade of a
business carried on by him. Such conversion/treatment is treated as transfer; or

Example: Where an investor in shares starts a business of dealing in shares and treats
existing investments as stock-in-trade of the newly set up business, such conversion shall
be regarded as transfer for the purpose of capital gains.

(v) the maturity or redemption of a zero coupon bond; or

(vi) possession of an immovable property in consideration of part-performance of a contract

referred to in section 53A of the Transfer of Property Act, 1882.

Example: A enters into an agreement for the sale of his house. The purchaser gives the
entire sale consideration to A. A hands over complete rights of possession to the purchaser
since he has received the entire sale consideration though house is not yet registered in the
name of the buyer. Under the Income-tax Act, the above transaction is considered as
transfer.

(vii) transactions which have the effect of transferring or enabling the enjoyment of an
immovable property.

Example: A person may become a member of a co-operative society, company or other

association of persons which may be building houses/ flats. When he pays an agreed amount,
the society etc. hands over possession of the house to the person concerned. No conveyance
deed is registered. For the purpose of income-tax, the above transaction is a transfer.

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Note – Section 2(47) provides an inclusive definition of “transfer”, in relation to a capital asset.
Explanation 2 to section 2(47) clarifies that ‘transfer’ includes and shall be deemed to have always
included –

(1) disposing of or parting with an - directly or indirectly,

asset or any interest therein, or
- absolutely or conditionally,
(2) creating any interest in any asset - voluntarily or involuntarily
in any manner whatsoever
by way of an agreement (whether entered into in India or outside India) or otherwise.

The above transactions would be deemed as a transfer notwithstanding that such transfer of rights
has been characterised as being effected or dependent upon or flowing from the transfer of a
share or shares of a company registered or incorporated outside India.

4.5 SCOPE AND YEAR OF CHARGEABILITY [SECTION 45]

(1) General Provision [Section 45(1)]
Any profits or gains arising from the transfer of a capital asset effected in the previous year (other
than exemptions covered under this chapter) shall be chargeable to income-tax under this head in
the previous year in which the transfer took place.

Year of chargeability - Capital gains are chargeable as the income of the previous year in which
the sale or transfer takes place. In other words, for determining the year of chargeability, the
relevant date of transfer is not the date of the agreement to sell, but the actual date of sale i.e., the
date on which the effect of transfer of title to the property as contemplated by the parties has taken
place [Alapati Venkataramiah v. CIT [1965] 57 ITR 185 (SC)].
However, as already noted, Income-tax Act has recognised certain transactions as transfer in spite
of the fact that conveyance deed might not have been executed and registered.

(2) Insurance receipts [Section 45(1A)]

Where any person receives any money or other assets under any insurance from an insurer on
account of damage to or destruction of any capital asset, as a result of -

 flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

 riot or civil disturbance; or

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 CAPITAL GAINS 4.15 a

 accidental fire or explosion; or

 action by an enemy or action taken in combating an enemy (whether with or without
declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to
income-tax under the head “Capital gains” and shall be deemed to be the income of such person
for the previous year in which such money or other asset was received.
Full value of consideration: In order to compute capital gains, the value of any money or the fair
market value of other assets on the date of such receipt shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of such capital assets.
(3) Unit Linked Insurance Policy Receipts [Section 45(1B)]
Where any person receives, at any time during any previous year, any amount, including the
amount allocated by way of bonus, on such policy under a unit linked insurance policy (ULIP), to
which exemption under section 10(10D) does not apply, then, any profits or gains arising from
receipt of such amount by such person shall be chargeable to income-tax under the head "Capital
gains" and shall be deemed to be the income of such person of the previous year in which such
amount was received.
Exemption under section 10(10D)

Any sum received under a life insurance policy, including the sum allocated by way of bonus on
such policy would not be included in the total income of a person.
The following table summarizes the exemption available under section 10(10D) vis-a-vis the date
of issue of such policies and the corresponding condition to be satisfied for exemption -
Exemption u/s 10(10D)
In respect of policies Any sum received under a LIP including the sum allocated by way of
issued before 1.4.2003 bonus is exempt.
In respect of policies Any sum received under a LIP including the sum allocated by way of
issued between bonus is exempt.
1.4.2003 and 31.3.2012 However, exemption would not be available if the premium payable
for any of the years during the term of the policy exceeds 20% of
“actual capital sum assured”.

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 4.16 DIRECT TAX LAWS

In respect of policies Any sum received under a LIP including the sum allocated by way of
issued on or after bonus is exempt.
1.4.2012 but before However, exemption would not be available if the premium payable
1.4.2013 for any of the years during the term of the policy exceeds 10% of
actual capital sum assured.
In respect of policies (a) Where the insurance is on the life of a person with disability
issued on or after or severe disability as referred to in section 80U or a person
1.4.2013 suffering from disease or ailment as specified under section
80DDB.
Any sum received under a LIP including the sum allocated by
way of bonus is exempt. However, exemption would not be
available if the premium payable for any of the years during the
term of the policy exceeds 15% of “actual capital sum assured”
(b) Where the insurance is on the life of any person, other than
mentioned in (a) above
Any sum received under a LIP including the sum allocated by way
of bonus is exempt. However, exemption would not be available if
the premium payable for any of the years during the term of the
policy exceeds 10% of “actual capital sum assured”.
In respect of ULIP Any sum received under a ULIP including the sum allocated by way of
issued on or after bonus is exempt.
1.2.2021 However, exemption would not be available if the premium payable for
any of the years during the term of the policy exceeds 10% or 15%, as
the case may be, of “actual capital sum assured.
Further, exemption would also not be available with respect to ULIP
issued on or after 1.2.2021, if the amount of premium payable exceeds
` 2,50,000 for any of the previous years during the term of such ULIP.
The condition of payment of premium of ` 2,50,000 would not be
applicable in case of any sum received, under a Life Insurance
policy issued by the IFSC Insurance Office, including the sum
allocated by way of bonus on such policy.
In a case where premium is payable by a person for more than one
ULIP issued on or after 1.2.2021 and the aggregate of premium
payable on such ULIPs exceed ` 2,50,000 for any of the previous
years during the term of any such ULIPs, exemption would be
available in respect of any of those ULIPs, at the option of the
assessee, whose aggregate premium payable does not exceed
` 2,50,000 for any of the previous years during their term.
Meaning of ULIP - ULIP means a life insurance policy which has
components of both investment and insurance and is linked to a unit
defined under IRDA (ULIP) Regulations, 2019 issued by IRDA under
the Insurance Act, 1938 and the IRDA Act, 1999.

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 CAPITAL GAINS 4.17 a

In respect of life Any sum received under a LIP including the sum allocated by way of
insurance policies bonus is exempt.
issued on or after However, exemption would not be available if the premium payable for
1.4.2023 any of the years during the term of the policy exceeds 10% or 15%, as
the case may be, of “actual capital sum assured.
Further, exemption would also not be available if the amount of
premium payable exceeds ` 5,00,000 for any of the previous years
during the term of such policy.
The condition of payment of premium of ` 5,00,000 would not be
applicable in case of any sum received, under a Life Insurance
policy issued by the IFSC Insurance Office, including the sum
allocated by way of bonus on such policy.
In a case where premium is payable by a person for more than one
LIP (other than ULIP) issued on or after 1.4.2023 and the aggregate
of premium payable on such policies exceed ` 5,00,000 for any of the
previous years during the term of any such policy(ies), exemption
would be available in respect of any of those LIPs (other than ULIP),
at the option of the assessee, whose aggregate premium payable
does not exceed ` 5,00,000 for any of the previous years during their
term.
Any sum is received on the death of a person is exempt irrespective of the annual premium
payable on the ULIP/LIP. The condition of payment of premium of 10% or 15% or 20% or
` 2,50,000 or ` 5,00,000 would not be applicable.

Exemption is not available in respect of amount received from an insurance policy taken for
disabled person under section 80DD: Any sum received under section 80DD(3) shall not be
exempt under section 10(10D). Accordingly, if the dependent disabled, in respect of whom an
individual or the member of the HUF has paid or deposited any amount in any scheme of LIC or
any other insurer, predeceases the individual or the member of the HUF, the amount so paid or
deposited shall be deemed to be the income of the assessee of the previous year in which such
amount is received. Such amount would not be exempt u/s 10(10D).

Exemption is not available in respect of the sum received under a Keyman insurance policy:
Any sum received under a Keyman insurance policy shall also not be exempt.
Explanation 1 to section 10(10D) defines “Keyman insurance policy” as a life insurance policy
taken by one person on the life of another person who is or was the employee of the first -
mentioned person or is or was connected in any manner whatsoever with the business of the first -
mentioned person. The term includes within its scope a keyman insurance policy which has been
assigned to any person during its term, with or without consideration. Therefore, such policies shall
continue to be treated as a keyman insurance policy even after the same is assigned to the

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 4.18 DIRECT TAX LAWS

keyman. Consequently, the sum received by the keyman on such policies, being “keyman
insurance policies”, would not be exempt u/s 10(10D).
Unit Linked Insurance Policies
Guidelines by CBDT: In case any difficulty arises in giving effect to the provisions of this clause,
the CBDT may issue guidelines for the purpose of removing the difficulty with the previous
approval of the Central Government.
Accordingly, the CBDT has, with the approval of the Central Government, vide Circular No.
2/2022, dated 19.01.2022, issued the following guidelines in respect of ULIPs –
Situation 1: No sum including any sum allocated by way of bonus (such sum hereinafter referred
as “consideration”) is received by the assessee on any ULIPs which are issued on or after
1.2.2021 (such ULIPs hereinafter referred as “eligible ULIPs”) during any previous year preceding
the current previous year or consideration has been received on such eligible ULIPs in an earlier
previous year but has not been claimed exempt. In such a situation, the exemption u/s 10(10D)
would be determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible ULIP only
Circumstance Eligibility for exemption u/s 10(10D)
If the amount of premium payable on such Such consideration would be eligible for
eligible ULIP does not exceed ` 2,50,000 exemption u/s 10(10D).
for any of the PYs during the term of such [Refer Example 1 given below]
eligible ULIP and annual premium does not
exceed 10% of actual capital sum assured
If the amount of premium payable on such Such consideration would not be eligible
eligible ULIP > ` 2,50,000 for any of the for exemption u/s 10(10D).
PYs during the term of such eligible ULIP [Refer Example 2 given below]

Example 1:
ULIP A
Date of issue 1.4.2021
Annual premium 2,50,000
Sum assured 25,00,000
Consideration received as on 01.11.2031 on maturity 32,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

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Eligibility for exemption u/s 10(10D) - The consideration received would be exempt u/s
10(10D) in A.Y. 2032-33, since the annual premium payable on the policy does not exceed
` 2,50,000 and also does not exceed 10% of actual capital sum assured.
Example 2:
ULIP A
Date of issue 1.4.2021
Annual premium 5,00,000
Sum assured 50,00,000
Consideration received as on 01.11.2031 on maturity 60,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) - The consideration received would not be exempt
u/s 10(10D) in A.Y. 2032-33 since the annual premium payable on the eligible ULIP
exceeds ` 2,50,000.
II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible ULIP
Circumstance Eligibility for exemption u/s 10(10D)
If the aggregate of the amount of Such consideration would be eligible for
premium payable on such eligible ULIPs exemption under u/s 10(10D).
does not exceed ` 2,50,000 for any of [Refer Example 3 given below]
the PYs during the term of such eligible
ULIPs and the annual premium ≤ 10% of
actual capital sum assured
If the aggregate of the amount of Consideration in respect of any of those
premium payable on such eligible ULIPs eligible ULIPs whose aggregate amount of
> ` 2,50,000 for any of the PYs during premium payable does not exceed
the term of such eligible ULIP ` 2,50,000 for any of the PYs during their
term would be eligible for exemption u/s
10(10D), provided their annual premium
≤ 10% of actual capital sum assured.
[Refer Examples 4 and 5 given below]

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 4.20 DIRECT TAX LAWS

Example 3:
ULIP A B
Date of issue 1.4.2021 1.4.2021
Annual premium 1,00,000 1,50,000
Sum assured 10,00,000 15,00,000
Consideration received as on 01.11.2031 on maturity 12,00,000 18,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for ULIP “A” and ULIP “B” does not exceed ` 2,50,000 during the term of these policies.
Further, annual premium payable in respect of ULIP “A” and ULIP “B” does not exceed 10%
of actual capital sum assured. Therefore, the consideration received under ULIP “A” and “B”
would be exempt u/s 10(10D) in A.Y. 2032-33
Example 4:
ULIP A B C
Date of issue 1.4.2021 1.4.2021 1.4.2021
Annual premium 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 15,00,000 30,00,000
Consideration received as on 01.11.2031 on 12,00,000 18,00,000 34,00,000
maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for ULIP “A”, ULIP “B” and ULIP “C” exceeds ` 2,50,000 during the term of these policies.
However, the consideration received under ULIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2032-33, since aggregate of annual premium payable for these two policies does not
exceed ` 2,50,000 for any previous year during the term of these two policies and also
does not exceed 10% of actual capital sum assured.
Consequently, the consideration received under ULIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2032-33.

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Example 5:
ULIP X A B C
Date of issue 1.4.2020 1.4.2021 1.4.2021 1.4.2021
Annual premium 2,50,000 1,00,000 1,50,000 3,00,000
Sum assured 25,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 30,00,000
01.11.2030 on maturity
Consideration received as on 12,00,000 18,00,000 34,00,000
01.11.2031 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) - The consideration received under ULIP “X” would
be exempt u/s 10(10D) in A.Y. 2031-32 since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.2.2021, limit
of ` 2,50,000 of amount of premium payable is not applicable.
The aggregate of annual premium payable for ULIP “A”, ULIP “B” and ULIP “C” (being
ULIPs issued on or after 1.2.2021) exceeds ` 2,50,000 during the term of these policies.
However, the consideration received under ULIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2032-33, since aggregate of annual premium payable for these two policies does not
exceed ` 2,50,000 for any previous year during the term of these two policies and annual
premium payable in respect of these policies does not exceed 10% of actual capital sum
assured.
Consequently, the consideration received under ULIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2032-33.
Situation 2: Consideration has been received by the assessee under any one or more eligible
ULIPs during any P.Y. preceding the current P.Y. and it has been claimed to be exempt u/s
10(10D). Such eligible ULIPs are referred as “Earlier Exempt Eligible ULIPs (EEE ULIPs)” in this
paragraph and corresponding examples and reference to eligible ULIPs shall not include EEE
ULIPs. The exemption u/s 10(10D) would be determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible ULIP only
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate amount of premium payable Consideration under such eligible ULIP
on such eligible ULIP and EEE ULIPs would be eligible for exemption u/s 10(10D).
does not exceed ` 2,50,000 for any of [Refer Example 6]

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the PYs during the term of such eligible

ULIP and annual premium in respect of
eligible ULIP does not exceed 10% of
actual capital sum assured.
If aggregate amount of premium payable Consideration under such eligible ULIP
on such eligible ULIP and EEE ULIPs > would not be eligible for exemption u/s
` 2,50,000 for any of the PYs during the 10(10D).
term of such eligible ULIP [Refer Example 7]

Example 6:
ULIP X A
Date of issue 1.4.2021 1.4.2022
Annual premium 2,00,000 50,000
Sum assured 20,00,000 5,00,000
Consideration received as on 01.11.2031 on maturity 25,00,000
Consideration received as on 01.11.2032 on maturity 6,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) – The consideration under ULIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000
and also does not exceed 10% of actual capital sum assured.
The consideration received under ULIP “A” will also be exempt u/s 10(10D) in A.Y. 2033 -34
since aggregate of the annual premium payable for ULIP “A” and ULIP “X” does not exceed
` 2,50,000 for the [Link]. 2022-23 to 2031-32 and the annual premium of ULIP “A” does not
exceed 10% of actual capital sum assured.
Example 7:
ULIP X A
Date of issue 1.4.2021 1.4.2022
Annual premium 2,00,000 1,00,000
Sum assured 20,00,000 10,00,000
Consideration received as on 01.11.2031 on maturity 25,00,000
Consideration received as on 01.11.2032 on maturity 12,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

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Eligibility for exemption u/s 10(10D) – The consideration under ULIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000
and also does not exceed 10% of actual capital sum assured.
The consideration received under ULIP “A” will not be exempt u/s 10(10D) in A.Y. 2033-34
since aggregate of the annual premium payable for ULIP “A” and ULIP “X” (both ULIPs
issued on or after 1.2.2021) exceeds ` 2,50,000.
II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible ULIP
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate of the amount of Consideration received would be eligible for
premium payable on such eligible exemption under u/s 10(10D).
ULIPs and EEE ULIPs does not
exceed ` 2,50,000 for any of the
PYs during the term of such eligible
ULIPs and annual premium in
respect of eligible ULIPs also does
not exceed 10% of actual capital
sum assured.
If aggregate of the amount of Consideration in respect of any of those eligible
premium payable on such eligible ULIPs (whose aggregate amount of premium
ULIPs and EEE ULIPs > ` 2,50,000 along with the aggregate amount of premium of
for any of the PYs during the term of EEE ULIPs does not exceed ` 2,50,000 for any
such eligible ULIPs of the PYs during their term) would be eligible for
exemption u/s 10(10D).
[Refer Examples 8, 9 and 10 given below]

Example 8:
ULIP X A B C
Date of issue 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 2,00,000 1,00,000 1,50,000 3,00,000
Sum assured 20,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 25,00,000
01.11.2031 on maturity
Consideration received as on 12,00,000 18,00,000 34,00,000
01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

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Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.

In this case, the aggregate of the annual premium payable for ULIP “A”, ULIP “B” and ULIP
“C” along with the premium for ULIP “X” exceeds ` 2,50,000 during the term of these
policies. Hence, the consideration received under ULIPs “A”, “B” and “C” will not be exempt
u/s 10(10D) in A.Y. 2033-34.

Alternative treatment: If the consideration under ULIP “X” was not claimed to be exempt
u/s 10(10D) in A.Y. 2032-33 by the assessee, then, the consideration received under ULIP
“A” and ULIP “B” would be exempt u/s 10(10D) in A.Y.2033-34 since the aggregate of the
annual premium payable for the ULIPs “A” and “B” together did not exceed ` 2,50,000 for
any of the previous years during the term of these two policies.
Example 9:

ULIP X A B C
Date of issue 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 12,00,000
01.11.2031 on maturity
Consideration received as on 12,00,000 18,00,000 34,00,000
01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.

In this case, the aggregate of the annual premium payable for ULIP “A”, ULIP “B” and ULIP
“C” along with the premium for ULIP “X” exceeds ` 2,50,000 during the term of these policies.

However, the consideration received under ULIPs “A” or “B” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2033-34.

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 CAPITAL GAINS 4.25 a

If the consideration received under ULIP “A” claimed to be exempt as aggregate of the
annual premium payable for ULIP “X” and “A” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “B” would not be exempt.

If the consideration received under ULIP “B” claimed to be exempt as aggregate of the
annual premium payable for ULIP “X” and “B” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “A” would not be exempt. Exemption for
consideration received under ULIP “B” is preferred as it is more beneficial to the assessee.

Alternative treatment: If the consideration under ULIP “X” was not claimed to be exempt
u/s 10(10D) in A.Y. 2032-33 by the assessee, then the consideration received under ULIP
“A” and ULIP “B” would be exempt u/s 10(10D) in A.Y. 2033-34 since the aggregate of the
annual premium payable for the ULIPs “A” and “B” together did not exceed ` 2,50,000 for
any of the previous years during the term of these two policies.

It may be noted that in every case, the consideration received for ULIP “C” would not be
exempt u/s 10(10D).
Example 10:

ULIP X Y A B C
Date of issue 1.4.2021 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 1,00,000 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received on 6,00,000
surrender as on 1.7.2025
Consideration received as 12,00,000
on 01.11.2031 on maturity
Consideration received as 12,00,000 18,00,000 34,00,000
on 01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2032-33, except ULIP “X” and “Y”.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y.2026-27, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.

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 4.26 DIRECT TAX LAWS

The consideration received under ULIP “Y” would be exempt u/s 10(10D) in A.Y. 2032 -33,
since the aggregate of annual premium payable for ULIP “X” and “Y” does not exceed
` 2,50,000 and annual premium payable for ULIP “Y” does not exceed 10% of actual capital
sum assured.

The consideration received under ULIPs “A”, ULIP “B” and ULIP “C” would not be exempt
u/s 10(10D) in A.Y. 2033-34, since aggregate of annual premium payable for these three
policies and ULIP “X” and “Y” exceeds ` 2,50,000.

Alternative treatment: If the consideration on surrender under ULIP “X” was not claimed to
be exempt u/s 10(10D) in A.Y. 2026-27 by the assessee, then the consideration received
under ULIP “Y” would be exempt and the consideration received under ULIP “A” or ULIP “B”
(any one) can be exempt u/s 10(10D) in A.Y. 2033-34. If the consideration received under
ULIP “A” claimed to be exempt, as aggregate of the annual premium payable for ULIP “Y”
and “A” did not exceed ` 2,50,000 for any of the PYs., the consideration received under
ULIP “B” would not be exempt.

If the consideration received under ULIP “B” is claimed to be exempt as aggregate of the
annual premium payable for ULIP “Y” and “B” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “A” would not be exempt. Exemption for
consideration received under ULIP “B” is preferred as it is more beneficial to the assessee.

If the consideration on surrender of ULIP “X” and on maturity of ULIP “Y” were not claimed
to be exempt under section 10(10D) in A.Y.2026-27 and A.Y.2032-33, respectively, then
consideration received under both ULIP “A” and ULIP “B” would be exempt in A.Y.2033 -34
(being ULIPs issued on or after 1.2.2021, whose aggregate consideration does not exceed
` 2,50,000).

It may be noted that, in every case, consideration received under ULIP “C” would not be
exempt under section 10(10D).

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 CAPITAL GAINS 4.27 a

Summary

Unit Linked Insurance Policy (ULIP)

Policy taken Policy taken on or after

before 1.2.2021 1.2.2021

Does premium exceed

10%/15%/20% of Sum
If premium does If premium or aggregate of
assured (SA)?
not exceed premium exceed
` 2,50,000 in any ` 2,50,000 in any P.Y during
P.Y during the term the term of policy
of policy
Yes No

Exempt Single ULIP Multiple ULIP

u/s
10(10D)

(1) Such ULIP will (1) Exemption can be

be taxable as claimed in respect of
capital asset those ULIP, at the
under section option of the
45(1B) assessee, whose
(2) Capital Gain aggregate premium
will be taxable payable does not
u/s 112A exceed ` 2,50,000
subject to the and where premium
condition does not exceed 10%
specified of SA.
therein (2) Remaining ULIPs will
be taxable as capital
asset under section
45(1B).
(3) Capital Gain will be
taxable u/s 112A
subject to the
condition specified
therein

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 4.28 DIRECT TAX LAWS

Any ULIP which is not exempt under section 10(10D) will be a capital asset and taxable
under section 45(1B).
Rule 8AD prescribes the following manner to compute capital gains on receipt of amount under
such ULIPs. Where any person receives at any time during any previous year any amount under
such ULIP, including the amount allocated by way of bonus on such policy, then, —

Situation Capital gains arising from receipt of amount during the previous
year in which such amount is received
(i) Where the amount is A-B, where
received for the first A = the amount received for the first time under such ULIP during the
time under such previous year, including the amount allocated by way of bonus on
ULIP during the such policy; and
previous year,
B = the aggregate of the premium paid during the term of such ULIP
till the date of receipt of the amount as referred to in “A”
(ii) Where the amount is C-D, where
received under such C = the amount received under such ULIP during the previous year,
ULIP during the at any time after the receipt of the amount as referred to in (i) above,
previous year, at any including the amount allocated by way of bonus on such policy.
time after the receipt
Note - The amount which has already been considered for
of the amount as
calculation of taxable amount during the earlier previous year(s)
referred to in (i)
would not be included in “C”.
D = the aggregate of the premium paid during the term of such ULIP
till the date of receipt of the amount as referred to in “C” as reduced
by “B” i.e., the premium that has already been considered for
calculation of taxable amount during the earlier previous year(s).

The capital gains as computed in above would be deemed to be the capital gains arising from the
transfer of a unit of an equity-oriented fund set up under a scheme of an insurance company
comprising unit linked insurance policies.

(4) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]

A person who is the owner of a capital asset may convert the same or treat it as stock -in-trade of
the business carried on by him. As noted above, the conversion/treatment is a transfer.

As per section 45(2), notwithstanding anything contained in section 45(1), being the charging
section, the profits or gains arising from the above conversion or treatment will be chargeable to
income-tax as his income of the previous year in which such stock-in-trade is sold or
otherwise transferred by him.

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 CAPITAL GAINS 4.29 a

Full value of consideration: In order to compute the capital gains, the fair market value of the
asset on the date of such conversion or treatment shall be deemed to be the full value of the
consideration received as a result of the transfer of the capital asset.

Components of
income arising Manner of computation of
on subsequent capital gains and business
sale of stock-in- income
trade
FMV on the date of conversion
(-) Cost/ Indexed Cost of
acquisition/ Improvement
Capital
Gains Indexation benefit would be
Conversion of considered in relation to the
capital asset year of conversion of capital
asset into stock-in-trade
into stock-in-
trade Business
Income Sale price of stock-in-trade (-)
FMV on the date of conversion

Note – Both Capital Gains and Business income are chargeable to tax in the year in which
stock-in-trade is sold or otherwise transferred.
ILLUSTRATION 1
X converts his capital asset (acquired on June 10, 2006 for ` 60,000) into stock-in-trade on March
10, 2025. The fair market value on the date of the above conversion was ` 5,50,000. He
subsequently sells the stock-in-trade so converted for ` 6,00,000 on June 10, 2025. Examine the
tax implication.
Cost Inflation Index - F.Y. 2006-07: 122; F.Y. 2024-25: 363; F.Y. 2025-26: 376.
SOLUTION
Since the capital asset is converted into stock-in-trade during the previous year relevant to the
A.Y. 2025-26, it will be a transfer under section 2(47) during the P.Y.2024-25. However, the profits
or gains arising from the above conversion will be chargeable to tax during the A.Y. 20 26-27, since
the stock-in-trade has been sold only on June 10, 2025. For this purpose, the fair market value on
the date of such conversion (i.e. 10 th March, 2025) will be the full value of consideration.

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 4.30 DIRECT TAX LAWS

The capital gains will be computed after deducting the cost of acquisition from the full value of
consideration since the transfer (i.e., conversion of capital asset into stock in trade) took place
during the P.Y. 2024-25. Indexation benefit will not be available since transfer took place on or
after 23.7.2024. ` 4,90,000 (i.e., ` 5,50,000 – ` 60,000) will be treated as long-term capital gains
chargeable to tax during the A.Y.2026-27. During the same assessment year, ` 50,000
(` 6,00,000 - ` 5,50,000) will be chargeable to tax as business profits.
(5) Transfer of beneficial interest in securities [Section 45(2A)]
As per section 45(2A), where any person has had at any time during the previous year any
beneficial interest in any securities, then, any profits or gains arising from the transfer made by the
depository or participant of such beneficial interest in respect of securities shall be chargeable to
tax as the income of the beneficial owner of the previous year in which such transfer took place
and shall not be regarded as income of the depository who is deemed to be the registered owner
of the securities by virtue of section 10(1) of the Depositories Act, 1996.
Full value of consideration and period of holding: For the purposes of section 48 and proviso
to section 2(42A), the cost of acquisition and the period of holding of securities shall be
determined on the basis of the first-in-first-out (FIFO) method.
When the securities are transacted through stock exchanges, it is the established procedure that
the brokers first enter into contracts for purchase/ sale of securities and thereafter, follow it up with
delivery of shares, accompanied by transfer deeds duly signed by the registered holders.
 The seller is entitled to receive the consideration agreed to as on the date of contract.
 Thus, it is the date of broker's note that should be treated as the date of transfer in case of
sale transactions of securities provided such transactions are followed up by delivery of
shares and also the transfer deeds.
 Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned
to take place directly between the parties and not through stock exchanges.
 The date of contract of sale as declared by the parties shall be treated as the date of
transfer provided it is followed up by actual delivery of shares and the transfer deeds.
Where securities are acquired in several lots at different points of time, the First -In-First-Out
(FIFO) method shall be adopted to reckon the period of the holding of the security, in cases where
the dates of purchase and sale could not be correlated through specific numbers of the scrips.
In other words, the assets acquired last will be taken to be remaining with the assessee while
assets acquired first will be treated as sold. Indexation, wherever applicable, for long -term assets
will be regulated on the basis of the holding period determined in this manner - CBDT Circular No.
704, dated 28.4.1995.

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 CAPITAL GAINS 4.31 a

Meaning of certain terms:

Term Meaning
Beneficial owner A person whose name is recorded as such with a depository.
Depository A company formed and registered under the Companies Act, 19561 and
which has been granted a certificate of registration under section 12(1A)
of the SEBI Act, 1992.
Security Such security as may be specified by SEBI.

(6) Introduction of capital asset as capital contribution [Section 45(3)]

Where a person transfers a capital asset to a firm, AOP or BOI in which he is already a partner/
member or is to become a partner/ member by way of capital contribution or otherwise, the profits
or gains arising from such transfer will be chargeable to tax as income of the previous year in
which such transfer takes place.
Full value of consideration: For this purpose, the full value of the consideration will be deemed
to be the amount recorded in the books of account of the firm, AOP or BOI as the value of the
capital asset.
(7) Tax implications on receipt of money or capital asset or stock-in trade by a partner or
a member on dissolution or reconstitution of firm/AOPs/BOIs [Section 9B and 45(4)]
Tax implications on receipt of capital assets or stock in trade or both on dissolution or
reconstitution of firm/AOP or BOI [Section 9B]
(i) Deemed transfer in the hands of specified entity - Where a specified person (partner
of a firm/member of AoP/BoI) receives during the previous year any capital asset or stock in
trade or both from a specified entity (firm/AoP/BoI, as the case may be) in connection with the
dissolution or reconstruction of such specified entity, then such specified entity would be
deemed to have transferred such capital asset or stock in trade or both, as the case may be, to
the specified person in the year in which such capital asset or stock in trade or both are
received by the specified person.
(ii) Year of taxability – Any profits and gains from such deemed transfer of capital asset or
stock in trade or both, as the case may be, by the specified entity shall be deemed to be the
income of such specified entity of the previous year in which such capital asset or stock in
trade or both were received by the specified person.

1 Now Companies Act, 2013

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 4.32 DIRECT TAX LAWS

(iii) Head of income – Any profit and gains from such deemed transfer of capital asset would
be chargeable to income-tax as income of such specified entity under the head “Capital gains”.
Any profits and gains from such deemed transfer of stock in trade would be chargeable to tax
under the head “Profits and gains from business or profession”, in accordance with the provisions
of this Act.
(iv) Full value of consideration - In order to compute the capital gains, the fair market
value of the capital asset or stock in trade or both on the date of its receipt by the specified
person shall be deemed to be the full value of the consideration received or accruing as a
result of such deemed transfer of the capital asset or stock in trade or both by the specified entity.
Tax implications on receipt of money or capital assets or both on reconstitution of firm/AOP
or BOI [Section 45(4)]
(i) Deemed income in the hands of specified entity – Where a specified person receives
during the previous year any money or capital asset or both from a specified entity in connection
with the reconstitution of such specified entity, then any profits or gains arising from such
receipt by the specified person shall be chargeable to income-tax as income of such specified
entity under the head “Capital gains”.
(ii) Year of taxability – Such profits and gains shall be deemed to be the income of specified
entity of the previous year in which such money or capital asset or both were received by
the specified person.
(iii) Computation of such profits and gains from such receipt – Notwithstanding anything
to the contrary contained in this Act, such profits or gains shall be determined in accordance with
the following formula –
A** = B + C – D
A = Income chargeable to income-tax u/s 45(4) as income of the specified entity under the
head "Capital gains"
B = Value of any money received by the specified person from the specified entity on the date of
such receipt;
C = The amount of fair market value of the capital asset received by the specified person from the
specified entity on the date of such receipt; and
D = The amount of balance in the capital account (represented in any manner) of the specified
person in the books of account of the specified entity at the time of its reconstitution.

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 CAPITAL GAINS 4.33 a

Balance in the capital account of the specified person in the books of account of the specified
entity is to be calculated without taking into account the increase in the capital account of the
specified person due to the following
- revaluation of any asset or
- self-generated goodwill or
- any other self-generated asset.
"self-generated goodwill" and "self-generated asset" mean goodwill or asset, as the case may be,
which has been acquired without incurring any cost for purchase or which has been generated
during the course of the business or profession.

** If the value of "A" in the above formula is negative, its value shall be deemed to be zero.

(iv) Taxability u/s 45(4) is in addition to taxability under section 9B – When a capital asset
is received by a specified person from a specified entity in connection with the reconstitution of
such specified entity, the provisions of this section shall operate in addition to the provisions of
section 9B and the taxation under section 9B shall be worked out independently.

(v) Definition of certain terms commonly used under both section 9B and 45(4):
Terms Meaning
Specified person a person, who is a partner of a firm or member of AOPs or BOIs (not
being a company or a co-operative society) in any previous year.
Specified entity a firm or other AOPs or BOIs (not being a company or a co-operative
society)
Reconstitution of Where
the specified entity (a) one or more of its partners or members, as the case may be, of
such specified entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are
admitted in such specified entity in such circumstances that one or
more of the persons who were partners or members, as the
case may be, of the specified entity, before the change, continue
as partner or partners or member or members after the
change; or
(c) all the partners or members, as the case may be, of such
specified entity continue with a change in their respective share
or in the shares of some of them

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 4.34 DIRECT TAX LAWS

Note: The case of dissolution of specified entity which is dealt in section 9B is not covered under
section 45(4). The taxability of receipt of money by a partner of a firm/ member of AoP/BoI on
reconstitution of firm/AoP/BoI, as the case may be, is dealt with only in section 45(4) and not in
section 9B. The taxability of receipt of stock-in-trade by a partner of a firm/member of AoP/BoI on
reconstitution is dealt with in section 9B. Therefore, it is only receipt of capital asset by a partner of
a firm/member of an AoP/BoI on reconstitution of the firm/AoP/BoI which is taxable under section
9B and under section 45(4).

(vi) Type of capital gain from capital asset received by specified person from specified
entity in connection with its reconstitution [Section 2(42A) Rule 8AA]: In case of the amount
which is chargeable to tax as income of specified entity under section 45(4) under the head -
"Capital gains", the amount or a part of it shall be deemed to be from transfer of short -term capital
asset or long term capital asset, as the case may be, mentioned in column (2), if it is attributed to
capital asset mentioned in the corresponding row in column (3) -

Deemed capital gains Type of capital asset of specified entity

from transfer of
capital asset
(2) (3)
1. Capital gains from (a) capital asset which is short term capital asset at the time of
transfer of a short term taxation of amount under section 45(4); or
capital asset (b) capital asset forming part of block of asset; or
(c) capital asset being self-generated asset and self-generated
goodwill as defined in section 45(4)
2. Capital gains from Capital asset which is not covered in 1. above and is long term
transfer of a long term capital asset at the time of taxation of amount under section
capital asset 45(4).

(vii) Attribution of capital gains: For the purpose of section 48(iii), where the amount is
chargeable to income-tax as income of specified entity under section 45(4), the specified entity
shall attribute such amount to capital asset remaining with the specified entity in the prescribed
manner:

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 CAPITAL GAINS 4.35 a

Accordingly, Rule 8AB provides that the specified entity shall attribute such amount to capital
asset remaining with the specified entity in the following manner:

S. No. Particulars Attribution to the capital assets remaining with

the specified entity
Where the aggregate of the value of money and the fair market value of the capital asset
received by the specified person from the specified entity, in excess of the balance in his
capital account, chargeable to tax under section 45(4) -
(i) relates to revaluation of any increase in, or recognition of,
capital asset or valuation of the value of that asset because of
self-generated asset or self- amount x revaluation or valuation
generated goodwill, of the charged aggregate of increase in, or
specified entity. u/s recognition of, value of all
The revaluation should be 45(4) assets because of the
based on a valuation report revaluation or valuation
obtained from a registered
valuer.
(ii) does not relate to revaluation the amount charged to tax under section 45(4)
of any capital asset or shall not be attributed to any capital asset
valuation of self generated
asset or self-generated
goodwill, of the specified entity
(iii) relate only to the capital asset the amount charged to tax under section 45(4)
received by the specified shall not be attributed to any capital asset
person from the specified
entity

The specified entity shall furnish the details of amount attributed to capital asset remaining with the
specified entity in Form No. 5C.
Form No. 5C shall be furnished on or before the due date referred to in Explanation 2 below section
139(1) for the assessment year in which the amount is chargeable to tax under section 45(4).

It is clarified that revaluation of an asset or valuation of self-generated asset or self-generated

goodwill does not entitle the specified entity for the depreciation on the increase in value of that

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 4.36 DIRECT TAX LAWS

asset on account of its revaluation or recognition of the value of self -generated asset or self-
generated goodwill due to its valuation.
(viii) Power of CBDT to issue guidelines [Section 9B(4) and 9B(5)] - If any difficulty arises in
giving effect to the provisions of section 9B and section 45(4), the CBDT may issue guidelines for
the purpose of removing the difficulty with the approval of the Central Government.
Every guideline issued by the CBDT shall be laid before each House of Parliament and shall be
binding on the income-tax authorities and on the assessee.
Guidelines under section 9B and section 45(4) of the Income-tax Act, 1961 [Circular No.
14/2021 dated 2.7.2021]
The amount taxed under section 45(4) is required to be attributed to the remaining capital assets
of the specified entity, so that when such capital assets get transferred in the future, the amount
attributed to such capital assets gets reduced from the full value of the consideration and to that
extent the specified entity does not pay tax again on the same amount.
This attribution is given only for the purposes of section 48. Section 48 only applies to capital
assets which are not forming block of assets. For capital assets forming block of assets there is
section 43(6)(c) to determine written down value of the block of asset and section 50 to determine
the capital gains arising on transfer of such assets.

However, the Act has not yet provided that amount taxed under section 45(4) can also be
attributed to capital assets forming part of block of assets and which are covered by these two
provisions.
The CBDT has, vide this circular, clarified that Rule 8AB also applies to capital assets forming part
of block of assets. Wherever the terms capital asset is appearing in the Rule 8AB, it refers to
capital asset whose capital gains is computed under section 48 as well as capital asset forming
part of block of assets. Further, wherever reference is made for the purposes of section 48, such
reference may be deemed to include reference for the purposes of section 43(6)(c) and section 50.
It is further clarified that in case the capital asset remaining with the specified entity is forming part
of a block of asset, the amount attributed to such capital asset under rule 8AB shall be reduced
from the full value of the consideration received or accruing as a result of subsequent transfer of
such asset by the specified entity, and the net value of such consideration shall be considered for
reduction from the written down value of such block under section 43(6)(c) or for calculation of
capital gains, as the case may be, under section 50.

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 CAPITAL GAINS 4.37 a

For the purposes of understanding and for removing difficulties, if any, the application of section
9B and section 45(4) is explained with the help of the following examples:
Example 1: There are three partners “A”, “B” and "C" in a firm "FR", having one third share each.
Each partner has a capital balance of ` 10 lakh in the firm. There are three pieces of lands “S”, “T”
and “U” in that firm and there is no other capital asset in that firm. Book value of each of the land is
` 10 lakh which is the cost of acquisition. All these three lands were acquired by the firm more
than two years ago.
Partner “A” wishes to exit. The firm revalues its lands based on valuation report from a registered
valuer, as defined in rule 11U, and as per that valuation report fair market value of lands “S” and
“T” is ` 70 lakh each, while fair market value of land “U” is ` 50 lakh. On the exit of partner “A", the
firm decides to give him ` 11 lakh of money and land “U” to settle his capital balance on
14.5.2025.
In accordance with the provisions of section 9B, it would be deemed that the firm “FR" has
transferred land “U” to the partner "A" at its fair market value of ` 50 lakh.
Now on account of the deeming provisions of section 9B, it is deemed that the firm “FR" has
transferred land “U” to partner “A". Thus, an amount of ` 50 lakh less ` 10 lakh would be charged
to tax in the hands of firm “FR" under the head “Capital gains”. For partner “A", the cost of
acquisition of this land would be ` 50 lakh. Hence, the amount of ` 40 lakh is charged to long term
capital gains and let us assume that the tax is ` 5,00,000 (assume no surcharge or cess just for
ease of calculation and illustration purposes).
This net book profit after tax of ` 35 lakh (capital gains of ` 40 lakh less tax of ` 5 lakh) is to be
credited in the capital account of each of the three partners, i.e. ` 11,66,667 each. Thus, partner
“A" capital account would increase to ` 21,66,667. This exercise is required to be carried out since
section 9B mandates that it is to be deemed that the firm “FR" has transferred the land “U" to
partner "A" and the long term capital gains of ` 40 lakh is chargeable to tax in the hands of the
firm “FR".
As against capital balance of ` 21,66,667, partner “A" has received ` 61 lakh (` 11 lakh of money
plus land “U" of fair market value of ` 50 lakh). Thus, ` 39,33,333 is required to be charged to tax
under section 45(4). This shall be in addition to an amount of ` 40 lakh charged to tax under
section 9B.
On account of clause (iii) of section 48, read with rule 8AB, this ` 39,33,333 is to be attributed to
the remaining assets of the firm “FR" on the basis of increase in their value due to revaluation
based on the valuation report of registered valuer. In this case as per revaluation there are only
two capital assets remaining; lands “S" and “T". In both cases the value has increased by ` 60
lakh each. Thus, out of ` 39,33,333, ` 19,66,666.50 shall be attributed to land “S" and

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 4.38 DIRECT TAX LAWS

` 19,66,666.50 to land “T". When either of these lands gets sold, this amount attributed to them
would be reduced from sales consideration under clause (iii) of section 48.
The amount of ` 39,33,333 which is charged to tax under section 45(4) shall be charged as long
term capital gains in view of rule 8AA(5), since the amount of ` 39,33,333 is attributed to land “S"
and land “T" which are both long term capital assets at the time of taxation of ` 39,33,333 under
section 45(4).
Example 2: There are three partners “A", “B" and “C" in a firm “FR", having one third share each.
Each partner has a capital balance of ` 10 lakh in the firm. There are three pieces of lands “S", “T"
and “U" in that firm and there is no other capital asset in that firm. All these three lands were
acquired by the firm more than two years ago.
Book value of each of the land is ` 10 lakh. Partner “A" wishes to exit. The firm sells land “U" on
20.6.2025 for its fair market value of ` 50 lakh. The cost of acquisition of land “U" is same as its
book value. Thus, an amount of ` 50 lakh less ` 10 lakh would be charged to tax in the hands of
firm “FR" under the head “Capital gains". Hence, the amount of ` 40 lakh is charged to long term
capital gains and let us assume that the tax is ` 5 lakh (assume no surcharge or cess just for ease
of calculation and illustration purposes).
This net book profit after tax of ` 35 lakh (capital gains of ` 40 lakh less tax of ` 5 lakh) is to be
credited in the capital account of each of the three partners, i.e. ` 11,66,667 each. Thus, partner
“A” capital account would increase to ` 21,66,667 lakh.
Partner “A” decides to exit the firm “FR”. The firm revalues its lands “S” and “T” based on valuation
report from a registered valuer, as defined in Rule 11U, and as per that valuation report fair market
value of lands “S” and “T” is ` 70 lakh each. On the exit of partner “A”, the firm decides to give him
` 61 lakh of money to settle his capital balance. Thus, as against capital balance of ` 21,66,667,
partner “A” has received ` 61 lakh of money. Thus ` 39,33,333 is required to be charged to tax
section 45(4). This will be in addition to ` 40 lakh already charged to capital gains.
On account of section 48(iii), read with rule 8AB, this ` 39,33,333 is to be attributed to the
remaining assets of the firm “FR” on the basis of increase in their value due to revaluation based
on the valuation report of registered valuer. In this case, as per revaluation, there are only two
capital assets remaining: lands “S” and “T”. In both cases, the value has increased by ` 60 lakh
each. Thus, out of ` 39,33,333, ` 19,66,666.50 shall be attributed to land “S” and ` 19,66,666.50
to land “’T’’. When either of these lands gets sold, this amount attributed to them would be reduced
from sales consideration under section 48(iii).
The amount of ` 39,33,333 which is charged to tax under section 45(4) shall be charged as long
term capital gains in view of rule 8AA(5), since the amount of ` 39,33,333 is attributed to land “S”

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 CAPITAL GAINS 4.39 a

and land “T” which are both long term capital assets at the time of taxation of ` 39,33,333 under
section 45(4).
Note: The final result in both example 1 and 2 is same due to the operation of section 9B.
Example 3: There are three partners “A”, “B” and “C” in a firm “FR”, having one third share each.
Each partner has a capital balance of ` 100 lakh in the firm. There is a piece of land “S” of book
value of ` 45 lakh. There is patent “T” of written down value of ` 45 lakh. And there is cash of
` 225 lakh. The land was acquired by the firm more than two years ago. The patent was acquired/
developed/ registered one year back.
Partner “A” wishes to exit. The firm revalues its land and patent based on valuation report from a
registered valuer, as defined in rule 11U, and as per that valuation report, fair market value of land
“S” is ` 45 lakh and fair market value of patent “T” is ` 60 lakh. As per the valuation report, there
is also self-generated goodwill of ` 30 lakh. On the exit of partner “A”, the firm decides to give him
` 75 lakh in money and land “S" to settle his capital balance on 14.7.2025.
In accordance with the provisions of section 9B, it would be deemed that the firm “FR" has
transferred land “S" to the partner “A" at its fair market value of ` 45 lakh. The cost of acquisition
of land “S" is same as its book value.
Now, on account of the deeming provisions of section 9B, it is deemed that the firm “FR" has
transferred land “S" to partner “A". However, since the sale consideration is equal to cost of
acquisition, there will not be any capital gains tax. For partner “A", the cost of acquisition of this
land would be ` 45 lakh.
As against capital balance of ` 100 lakh, partner “A" has received ` 120 lakh (money of ` 75 lakh
plus land “S" of fair market value of ` 45 lakh). Thus, ` 20 lakh is required to be charged to tax
under section 45(4).
On account of section 48(iii), read with rule 8AB and this guidance note, this ` 20 lakh is to be
attributed to the remaining capital assets of the firm “FR" on the basis of increase in the value due
to revaluation of existing capital assets, or due to recognition of the value of self -generated
goodwill, based on the valuation report of registered valuer. In this case, as per this report, the
value of patent “T" has increased by ` 15 lakh and the self-generated goodwill value has been
recognised at ` 30 lakh. Thus, one third of ` 20 lakh (i.e. ` 6,66,667) would be attributed to patent
“T", while two third of ` 20 lakh (i.e. ` 13,33,333) would be attributed to self-generated goodwill.
` 6,66,667 attributed to patent “T" shall not be added to the block of the assets and no
depreciation shall be available on the same. When patent “T" gets transferred subsequently, this
` 6,66,667 attributed shall be reduced from the full value of the consideration received or accruing
as a result of transfer of patent “T" by the firm “FR", and the net value shall be considered for
reduction from the written down value of the intangible block under section 43(6)(c) or for

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calculation of capital gains, as the case may be, under section 50. Let us say that Patent T is sold
for ` 25 lakh. ` 6,66,667 shall be reduced from ` 25 lakh and only net amount of ` 18,33,333 shall
be considered for reduction from the written down value of the intangible block under section
43(6)(c) or for calculation of capital gains, as the case may be, under section 50. Similarly, when
goodwill gets sold subsequently, ` 13,33,333 would be reduced from its sales consideration under
section 48(iii).
The amount ` 20 lakh which is charged to tax under section 45(4) shall be charged as short term
capital gains, as ` 6,66,667 is attributed to the Patent “T" which is part of block of assets and
` 13,33,333 is attributed to self-generated goodwill. In accordance with rule 8AA(5), both of these
are to be characterised as short term capital gains.
Note: For the purpose of calculation of depreciation under section 32, the written down value of
the block of asset “intangible" of which Patent “T" is part, would remain ` 45 lakh and would not be
increased to ` 60 lakh due to revaluation during the year. In this regard it may be highlighted that
the following provisions are relevant in determining the amount on which depreciation is allowable
under the Act:
• Explanation 2 of section 32(1) provides that the term "written down value of the block of
assets" shall have the same meaning as in section 43(6)(c).
• Section 43(6)(c), with respect to block of assets, inter alia, provides that the aggregate of the
written down values of all the assets falling within that block of assets at the beginning of the
previous year is to be increased by the actual cost of any asset falling within that block,
acquired during the previous year. This clause does not allow any increase on account of
revaluation.
• Section 43(1) which defines “Actual cost" as actual cost of the assets to the assessee. In
revaluation, there is no actual cost to the assessee.
Further, section 32 does not allow depreciation on goodwill. If in the given example “self -generated
goodwill" is replaced by “self-generated asset", even then, the depreciation will not be admissible
on the amount of ` 30 lakh recognised in valuation. In this regard it may be highlighted that the
above mentioned provisions, in the immediate preceding paragraph, are also applicable to “self -
generated asset" and since there is no actual cost to assessee in case of “self -generated asset",
depreciation is not allowable under section 32 on an asset whose actual cost is nil.
(8) Compensation on compulsory acquisition [Section 45(5)]
Sometimes, a building or some other capital asset belonging to a person is taken over by the
Central Government by way of compulsory acquisition. In that case, the consideration for the
transfer is determined by the Central Government or RBI. When the Central Government pays the

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above compensation, capital gains may arise. Such capital gains are chargeable as income of
the previous year in which such compensation or part thereof, was first received.
Enhanced Compensation- Many times, persons whose capital assets have been taken over by
the Central Government and who get compensation from the government go to the court of law for
enhancement of compensation. If the court awards a compensation which is higher than the
original compensation, the difference thereof will be chargeable to capital gains in the year in
which the same is received from the government.
Cost of acquisition in case of enhanced compensation - For this purpose, the cost of
acquisition and cost of improvement shall be taken to be nil.
Compensation received in pursuance of an interim order deemed as income chargeable to
tax in the year of final order - In order to remove the uncertainty regarding the year in which the
amount of compensation received in pursuance of an interim order of the court is to be charged to
tax, a proviso has been inserted after clause (b) to provide that such compensation shall be
deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the
final order of such court, Tribunal or other authority is made.
Reduction of enhanced compensation - Where capital gain has been charged on the
compensation received by the assessee for the compulsory acquisition of any capital asset or
enhanced compensation received by the assessee and subsequently such compensation is
reduced by any court, tribunal or any authority, the assessed capital gain of that year shall be
recomputed by taking into consideration the reduced amount. This re-computation shall be done
by way of rectification under section 155.
Death of the transferor- It is possible that the transferor may die before he receives the enhanced
compensation. In that case, the enhanced compensation or consideration will be chargeable to tax
in the hands of the person who receives the same.
(9) Taxability of capital gains in case of Specified Agreement [Section 45(5A)]
Genuine hardship on account of taxability of capital gains in the year of transfer of property
to developer: The definition of 'transfer', inter alia, includes any arrangement or transaction where
any rights are handed over in execution of part performance of contract, even though the legal title
has not been transferred.
Applying the definition of transfer, under these development agreements, the transfer took place in
the year in which the owner of the immovable property, being land or building or both handed over
the immovable property to the developer.
Consequently, the capital gains tax liability in the hands of the owner would arise in the year in
which the possession of immovable property is handed over to the developer for development of a

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 4.42 DIRECT TAX LAWS

project, in spite of the fact that the consideration thereof (i.e. the actual constructed property) will
be received only after a couple of years.
Deferment of taxability of capital gains: With a view to minimise the genuine hardship which the
owner of land or building may face in paying capital gains tax in the year of transfer, section
45(5A) provides that
- in case of an assessee being individual or Hindu undivided family,
- who enters into a specified agreement for development of a project,
- the capital gain arises from such transfer shall be chargeable to income -tax as income of
the previous year in which the certificate of completion for the whole or part of the
project is issued by the competent authority.
Meaning of Specified Agreement: Specified agreement means the registered agreement in
which a person owing land or building or both, agrees to allow another person to develop a real
estate project on such land or building or both, in consideration of a share, being land or building
or both in such project, whether with or without payment of part of the consideration in cash .
Full value of consideration: For the purpose of section 48, the stamp duty value of his share,
being land or building or both, in the project on the date of issuing of said certificate of completion
as increased by any consideration received in cash or by a cheque or draft or by any other mode,
if any, shall be deemed to be the full value of the consideration received or accruing as a result of
the transfer of the capital asset.
Non-applicability of the beneficial provision: It may, however, be noted these beneficial
provisions would not apply, where the assessee transfers his share in the project on or before the
date of issue of said completion certificate and the capital gain tax liability would be deemed to
arise in the previous year in which such transfer took place. In such a case, full value of
consideration received or accruing shall be determined by the general provisions of the Act.
[Proviso to section 45(5A)]
Meaning of certain terms:
Term Meaning
Competent authority The authority empowered to approve the building plan by or under any
law for the time being in force
Stamp duty value The value adopted or assessed or reassessable by any authority of
Government for the purpose of payment of stamp duty in respect of an
immovable property being land or building or both.

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 CAPITAL GAINS 4.43 a

Taxability of capital gains in case of Specified Agreement: At a Glance

Individual/ HUF entering into specified

agreement for development of project

Is the individual/ HUF transferring his share No Is the individual/ HUF

in the project after the date of issue of transferring his share in the
completion certificate? project on or before the date of
issue of completion certificate?

Yes Yes

Capital gains tax liability would arise in the Capital gains tax liability would
P.Y. in which Certificate of Completion arise in the P.Y. in which the
for whole or part of project is issued by the property is handed over to
Competent Authority the developer

Stamp duty value of his share, on the date of

issue of certificate of completion (+)
Consideration in cash or cheque or draft or
any other mode = Full Value of
Consideration as per section 45(5A)

Full value of consideration deemed to be

the cost of acquisition for determining
capital gains on subsequent sale of share
of developed property [Section 49(7)]

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 4.44 DIRECT TAX LAWS

4.6 CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY

COMPANIES IN LIQUIDATION [SECTION 46]
(1) In the hands of liquidated company: Where the assets of a company are distributed to
its shareholders on its liquidation, such distribution shall not be regarded as a transfer by
the company for the purposes of section 45 [Section 46(1)].

The above section is restricted in its application to the circumstances mentioned therein
i.e., the assets of the company must be distributed to shareholders on the liquidation of
the company. If, however, the liquidator sells the assets of the company resulting in a
capital gain and distributes the funds so collected, the company will be liable to pay tax
on such gains.

(2) In the hands of shareholders: Shareholders receive money or other assets from the
company on its liquidation. They will be chargeable to income-tax under the head ‘capital
gains’ in respect of the market value of the assets received on the date of distribution, or
the moneys so received by them. The portion of the distribution which is at tributable to
the accumulated profits of the company is to be treated as dividend income of the
shareholder under section 2(22)(c), which would be taxable in the hands of shareholders
under the head “Income from other sources”. The same will be deducted from the amount
received/ fair market value for the purpose of determining the full value of consideration
for computation of capital gains.

(3) Capital gains tax on subsequent sale by the shareholders: If the shareholder, after
receipt of any such asset on liquidation of the company, transfers it, then Fair Market
Value on the date of distribution would be treated as cost of acquisition of such asset.

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 CAPITAL GAINS 4.45 a

Capital Gains on
distribution of assets by
companies in liquidation
[Section 46]

In the hands of the In the hands of the

company [Section shareholders
46(1)] [Section 46(2)]

Distribution is not a
transfer
Distribution attributable to Money received (+) FMV of
accumulated profits of the assets distributed (-)
company deemed dividend u/s
2(22)(c)
No capital gains tax
liability
Deemed dividend u/s Full value of
2(22)(c) consideration for the
purpose of section 48

Taxable in the hands of To be considered for

shareholders as “Income computing Capital
from Other Sources” Gains in the hands of
shareholders

4.7 CAPITAL GAINS ON BUYBACK OF SHARES OR

OTHER SECURITIES [SECTION 46A]
(1) In case of shares of a company other than a domestic company and specified
securities: Any consideration received by a holder of specified securities (other than
shares of a domestic company) from any company on purchase of its specified securities
is chargeable to tax in the hands of the holder of specified securities. The difference
between the cost of acquisition and the value of consideration received by the holder of
securities is chargeable to tax as capital gains in his hands. The computation of capi tal
gains shall be made in accordance with the provisions of section 48.

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 4.46 DIRECT TAX LAWS

Such capital gains shall be chargeable in the year in which such securities were
purchased by the company. For this purpose, “specified securities” shall have the same
meaning as given in Explanation to section 77A of the Companies Act, 1956 2.

As per Section 68 of the Companies Act, 2013, "specified securities" includes employees' stock
option or other securities as may be notified by the Central Government from time to time.

Note – As far as shares are concerned, this provision would be attracted in the hands of the
shareholder only if the shares are bought back by a company, other than a domestic
company.

(2) In case of buy back of shares by domestic companies: In case of buyback of shares
(whether listed or unlisted) by a domestic company, the sum paid by a domestic company
for purchase of its own shares would be treated as dividend and taxable under the head
“Income from Other Sources” in the hands of shareholders. No deduction for expenses
would be available against such dividend income.
Consequently, as per section 46A, the value of consideration received by a shareholder on
buy back of shares by a domestic company would be Nil and the difference between the
cost of acquisition and the value of consideration received by the shareholder will result into
capital loss. The same can be set off and carried forward as per the applicable set -off &
carry forward provisions of the Act. If it is long-term capital loss, it can be set-off only
against long-term capital gains. If it is a short-term capital loss, it can set-off against both
long term capital gains and short term capital gains. For details, refer Chapter: 7:
Aggregation of income, Set-off and Carry Forward of Losses.

4.8 IMPORTANT DEFINITIONS

(a) Amalgamation [Section 2(1B)] - “Amalgamation”, in relation to companies, means
- the merger of one or more companies with another company or
- the merger of two or more companies to form one company
(the company or companies which so merge being referred to as the amalgamating
company or companies and the company with which they merge or which is formed as a
result of the merger, as the amalgamated company) in such a manner that -

2 Now section 68 of the Companies Act, 2013

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 CAPITAL GAINS 4.47 a

(i) all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation;
(ii) all the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation;
(iii) shareholders holding not less than three-fourth in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another
company pursuant to the purchase of such property by the other company or as a result of
the distribution of such property to the other company after the winding up of the first
mentioned company.
(b) Demerger [Section 2(19AA)] - “Demerger”, in relation to companies, means the transfer,
pursuant to a scheme of arrangement under sections 230 to 232 of the Companies Act,
2013, by a demerged company of its one or more undertaking to any resulting company in
such a manner that -
(i) all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by
virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred
by the demerged company are transferred at values appearing in its books of
account immediately before the demerger;
However, this provision does not apply where, in compliance to the Indian Accounting
Standards specified in Annexure to the Companies (Indian Accounting Standards)
Rules, 2015, the resulting company records the value of the property and the liabilities
of the undertaking or undertakings at a value different from the value appearing in the
books of account of the demerged company, immediately before the demerger.

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 4.48 DIRECT TAX LAWS

(iv) the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis except where the
resulting company itself is a shareholder of the demerged company;
Note - If the resulting company is a shareholder of the demerged company, it cannot
issue shares to itself. However, the resulting company has to issue shares to the
other shareholders of the demerged company.
(v) the shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or, its subsidiary) become
shareholders of the resulting company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under section
72A(5) by the Central Government in this behalf.
Explanation in respect of Certain Terms:
Explanation Term Particulars
1 Undertaking Includes
- any part of an undertaking or a unit or division
of an undertaking or
- a business activity taken as a whole,
However, it does not include individual assets or
liabilities or any combination thereof not constituting
a business activity.
2 Liabilities Includes
(a) the liabilities which arise out of the activities or
operations of the undertaking;
(b) the specific loans or borrowings (including
debentures) raised, incurred and utilised
solely for the activities or operations of the
undertaking; and
(c) in cases, other than those referred to in clause
(a) or clause (b), so much of the amounts of
general or multipurpose borrowings, if any, of
the demerged company as stand in the same
proportion which the value of the assets
transferred in a demerger bears to the total

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 CAPITAL GAINS 4.49 a

value of the assets of such demerged

company immediately before the demerger.
3 Property For the purpose of determining the value of the
property, any change in the value of assets conse-
quent to their revaluation shall be ignored.
4&5 Splitting up or (i) Splitting up or the reconstruction of
reconstruction - any authority or
- a body constituted or established under
a Central, State or Provincial Act, or
- a local authority or
- a public sector company,
into separate authorities or bodies or local
authorities or companies, as the case may be,
shall be deemed to be a demerger if such split
up or reconstruction fulfils such conditions as
may be notified by the Central Government in
the Official Gazette.
(ii) The reconstruction or splitting up of a
company, which ceased to be a public sector
company as a result of transfer of its shares
by the Central Government, into separate
companies, shall be deemed to be a
demerger, if such reconstruction or splitting up
has been made to give effect to any condition
attached to the said transfer of shares and
also fulfils such other conditions as may be
notified by the Central Government.
6 Reconstruction The reconstruction or splitting up of a public sector
or splitting up company into separate companies shall be deemed
of a public to be a demerger, if such reconstruction or splitting
sector up has been made to transfer any asset of the
company demerged company to the resulting company and the
resulting company ––
(i) is a public sector company on the appointed
day indicated in such scheme, as may be
approved by the Central Government or any
other body authorised under the provisions of
the Companies Act, 2013 or any other law for
the time being in force governing such public
sector companies in this behalf; and
(ii) fulfils such other conditions as may be notified
by the Central Government.

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 4.50 DIRECT TAX LAWS

(c) Demerged company [Section 2(19AAA)] - Demerged company means the company
whose undertaking is transferred, pursuant to a demerger, to a resulting company.
(d) Resulting company [Section 2(41A)] - Resulting company means one or more companies
(including a wholly owned subsidiary thereof) to which the undertaking of the demerged
company is transferred in a demerger and, the resulting company in consideration of such
transfer of undertaking, issues shares to the shareholders of the demerged company and
includes any authority or body or local authority or public sector company or a company
established, constituted or formed as a result of demerger.

4.9 TRANSACTIONS NOT REGARDED AS TRANSFER

[SECTION 47]
Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of
capital gains tax:

(1) (2) (3) (4)

Clause of Particulars of transfer of Asset transferred Conditions to be fulfilled
section 47 capital asset referred to in
column (3)
47(i) Any distribution on the total or Any capital asset -
partial partition of a HUF
47(iii) Any transfer by an individual Any capital asset. -
or HUF under a gift or will or
an irrevocable trust
[Upto A.Y. 2024-25, transfer of
a capital asset (other than
shares, debentures or
warrants allotted by a
company under any ESOP)
under a gift or will or
irrevocable trust by any
person was not considered as
a transfer]
47(iv) Any transfer by a holding Any capital asset (a) The parent company or its
company to its subsidiary nominees must hold the
company whole of the shares of the
subsidiary company; and

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 CAPITAL GAINS 4.51 a

(b) The subsidiary company

must be an Indian
company.
47(v) Any transfer by a subsidiary Any capital asset (a) The whole of share capital
company to the holding of the subsidiary company
company must be held by the
holding company; and
(b) The holding company must
be an Indian company.
The exemption mentioned in
section 47(iv) or (v) will not
apply if a capital asset is
transferred as stock-in-trade.
47(vi) Any transfer by the Any capital asset The amalgamated company
amalgamating company to the should be an Indian company
amalgamated company, in a
scheme of amalgamation.
47(via) Any transfer by the Capital asset, (a) At least 25% of the
amalgamating foreign being shares held shareholders of the
company to the amalgamated in an Indian amalgamating foreign
foreign company, in a scheme company company must continue to
of amalgamation of two remain shareholders of the
foreign companies. amalgamated foreign
company;
(b) Such transfer should not
attract capital gains in the
country in which the
amalgamating company is
incorporated.
47(viaa) Any transfer by a banking Any capital asset -
company to banking
institution, in a scheme of
amalgamation of the banking
company with the banking
institution, sanctioned and
brought into force by the
Central Government under
section 45(7) of the Banking
Regulation Act, 1949.
47(viab) Any transfer by the Capital asset, (a) At least 25% of the
amalgamating foreign being share of a shareholders of the
company to the amalgamated foreign company, amalgamating foreign
foreign company, in a scheme referred to in company must continue to

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 4.52 DIRECT TAX LAWS

of amalgamation of two Explanation 5 to remain shareholders of the

foreign companies. section 9(1)(i), amalgamated foreign
which derives, company;
directly or (b) Such transfer should not
indirectly, its value attract capital gains in the
substantially from country in which the
the share or amalgamating company is
shares of an incorporated.
Indian company
47(vib) Any transfer, in a demerger, Any capital asset The resulting company should
by the demerged company to be an Indian company.
the resulting company
47(vic) Any transfer by the demerged Capital asset, (a) The shareholders holding
foreign company to the being a share or at least three-fourths in
resulting foreign company, in a shares held in an value of the shares of the
scheme of demerger of a Indian company demerged foreign company
foreign company. continue to remain
shareholders of the
resulting foreign company;
(b) Such transfer should not
attract tax on capital gains
in the country, in which the
demerged foreign company
is incorporated.
However, the provisions of
sections 391 to 394 of the
Companies Act, 1956 3, shall
not apply in case of demergers
referred to in this clause.
47(vica) Any transfer by the Any capital asset -
predecessor co-operative
bank to the successor co-
operative bank or to the
converted banking company,
in a business reorganization of
co-operative bank.
47(vicb) Any transfer by a shareholder of Capital asset, If the transfer is made in
predecessor co-operative bank, being a share or consideration of the allotment to
in a business reorganization. shares held by him him of any share or shares in the
in the predecessor successor co-operative bank or
co-operative bank the converted banking company.

3
Sections 230 to 232 of the Companies Act, 2013

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 CAPITAL GAINS 4.53 a

Note – Refer to section 44DB for

the meanings of “business
reorganisation”, “converted
banking company”, “predecessor
co-operative bank” and
“successor co-operative bank”.
47(vicc) Any transfer by the demerged Capital asset, (a) The shareholders holding
foreign company to the being a share of a at least three-fourths in
resulting foreign company, in a foreign company value of the shares of the
scheme of demerger of a referred to in demerged foreign company
foreign company Explanation 5 to continue to remain
section 9(1)(i), shareholders of the
which derives, resulting foreign company;
directly or (b) Such transfer should not
indirectly, its value attract capital gains in the
substantially from country in which the
the share or demerged foreign company
shares of an is incorporated.
Indian company However, the provisions of
sections 391 to 394 of the
Companies Act, 1956 3, shall
not apply in case of demergers
referred to in this clause.
47(vid) Any transfer or issue of shares Capital asset, The transfer or issue should be
by the resulting company, in a being shares made in consideration of
scheme of demerger to the demerger of the undertaking.
shareholders of the demerged
company.
47(vii) Any transfer by a shareholder Capital asset, (a) The transfer is made in
of amalgamating company, in being shares held consideration of the
a scheme of amalgamation of in the allotment to him of any
companies amalgamating share in the amalgamated
company company, except where
the shareholder itself is
the amalgamated
company; and
(b) The amalgamated
company should be an
Indian company.
Example:
Let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd.
amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A Ltd., being the

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 4.54 DIRECT TAX LAWS

amalgamated company, cannot issue shares to itself. However, A Ltd. has to issue shares to the
other shareholders of B Ltd.
47(viia) Any transfer by a non-resident Capital asset, Conditions laid down in section
to another non-resident being bonds or 115AC(1) should be fulfilled:
outside India. Global Depository (a) Bonds should be of:
Receipts (GDRs)
(i) an Indian company
referred to in
(issued in accordance
section 115AC(1)
with Notified scheme of
Central Government); or
(ii) a public sector company
sold by the Government
and purchased by the
non-resident in foreign
currency
(b) GDRs should be issued:
(i) in accordance with
notified scheme of
Central Government
against initial issue of
shares of an Indian
company and
purchased by the non-
resident in foreign
currency; or
(ii) against the shares of a
public sector company
sold by the
Government and
purchased by him in
foreign currency
through an approved
intermediary; or
(iii) issued or reissued in
accordance with
Notified Scheme of
Central Government
against the existing
shares of an Indian
company purchased by
him in foreign currency
through an approved
intermediary.

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 CAPITAL GAINS 4.55 a

47(viiaa) Any transfer, made outside Capital asset, -

India, by a non-resident to being a rupee
another non-resident. denominated bond
of an Indian
company issued
outside India
47(viiab) Any transfer of specified capital Capital asset, being The consideration for such
assets by a non-resident on a - A bond or GDR transaction is paid or payable in
recognised stock exchange referred to in foreign currency.
located in any International section
Financial Services Centre 115AC(1) (or)
(IFSC)
- A rupee
denominated
bond of an
Indian company
(or)
- A derivative (or)
- Any other
security notified
by the Central
Government.
Accordingly, the
Central
Government has,
vide Notification
No. 16/2020, dated
5.3.2020,
Notification No.
89/2022 dated
3.8.2022 and
Notification No.
71/2023 dated
12.9.2023,
specified the
following
securities:
(i) foreign
currency
denominated
bond;
(ii) unit of a Mutual
Fund;

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 4.56 DIRECT TAX LAWS

(iii) unit of a
business trust;
(iv) foreign
currency
denominated
equity share of
a company;
(v) unit of
Alternative
Investment
Fund;
(vi) Bullion
Depository
Receipt with
underlying
bullion
(vii) unit of
investment
trust, being
REITs or an
InvITs;
(viii) unit of a
scheme (a
scheme of a
fund
management
entity launched
under IFSC
Authority (Fund
Management)
Regulations,
2022);
(ix) unit of a
Exchange
Traded Fund
launched under
IFSC Authority
(Fund
Management)
Regulations,
2022
which are listed on
a recognised stock

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 CAPITAL GAINS 4.57 a

exchange located
in any IFSC in
accordance with
the regulations
made by the SEBI
under the SEBI
Act 1992 or the
IFSC Authority
under the IFSC
Authority Act
2019, as the case
may be.
47(viiac) Any transfer, in a relocation, of Any capital asset -
a capital asset by the original
fund to the resulting fund
47(viiad) Any transfer by a shareholder Capital asset, Transfer of capital asset should
or unit holder or interest being share or unit be in consideration for the
holder of original fund, in a or interest held by share or unit or interest in the
relocation of fund. the shareholder in resultant fund.
the original fund
Original fund – Original Fund means
(A) a fund established or incorporated or registered outside India, which collects funds from its
members for investing it for their benefit and fulfils the following conditions, namely-
(i) the fund is not a person resident in India;
(ii) the fund is a resident of a country or a specified territory with which an agreement
referred to in section 90(1) or 90A(1) has been entered into; or is established or
incorporated or registered in a country or a specified territory as may be notified by the
Central Government in this behalf;
(iii) the fund and its activities are subject to applicable investor protection regulations in the
country or specified territory where it is established or incorporated or is a resident; and
(iv) fulfils such other conditions as may be prescribed;
Accordingly, vide Notification No. 80/2022 dated 8.7.2022, Rule 21AL prescribes that the
aggregate participation or investment in the original fund, directly or indirectly, by persons
resident in India shall not exceed 5% of the corpus of such fund at the time of transfer of a
capital asset to a resultant fund being a Category III AIF.
(B) an investment vehicle, in which Abu Dhabi Investment Authority is the direct or indirect sole
shareholder or unit holder or beneficiary or interest holder and such investment vehicle is
wholly owned and controlled, directly or indirectly, by the Abu Dhabi Investment Authority or
the Government of Abu Dhabi; or

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 4.58 DIRECT TAX LAWS

(C) a fund notified by the Central Government subject to the conditions specified.
Relocation - Transfer of assets of the original fund, or of its wholly owned special purpose
vehicle, to a resultant fund on or before 31.3.2030, where consideration for such transfer is
discharged in the form of share or unit or interest in the resulting fund to –
(i) shareholder or unit holder or interest holder of the original fund, in the same proportion in
which the share or unit or interest was held by such shareholder or unit holder or interest
holder in such original fund, in lieu of their shares or units or interests in the original fund; or
(ii) the original fund, in the same proportion as referred to in (i), in respect of which the share or
unit or interest is not issued by resultant fund to its shareholder or unit holder or interest
holder.
Resultant fund - A fund established or incorporated in India in the form of a trust or a company or
a LLP, which is located in any IFSC as referred to in section 80LA(1A) and has been granted a
certificate of registration as a Category I or Category II or Category III AIF or a certificate as a
retail scheme or an Exchange Traded Fund, and is regulated under the SEBI (Alternative
Investment Fund) Regulations, 2012 made under the SEBI Act, 1992 or regulated under the IFSC
Authority (Fund Management) Regulations, 2022 made under the IFSC Authority Act, 2019.
47(viiae) Any transfer by India Any capital asset The institution should be set up
Infrastructure Finance under an Act of Parliament and
Company Limited to an notified by the Central
institution established for Government.
financing the infrastructure
and development.
47(viiaf) Any transfer by a public sector Any capital asset Transfer should be under a
company to another public plan approved by the Central
sector company notified by the Government.
Central Government for this
purpose or to the Central
Government or to a State
Government.
47(viib) Any transfer of a capital asset Capital asset, The transfer should be through
made outside India by a non- being a an intermediary dealing in
resident to another non- Government settlement of securities.
resident. Security carrying a
periodic payment
of interest.
47(viic) Any transfer by way of Capital asset, being -
redemption by an individual Sovereign Gold
Bond issued by the
RBI under the
Sovereign Gold
Bond Scheme, 2015

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 CAPITAL GAINS 4.59 a

Sovereign Gold Bond Scheme, 2015

This scheme of the Government of India is intended to reduce the demand for physical gold and
consequently, reduce the foreign exchange outflow due to import of gold. The two -fold benefits of
this scheme are:
(1) The gold bond would serve as a substitute for physical gold; and
(2) The gold bond would provide security to the individual investor investing in gold for meeting
their social obligation.
47(viid) Any transfer of a capital asset Capital asset, Vault Manager – Any person
being conversion who carries on or intends to
of gold into carry on the business of
Electronic Gold providing vaulting services.
Receipt issued by Vaulting service” in relation to
a Vault Manager, gold means the storage and
or conversion of safekeeping of gold deposited
Electronic Gold with the Vault Manager, by the
Receipts into gold. depositor, for the purpose of
trading in Electronic Gold
Receipt and providing services
incidental thereto, and
includes—(i) utilizing the
services of assayers
empanelled with the Stock
Exchanges for testing as per
the gold standard, wherever
required; (ii) coordination with
depositories for creation,
transfer and extinguishment of
Electronic Gold Receipt; and
(iii) providing deposit, storage
and withdrawal services to the
beneficial owners
47(ix) Any transfer to the (i) work of art -
Government or to a University (ii)
or the National Museum, archaeologi
National Art Gallery, National cal, scientific
Archives or any other public or art
museum or institution notified collection
by the Central Government to
(iii) book
be of national importance or to
be of renown throughout any (iv) manuscript
State (v) drawing
(vi) painting

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 4.60 DIRECT TAX LAWS

(vii) photograph or
(viii) print.
47(x) Any transfer by way of Capital asset, -
conversion of bonds or deben- being bonds or
tures, debenture-stock or debentures,
deposit certificates in any debenture-stock or
form, of a company into deposit certificates
shares or debentures of that in any form, of a
company company
47(xa) Any transfer by way of Capital asset, Conditions laid down in section
conversion of bonds into being bonds 115AC(1) should be fulfilled
shares or debentures of any referred to in i.e., Bonds should be of:
company section (i) an Indian company (issued
115AC(1)(a) in accordance with Notified
scheme of Central
Government); or
(ii) a public sector company
sold by the Government
and purchased by the non-
resident in foreign currency
47(xb) Any transfer by way of Conversion of -
conversion of preference preference shares
shares of a company into of a company
equity shares of that company
47(xii) Any transfer under a scheme Land of a sick Such transfer is made in the
prepared and sanctioned industrial company period commencing from the
under section 18 of the Sick previous year in which the said
Industrial Companies (Special company has become a sick
Provisions) Act, 1985, by a industrial company and ending
sick industrial company which with the previous year during
is managed by its workers’ co- which the entire net worth of
operative such company becomes equal
to or exceeds the accumulated
losses.
47(xiii) - Transfer of a capital asset or - Any capital Discussed in detail at the end
intangible asset by a firm to asset or of this table
a company on succession of intangible
the firm by a company in the asset
business carried on by the
firm
- Transfer of a capital asset - Capital Asset
by AOP/BOI to company

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 CAPITAL GAINS 4.61 a

consequent to
demutualisation or
corporatisation of a
recognised stock exchange
in India
47(xiiia) Any transfer of a membership Capital asset, -
right by a member of being membership
recognised stock exchange in right
India for acquisition of shares
and trading or clearing rights
acquired by such member in
that recognised stock exchange
in accordance with a scheme
for demutualisation or
corporatisation approved by
SEBI
47(xiiib) - Transfer of capital asset or - Any Capital Discussed in detail at the end
intangible asset by private asset or of this table
company or unlisted public intangible
company to LLP asset
- Transfer of shares held in - Capital asset,
the company by the being shares in
shareholder the company
as a result of conversion of
the company into a LLP
47(xiv) Transfer of capital asset or Capital asset or (i) All assets and liabilities of
intangible asset by sole intangible asset the sole proprietary
proprietary concern to a concern relating to the
company on succession of the business immediately
sole proprietary concern by before the succession
the company should become the assets
and liabilities of the
company;
(ii) The sole proprietor should
hold not less than 50% of
the total voting power in
the company, and his
shareholding should
continue in such manner
for a period of 5 years
from the date of succes-
sion;

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 4.62 DIRECT TAX LAWS

(iii) The sole proprietor should

not receive any
consideration or benefit in
any form, directly or
indirectly, other than by
way of allotment of shares
in the company.
47(xv) Any transfer in a scheme for - -
lending of any securities under
an agreement or arrangement
which the assessee has entered
into with the borrower of such
securities and which is subject to
the guidelines issued by SEBI or
the RBI
47(xvi) Transfer of capital asset under Discussed in detail at the
Reverse Mortgage end of this table
47(xvii) Any transfer of a capital asset Capital asset, Capital asset should be
to a business trust being share of a transferred in exchange of
special purpose units allotted by that trust to
vehicle the transferor
47(xviii) Any transfer by a unit holder in A unit or units, held Transfer is made in
the consolidating scheme of a by him in the consideration of the allotment to
mutual fund consolidating unit holder of a capital asset,
scheme of a mutual being a unit or units, in the
fund consolidated scheme of the
mutual fund.
However, this exemption would
be available only if, the
consolidation takes place of
two or more schemes of equity
oriented fund or of two or more
schemes of a fund other than
equity oriented fund.
47(xix) Any transfer by a unit holder in A unit or units, Transfer should be made in
the consolidating plan of a held by him in the consideration of the allotment
mutual fund scheme consolidating plan to unit holder of a capital
of a mutual fund asset, being a unit or units, in
scheme the consolidated plan of that
scheme of the mutual fund.

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 CAPITAL GAINS 4.63 a

Consolidating scheme - The scheme of a mutual fund which merges under the process of
consolidation of the schemes of mutual fund in accordance with the SEBI (Mutual Funds)
Regulations, 1996 made under SEBI Act, 1992.
Consolidated scheme - The scheme with which the consolidating scheme merges or which is
formed as a result of such merger.
Consolidating plan - The plan within a scheme of a mutual fund which merges under the process
of consolidation of the plans within a scheme of mutual fund in accordance with the SEBI (Mutual
Funds) Regulations, 1996 made under SEBI Act, 1992.
Consolidated plan - The plan with which the consolidating plan merges or which is formed as a
result of such merger.
Mutual Fund - A mutual fund specified under section 10(23D), i.e.,
(i) a Mutual Fund registered under the SEBI Act, 1992 or regulations made thereunder;
(ii) such other Mutual Fund set up by a public sector bank or a public financial institution or
authorised by the Reserve Bank of India and subject to conditions notified by the Central
Government.
47(xx) Any transfer of a capital asset Capital asset, Transfer should be in
held by a public sector being an interest exchange of shares of a
company in a joint venture. company incorporated outside
India by the Government of a
foreign State, in accordance
with the laws of that foreign
State.
“Joint venture" means a
business entity, as may be
notified by the Central
Government.

ILLUSTRATION 2

M held 2000 shares in a company ABC Ltd. This company amalgamated with another company
during the previous year ending 31-3-2026. Under the scheme of amalgamation, M was allotted
1000 shares in the new company. The market value of shares allotted is higher by ` 50,000 than
the value of holding in ABC Ltd.

The Assessing Officer proposes to treat the transaction as an exchange and to tax ` 50,000 as
capital gain. Is he justified?

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 4.64 DIRECT TAX LAWS

SOLUTION
In the above example, assuming that the amalgamated company is an Indian company, the
transaction is squarely covered by the exemption under section 47(vii) and the proposal of the
Assessing Officer to treat the transaction as an exchange is not justified.
Transfer of capital asset or intangible asset on succession of the firm by a company or by
AOP/ BOI to company consequent to demutualisation or corporatisation of a recognised
stock exchange [Section 47(xiii)]:
Any transfer of a capital asset or intangible asset (in the case of a firm) –
(i) by a firm to a company where such firm is succeeded by that company; or
(ii) to a company in the course of demutualisation or corporatisation of a recognised stock
exchange in India as a result of which an AOP or BOI is succeeded by that company.
Conditions –
(i) All assets and liabilities of the firm or AOP or BOI relating to the business immediately before
the succession become the assets and liabilities of the company;
(ii) All the partners of the firm immediately before the succession become the shareholders of
the company in the same the proportion in which their capital accounts stood in the books of
the firm on the date of succession;
(iii) The partners of the firm do not receive any consideration or benefit in any form, directly or
indirectly, other than by way of allotment of shares in the company;
(iv) The partners of the firm together hold not less than 50% of the total voting power in the
company, and their shareholding continues in such manner for a period of 5 years from the
date of succession;
(v) The demutualisation or corporatisation of a recognised stock exchange in India is carried out
in accordance with a scheme for demutualisation or corporatisation approved by SEBI.
Transfer of capital asset or intangible asset by private company and share held by
shareholder to LLP in a conversion of private company into a LLP [Section 47(xiiib)]:
(i) Any transfer of a capital asset or intangible asset by a private company or unlisted public
company to a LLP or
(ii) Any transfer of a share or shares held in a company by a shareholder on conversion of a
company into a LLP
in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008.

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 CAPITAL GAINS 4.65 a

Conditions –
(i) All assets and liabilities of the company immediately before the conversion become the
assets and liabilities of the LLP;
(ii) all the shareholders of the company immediately before the conversion become partners of
the LLP and their capital contribution and profit sharing ratio in the LLP are in the same
proportion as their shareholding in the company on the date of conversion;
(iii) No consideration other than share in profit and capital contribution in the LLP arises to the
shareholders;

(iv) The erstwhile shareholders of the company continue to be entitled to receive at least 50% of
the profits of the LLP for a period of 5 years from the date of conversion;
(v) The total sales, turnover or gross receipts in business of the company should not exceed
` 60 lakh in any of the three preceding previous years;
(vi) The total value of assets as appearing in the books of account of the company in any of the
three previous years preceding the previous year in which the conversion takes place, should
not exceed ` 5 crore; and
(vii) No amount is paid, either directly or indirectly, to any partner out of the accumulated profit of
the company for a period of 3 years from the date of conversion.

Transfer of capital asset under Reverse Mortgage [Section 47(xvi)]:

Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and
notified by the Central Government.
The Reverse Mortgage scheme is for the benefit of senior citizens, who own a residential house
property. In order to supplement their existing income, they can mortgage their house property
with a scheduled bank or housing finance company, in return for a lump-sum amount or for a
regular monthly/ quarterly/ annual income. The senior citizens can continue to live in the house
and receive regular income, without the botheration of having to pay back the loan.
The loan will be given up to, say, 60% of the value of residential house property mortgaged. Also,
the bank/housing finance company would undertake a revaluation of the property once every 5
years. The borrower can use the loan amount for renovation and extension of residential property,
family’s medical and emergency expenditure etc., amongst others. However, he cannot use the
amount for speculative or trading purposes.

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The Reverse Mortgage Scheme, 2008, includes within its scope, disbursement of loan by an
approved lending institution, in part or in full, to the annuity sourcing institution, for the purposes of
periodic payments by way of annuity to the reverse mortgagor. This would be an additional mode
of disbursement i.e., in addition to direct disbursements by the approved lending institution to the
Reverse Mortgagor by way of periodic payments or lump sum payment in one or more tranches.
An annuity sourcing institution has been defined to mean Life Insurance Corporation of India or
any other insurer registered with the Insurance Regulatory and Development Authority.
Maximum Period of Reverse Mortgage Loan:
Mode of disbursement Maximum period of loan
(a) Where the loan is disbursed directly to the 20 years from the date of signing the
Reverse Mortgagor agreement by the reverse mortgagor and the
approved lending institution.
(b) Where the loan is disbursed, in part or in The residual life time of the borrower.
full, to the annuity sourcing institution for
the purposes of periodic payments by way
of annuity to the Reverse Mortgagor

The bank will recover the loan along with the accumulated interest by selling the house after the
death of the borrower. The excess amount will be given to the legal heirs. However, before
resorting to sale of the house, preference will be given to the legal heirs to repay the loan and
interest and get the mortgaged property released.
Therefore, section 47(xvi) clarifies that any transfer of a capital asset in a transaction of reverse
mortgage under a scheme made and notified by the Central Government would not amount to a
transfer for the purpose of capital gains.

Exemption of income received in a transaction of reverse mortgage [Section 10(43)]: Section

10(43), further, provides that the amount received by the senior citizen as a loan, either in lump
sum or in instalments, in a transaction of reverse mortgage would be exempt from income -tax.

Capital gains tax liability would be attracted only at the stage of alienation of the mortgaged
property by the bank/ housing finance company for the purposes of recovering the loan.
ILLUSTRATION 3
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2025-26, he gifted it to his son at the
time of marriage. Fair market value (FMV) of the gold on the day the gift was made was
` 1,00,000.

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 CAPITAL GAINS 4.67 a

(ii) A house property is purchased by a Hindu undivided family in 1945 for ` 20,000. It is given
to one of the family members in the P.Y. 2025-26 at the time of partition of the family. FMV
on the day of partition was ` 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into
500 shares worth ` 85,000 in November 2025 by the company.
SOLUTION
We know that capital gains arise only when we transfer a capital asset. The liability of capital gains
tax in the situations given above is discussed as follows:

(i) As per the provisions of section 47(iii), transfer of a capital asset by an individual under a
gift is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax
liability does not arise in the given situation.

(ii) As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total
or partial partition of Hindu undivided family is not regarded as transfer for the purpose of
capital gains. Therefore, capital gains tax liability does not arise in the given situation.

(iii) As per the provisions of section 47(x), transfer by way of conversion of bonds or
debentures, debenture stock or deposit certificates in any form of a company into shares or
debentures of that company is not regarded as transfer for the purpose of capital gains.
Therefore, capital gains tax liability does not arise in the given situation.
ILLUSTRATION 4
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse mortgage
transaction?
SOLUTION
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government shall not be considered as a
transfer for the purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be regarded as
a transfer. Therefore, no capital gain will be charged on such transaction.

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 4.68 DIRECT TAX LAWS

Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in
lump sum or in instalment, in a transaction of reverse mortgage would be exempt from income -tax.
Therefore, the monthly instalment amounts received by Mr. Abhishek would not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged
property by the bank for the purposes of recovering the loan.

4.10 WITHDRAWAL OF EXEMPTION IN CERTAIN CASES

Section 47A provides for withdrawal of the benefit of exemption given by section 47 in certain cases.
(1) Conditions for transfer of capital asset by holding to its wholly owned subsidiary and
vice versa [Section 47(iv) or 47(v)]: As noted above, capital gains arising from the
transfer of a capital asset by a company to its wholly owned subsidi ary company is exempt
from tax.
Similarly, capital gains arising from the transfer of a capital asset by the subsidiary
company to its 100% holding company is also exempt from tax, provided under both
circumstances the transferee is an Indian company.
Section 47A provides that the above exemption will be withdrawn if at any time before the
expiry of 8 years from the date of transfer of a capital asset referred to above
(1) such capital asset is converted by the transferee company or is treat ed by it as
stock-in-trade of its business; or
(2) the parent company or its nominees ceases to hold the whole of the share capital of
the subsidiary company.
In the above two cases, the amount of capital gains exempt from tax by virtue of the
provisions contained in section 47 will be deemed to be the income of the transferor
company chargeable under the head ‘capital gains’ of the year in which such transfer took
place.

(2) Transfer of membership of a recognised stock exchange for shares [Section 47(xi)]:
Capital gains not charged to tax under clause (xi) of section 47 shall be deemed to be the
income chargeable under the head “capital gains” of the previous year in which such
transfer took place if the shares of the company received in exchange for transfer of
membership in a recognised stock exchange, are transferred at any time before the expiry
of 3 years from the date of such transfer.

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 CAPITAL GAINS 4.69 a

(3) Transfer of capital asset or intangible asset on succession of firm/ sole proprietary
concern by a company [Section 47(xiii) or 47(xiv)]: Where any of the conditions laid
down in section 47(xiii) or (xvi), as the case may be, for succession of a firm or sole
proprietary concern by a company are not complied with, the amount of profits or gains
arising from the transfer of such capital asset or intangible asset shall be deemed to be the
profits and gains chargeable to tax of the successor company for the previous year in
which the conditions are not complied with.
(4) Transfer of capital asset or intangible asset by private company or unlisted public
company and share held by shareholder to LLP in a conversion of private company
or unlisted public company by a LLP [Section 47(xiiib)]: If subsequent to the conversion
of a private company or unlisted company into an LLP, any of the conditions laid down in
section 47(xiiib) are not complied with, the capital gains not charged under section 45 would
be deemed to be chargeable to tax in the previous year in which the conditions are not
complied with, in the hands of the LLP or the shareholder of the predecessor
company, as the case may be.

4.11 MODE OF COMPUTATION OF CAPITAL GAINS

[SECTION 48]
(1) Computation of capital gains: The income chargeable under the head ‘capital gains’ shall
be computed by deducting the following items from the full value of the consideration
received or accruing as a result of the transfer of the capital asset:
(i) Expenditure incurred wholly and exclusively in connection with such transfer like,
brokerage, stamp duty, registration fee, legal expenses etc.
(ii) The cost of acquisition and cost of any improvement thereto.
However, the cost of acquisition of the asset or the cost of improvement thereto
would not include the deductions claimed in respect of interest u/s 24(b) or under the
provisions of Chapter VI-A.
Deduction from cost of acquisition of a unit of a business trust - The cost of
acquisition of a unit of a business trust has to be reduced -
➢ by any sum received by a unit holder from the business trust with respect to such
unit, which is not in the nature of interest and dividend referred to in section
10(23FC) or rental income referred to in section 10(23FCA) and

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➢ which is not chargeable to tax in the hands of unit holders under section
56(2)(xii) and in the hands of business trust under section 115UA(2).
However, where transaction of transfer of a unit is not considered as transfer under
section 47 and cost of acquisition of such unit is determined under section 49, sum
received with respect to such unit before such transaction as well as after such
transaction has to be reduced from the cost of acquisition.
(iii) in case of value of any money or capital asset received by a specified person from a
specified entity referred to in section 45(4), the amount chargeable to income-tax
as income of such specified entity under that section which is attributable to the
capital asset being transferred by the specified entity, calculated in the
prescribed manner [The manner of attribution is prescribed under Rule 8AB,
which was discussed in earlier paras along with section 45(4)].
(2) No deduction in respect of STT paid: No deduction, however, shall be allowed in
computing the income chargeable under the head “Capital Gains” in respect of any amount
paid on account of securities transaction tax under Chapter VII of the Finance (No.2)
Act, 2004.
(3) Cost inflation index: Under section 48, the cost of acquisition and cost of improvement will
be increased by applying the cost inflation index (CII). Once the cost inflation index is
applied to the cost of acquisition and cost of improvement, it becomes indexed cost of
acquisition and indexed cost of improvement.

“Cost Inflation Index” in relation to a previous year means such index as may be notified by
the Central Government having regard to 75% of average rise in the Consumer Price Index
(Urban) for the immediately preceding previous year to such previous year.

Indexed cost of acquisition means an amount which bears to the cost of acquisition, the
same proportion as CII for the year in which the asset is transferred bears to the CII for the
first year in which the asset was held by the assessee or for the year beginning on 1st April,
2001, whichever is later.

Similarly, indexed cost of any improvement means an amount which bears to the cost of
improvement, the same proportion as CII for the year in which the asset is transferred bears
to the CII for the year in which the improvement to the asset took place.

Indexation benefit was available while computing long-term capital gains arising on transfer
long-term capital assets before 23.7.2024.

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 CAPITAL GAINS 4.71 a

While computing tax liability u/s 112, option of taking indexation benefit is available
to an individual or HUF, resident in India on transfer of long term capital asset, being
land or building or both which is acquired before 23.7.2024:
A resident individual or HUF, while computing tax on LTCG on transfer of land or building or
both, has the option to take the benefit of indexation under section 112 in respect of long -
term capital gains arising on transfer of land or building or both which is acquired before
23.7.2024.
Accordingly, LTCG on transfer of such land or building or both are subject to lower of tax

- @12.5% on LTCG computed without indexation benefit or

- @20% on LTCG computed with indexation benefit.
It may be noted that this benefit to a resident individual or HUF is to be given only while
computing tax on LTCG under section 112 on transfer of land or building or both and not
while computing Income under the head “Capital Gains” which would form part of gross total
income/total income. Thus, for computing income under the head “Capital Gains” to be
included in gross total income, indexation benefit is not to be given.
The cost inflation indices for the financial years so far have been notified as under:
Financial Year Cost Inflation Index
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254

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 4.72 DIRECT TAX LAWS

2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331
2023-24 348
2024-25 363
2025-26 376

(4) Full value of consideration of shares, debentures or warrants issued under ESOP in
case of transfer under a gift etc. upto A.Y. 2024-25 - In case where shares, debentures
or warrants allotted by a company directly or indirectly to its employees under the
Employees' Stock Option Plan or Scheme in accordance with the guidelines issued in this
behalf by the Central Government are transferred under a gift or irrecoverable trust, then
the market value on the date of such transfer shall be deemed to be the full value of
consideration received or accruing as a result of transfer of such asset.
(5) Special provision for non-residents - In case of non-residents who invest foreign
exchange to acquire capital assets, capital gains arising from the transfer of shares or
debentures of an Indian company is to be computed in the following manner:
• The cost of acquisition, the expenditure incurred wholly and exclusively in connection
with the transfer and the full value of the consideration are to be converted into the
same foreign currency with which such shares were acquired. The conversion has to
be done at the average of Telegraphic Transfer Buying Rate (TTBR) and Telegraphic
Transfer Selling Rate (TTSR) on the respective dates.
• The resulting capital gains shall be reconverted into Indian currency by applying the
TTBR on the date of transfer.

The aforesaid manner of computation of capital gains shall be applied for every purchase
and sale of shares or debentures of an Indian company. This will provide relief from risk of
foreign currency fluctuation to non-residents. Rule 115A is relevant for this purpose.
Note – Refer to Chapter 21: Non-resident Taxation of Module 4 where Rule 115A is
detailed.

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 CAPITAL GAINS 4.73 a

On long-term capital gains arising from transfer of unlisted securities or shares of a

company in which public are not substantially interested, non-residents and foreign
companies are subject to tax at a concessional rate of @12.5% (without currency
conversion) [Section 112].

Rupee Denominated Bonds (RDBs)

As a measure to enable Indian companies to raise funds from outside India, the RBI has
permitted them to issue rupee denominated bonds outside India. Accordingly, in case of
non-resident assessees, any gains arising on account of appreciation of rupee between the
date of purchase and the date of redemption of rupee denominated bond of an Indian
company held by him against foreign currency in which investment is made shall not be
included in computation of full value of consideration. This would provide rel ief to the non-
resident investor who bears the risk of currency fluctuation.
Note – The benefit of currency fluctuation would not be applicable to the long-term capital gains
arising from the transfer of the following assets referred to in section 112A –
(i) equity share in a company on which STT is paid both at the time of acquisition and
transfer
(ii) unit of equity oriented fund or unit of business trust on which STT is paid at the time of
transfer.

4.12 ASCERTAINMENT OF COST IN SPECIFIED

CIRCUMSTANCES [SECTION 49]
A person becomes the owner of a capital asset not only by purchase but also by several other
methods. Section 49 gives guidelines as to how to compute the cost under different
circumstances.
Section Circumstance Cost of acquisition
49(1) Cost to previous owner deemed as cost of acquisition of asset:
Where the capital asset became the property Cost for which the previous owner
of the assessee: of the property acquired it.
(i) on any distribution of assets on the total
or partition of a HUF; Notes –
(ii) under a gift or will by an individual or Cost of improvement – To the cost
HUF (by any person upto 31.3.2024); of acquisition, the cost of
(iii) by succession, inheritance or devolution; improvement to the asset, incurred

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(iv) on any distribution of assets on the by the previous owner or the

liquidation of a company; assessee on or after 1.4.2001 must
(v) under a transfer to revocable or an be added.
irrevocable trust; Period of holding - It may be noted
(vi) under any transfer of capital asset by a that section 2(42A) provides that in
holding company to its wholly owned all such cases, for determining the
subsidiary Indian company or by a period for which the capital asset is
subsidiary company to its 100% holding held by the transferee, the period of
Indian company, referred to in section holding of the asset by the previous
47(iv) and 47(v), respectively; owner shall also be considered.
(vii) under any transfer referred to in section
47(vi) of a capital asset by amalgamating Benefit of indexation - The
company to the amalgamated Indian Bombay High Court, in CIT v.
company, in a scheme of amalgamation; Manjula J. Shah 16 Taxman 42,
held that the indexed cost of
(viii) under any transfer referred to in section
acquisition in case of gifted asset
47(via) of shares held in an Indian
has to be computed with reference
company, in a scheme of amalgamation,
to the year in which the previous
by amalgamating foreign company to the
owner first held the asset and not
amalgamated foreign company;
the year in which the assessee
(ix) under any transfer referred to in section became the owner of the asset.
47(viaa) by a banking company to the
As per the plain reading of the
banking institution, in a scheme of
provisions of section 48, however,
amalgamation of the banking company
the indexed cost of acquisition
with a banking institution;
would be determined by taking CII
(x) under any transfer of a capital asset, for the year in which asset is first
being a share of a foreign company, which held by the assessee.
derives directly or indirectly its value The benefit of indexation can be
substantially from the share(s) of an opted by a resident individual or
Indian company, held by the HUF while computing tax liability u/s
amalgamating foreign company to the 112 only for long-term capital
amalgamated foreign company, in the assets, being land or building or
scheme of amalgamation referred to both which are acquired before
under section 47(viab); 23.7.2024.
(xi) under any transfer referred to in section
47(vib), of a capital asset by the
demerged company to the resulting Indian
company, in a scheme of demerger;
(xii) by any transfer of a capital asset, being
share(s) held in an Indian company, by
the demerged foreign company to the
resulting foreign company, in a scheme of
demerger referred to in section 47(vic);

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 CAPITAL GAINS 4.75 a

(xiii) by any transfer of a capital asset in a

business reorganization under section
47(vica), by the predecessor co-operative
bank to the successor co-operative bank;
(xiv) by any transfer by a shareholder, in a
business reorganisation referred to under
section 47(vicb), of a capital asset being
a share or shares held by him in the
predecessor co-operative bank, if the
transfer is made in consideration of the
allotment to him of any share or shares
in the successor co-operative bank;
(xv) by transfer of a capital asset, being a
share in a foreign company, which
derives, directly or indirectly, its value
substantially from the share or shares of
an Indian company, held by the
demerged foreign company to the
resulting foreign company in the scheme
of demerger referred under section
47(vicc);
(xvi) by any transfer referred to in section
47(viiac), in a relocation, of a capital
asset by the original fund to the resulting
fund;
(xvii) under any transfer referred to in section
47(viiad) by a shareholder or unit holder
or interest holder, in a relocation, of a
capital asst being a share or unit or
interest held by him in the original fund in
consideration for the share or unit or
interest in the resultant fund;
(xviii)under any transfer referred to in section
47(viiae) of capital asset by India
Infrastructure Finance Company Limited
to an institution established for financing
the infrastructure and development, set
up under any Act of Parliament and
notified by the Central Government;
(xix) under any transfer referred to in section
47(viiaf) of a capital asset, under a plan
approved by the Central Government, by a
public sector company to another public
sector company notified by the Central

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Government for this purpose or to the

Central Government or to a State
Government;
(xx) by any transfer of capital asset or
intangible asset on succession of a firm
by a company in a business carried on
by it or any transfer of a capital asset on
succession of an AOP/BOI by a company
on demutualisation or corporatisation of
a recognized stock exchange referred to
in section 47(xiii);
(xxi) under any transfer under section 47(xiiib)
of a capital asset or intangible asset by a
private company or unlisted public
company to a LLP;
(xxii) by any transfer of capital asset or
intangible asset on succession of a sole
proprietorship concern by a company in a
business carried on by it, fulfilling the
conditions mentioned in section 47(xiv);
(xxiii)by conversion by an individual of his
separate property into a HUF property,
by the mode referred to in section 64(2).
49(2) Shares received under the scheme of amalgamation
Where shares in an amalgamated company The cost of acquisition to him of the
which is an Indian company become the shares in the amalgamated
property of the assessee in consideration of company shall be taken as the cost
the transfer of shares referred to in section of acquisition of the shares in the
47(vii) held by him in the amalgamating amalgamating company.
company under a scheme of amalgamation This also applies in relation to
business reorganization of a co-
operative bank as referred to in
section 44DB [Section 49(2E)].

49(2A) Shares or debentures received during the process of conversion of bonds or

debentures, debenture stock or deposit certificates
Where a person becomes the owner of shares That part of the cost of debentures,
or debentures in a company during the debenture stock, bond or deposit
process of conversion of bonds or debentures, certificate in relation to which such
debenture stock or deposit certificates asset (shares or debentures) is
referred under section 47(x). acquired by that person.

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 CAPITAL GAINS 4.77 a

49(2AA) Specified security or sweat equity shares

Where the capital gain arises from the transfer Fair market value which has been
of specified security or sweat equity shares taken into account for perquisite
referred to in section 17(2)(vi) valuation.
49(2AAA) Rights received in a firm by shareholders on conversion of private or unlisted
public company into LLP
Where a shareholder of a company receives The cost of acquisition of the capital
rights in a partnership firm as consideration asset being rights of a partner
for transfer of shares on conversion of a referred to in section 42 of the LLP
company into a LLP referred to in section Act, 2008 shall be deemed to be the
47(xiiib) cost of acquisition to him of the
shares in the predecessor company,
immediately before its conversion.
49(2ABB) Shares acquired on redemption of Global Depository Receipts
Where the capital asset, being share or The cost of acquisition of the share
shares of a company is acquired by a non- or shares would be the price of such
resident on redemption of GDR referred to in share or shares prevailing on any
section 115AC(1)(b) held by such assessee recognized stock exchange on the
date on which a request for such
redemption was made.
49(2AC) Unit of business trust in consideration of shares of a special purpose vehicle
Where the capital asset, being unit of a The cost of acquisition of the unit
business trust, became the property of the would be deemed to be the cost of
assessee in consideration of transfer of acquisition of the shares to him.
shares of a special purpose vehicle as
referred to in section 47(xvii)
49(2AE) Equity shares received at the time of conversion of preference shares
Where equity shares of a company, became That part of the cost of the
the property of the assessee in consideration preference share in relation to
of transfer by way of conversion of preference which such equity shares are
shares of the company [Section 47(xb)] acquired by the assessee.

49(2AF) Units acquired under consolidated plan of Mutual Fund scheme

Where the capital asset, being a unit or units The cost of acquisition of the asset
in a consolidated plan of a mutual fund shall be deemed to be the cost of
scheme, became the property of the assessee acquisition to him of the unit or units
in consideration of a transfer referred to in in the consolidating plan of the
section 47(xix) scheme of the mutual fund.

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49(2AG)/ A unit or units in the segregated portfolio

49(2AH) In case of segregated portfolio The cost of acquisition of a unit or units
in the segregated portfolio shall be the
amount which bears, to the cost of
acquisition of a unit or units held by the
assessee in the total portfolio, the same
proportion as the net asset value of the
asset transferred to the segregated
portfolio bears to the net asset value of
the total portfolio immediately before the
segregation of portfolios.
The cost of the acquisition of the
original units held by the unit holder in
the main portfolio shall be deemed to
have been reduced by the amount as so
arrived at under sub-section (2AG)
Term Meaning
Main portfolio the scheme portfolio excluding the segregated portfolio
Segregated portfolio a portfolio, comprising of debt or money market
instrument affected by a credit event, that has been
segregated in a mutual fund scheme
Total portfolio the scheme portfolio including the securities affected
by the credit event
SEBI has, vide circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28,
2018, permitted creation of segregated portfolio of debt and money market
instruments by Mutual Fund schemes. As per the SEBI circular, all the existing unit
holders in the affected scheme as on the day of the credit event i.e. downgrade in
credit rating by a SEBI registered Credit Rating Agency (CRA), shall be allotted
equal number of units in the segregated portfolio as held in the main portfolio. On
segregation, the unit holders come to hold same number of units in two schemes –
the main scheme and segregated scheme.
49(2AI) Shares of a company incorporated outside India by the Government of a
foreign State, in accordance with the laws of that foreign State
Where the capital asset, being shares of a The cost of acquisition of such asset
company incorporated outside India by would be deemed to be the cost of
the Government of a foreign State, in acquisition to it of the interest in the
accordance with the laws of that foreign joint venture.
State as referred to in section 47(xx),
became the property of the assessee

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 CAPITAL GAINS 4.79 a

49(2C) Shares received in the resulting company in the scheme of demerger

In case of demerger The cost of acquisition of the shares in
the resulting company shall be the
amount which bears to the cost of
acquisition of shares held by the
assessee in the demerged company
the same proportion as the net book
value of the assets transferred in a
demerger bears to the net worth of the
demerged company immediately
before such demerger.

Cost of acquisition of shares in the

B
resulting company = A 
C
A = Cost of acquisition of shares held
in the demerged company
B = Net book value of the assets
transferred in a demerger
C = Net worth of the demerged
company i.e., the aggregate of the paid
up share capital and general reserves
as appearing in the books of account
of the demerged company immediately
before the demerger.
“Net worth” means the aggregate of the paid up share capital and general
reserves as appearing in the books of account of the demerged company
immediately before the demerger.
49(2D) Shares held in the demerged company
In case of demerger The cost of acquisition of the original
shares held by the shareholder in the
demerged company shall be deemed
to have been reduced by the amount
as so arrived under the sub-section
(2C).
The provisions of section 49(2C) and
49(2D) also applies in relation to
business reorganization of a co-
operative bank as referred to in section
44DB.

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49(3) Capital asset transferred by holding company to its wholly owned subsidiary
Indian company or vice a versa, in case of attraction of section 47A
Where the capital gain arising from the The cost of acquisition of such asset
transfer of a capital asset referred to in to the transferee-company shall be
section 47(iv) or section 47(v) is deemed the cost for which such asset was
to be income chargeable under the head acquired by it.
"Capital gains" by virtue of the provisions
contained in section 47A
49(4) Property subject to tax under section 56(2)(x)

Where the capital gain arises from the The value taken into account for the
transfer of such property which has been purposes of section 56(2)(x).
subject to tax under section 56(2)(x)
49(6) Specified capital asset referred under clause (c) of the Explanation to
section 10(37A) [Refer diagram at the end of this table]

Where the capital gain arises from the The cost of acquisition of such
transfer of a reconstituted plot or land, reconstituted plot or land shall be
(received by the assessee in lieu of land deemed to be its stamp duty value as
or building or both transferred under the on the last day of the second financial
Land Pooling Scheme of Andhra year after the end of the financial year
Pradesh) which has been transferred in which the possession of the said
after the expiry of 2 years from the end of plot or land was handed over to the
the financial year in which the possession assessee.
of such plot or land was handed over to
the assessee

Exemption in respect of capital gains arising on transfer of Specified Capital

Assets under the Land Pooling Scheme notified under the provisions of
Andhra Pradesh Capital Region Development Authority Act, 2014
[Section 10(37A)]
 As per section 96 of the Right to Fair Compensation and Transparency in
Land Acquisition, Rehabilitation and Resettlement Act, 2014, the specified
compensation received by the landowner in lieu of acquisition of land is
exempt from income tax. The Land Pooling Scheme is an alternative form
of arrangement made by the Government of Andhra Pradesh for formation
of new capital city of Amaravati to avoid land acquisition disputes and
lessen the financial burden associated with payment of compensation
under that Act.
 In Land Pooling Scheme, the compensation in the form of reconstituted plot
or land is provided to land owners. However, the existing provisions of the

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 CAPITAL GAINS 4.81 a

Act do not provide for exemption from tax on transfer of land under the land
pooling scheme as well as on transfer of Land Pooling Ownership
Certificates (LPOCs) or reconstituted plot or land.
 With a view to provide relief to an individual or Hindu undivided family who
was the owner of such land as on 2 nd June, 2014, and has transferred their
land under the Land Pooling Scheme notified under the provisions of
Andhra Pradesh Capital Region Development Authority Act, 2014, clause
(37A) of section 10 provides that in respect of said persons, capital gains
arising from the transfer of the specified capital assets shall not be
chargeable to tax under the Act:

Meaning of Specified Capital Asset:

Specified Capital Assets means
- the land or building or both owned by the assessee as on 2 nd June, 2014
and which has been transferred under the land pooling scheme; or
- the land pooling ownership certificate (LPOC) issued to the assessee in
lieu of transferred land or building or both or
- the reconstituted plot or land, as the case may be received by the assessee
in lieu of land or building or both in accordance with the scheme, if such
plot or land, as the case may be, so received is transferred within two years
from the end of the financial year in which the possession of such plot or
land was handed over to him.

49(7) Capital asset, being share in the project referred under section 45(5A)

Where the capital gain arises from the The cost of acquisition of such asset,
transfer of a capital asset, being share in would be the amount which is
the project, in the form of land or building deemed as full value of consideration
or both, referred to in section 45(5A) in that sub-section i.e., stamp duty
which is chargeable to tax in the previous value on the date of issue of
year in which the completion of certificate certificate of completion plus cash
for the whole or part of the project is consideration.
issued by the competent authority)
However, this does not apply to a
capital asset, being share in the
project which is transferred on or
before the date of issue of said
completion certificate.

49(8) Capital assets of entities in case of levy of tax on accreted income under
section 115TD
The cost of acquisition of such asset
Where the capital gain arises from the
shall be deemed to be the fair market
transfer of an asset, being the asset held
value of the asset which has been

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by a trust or an institution in respect of taken into account for computation of

which accreted income has been accreted income as on the specified
computed, and the tax has been paid date referred to in section 115TD(2).
thereon in accordance with the provisions
Note: Refer to Chapter 10 on
relating to tax on accreted income of
“Assessment of Trusts and
certain trusts and institutions under
Institutions, Political Parties and
Chapter XII-EB
Other Special Entities” for
understanding the concept of related
income.

49(9) Capital asset which was used by the assessee as an inventory before its
conversion into capital asset

Where the capital gain arises from the The fair market value of the inventory
transfer of a capital asset which was as on the date on such conversion
used by the assessee as inventory earlier determined in the prescribed manner
before its conversion into capital asset

49(10) Capital asset, being an Electronic Gold Receipt or Gold

Where a capital asset, being an The cost of gold in the hands of the
Electronic Gold Receipt issued by a Vault person in whose name Electronic
Manager became the property of the Gold Receipt is issued.
person as consideration for transfer of
gold [Section 47(viid)]
Where gold is released against an The cost of the Electronic Gold
Electronic Gold Receipt, which became Receipt in the hands of such person.
the property of the person as
consideration for transfer of Electronic
Gold Receipt [Section 47(viid)]

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Taxability/ Exemption of Capital Gains arising on transfer of Specified Capital Assets

Land or Building or both

owned by the assessee as
on 2.6.2014

Transferred under Land Transfer exempt from

Pooling Scheme of A.P. capital gains u/s 10(37A)

Allotment of LPOCs to
landowners

Sale of LPOCs by Allotment of reconstituted plot

Landowners or land to landowner

Transfer of reconstituted plot Transfer of reconstituted

or land within 2 years from plot or land after 2 years
the end of the P.Y. in which from the end of the P.Y. in
he receives possession which he receives
possession

Exempt from Transfer exempt from Subject to Capital

capital gains capital gains u/s Gains
u/s 10(37A) 10(37A)

Stamp duty value on the last date of

the second F.Y. after the end of the
F.Y. of possession deemed as cost of
acquisition

ILLUSTRATION 5
Neerja was carrying on the textile business under a proprietorship concern, Neerja Textiles. On
30.12.2025 the business of Neerja Textiles was succeeded by New Look Textile Private Limited
and all the assets and liabilities of Neerja Textiles on that date became the assets and liabilities of
New Look Textile Private Limited and Neerja was given 52% share in the share capital of the
company. No other consideration was given to Neerja on account of this succession.
The assets and liabilities of Neerja Textiles transferred to the company include an urban land
which was acquired by Neerja on 19.7.2013 for ` 9,80,000. The company sold the same on
30.03.2026 for ` 16,00,000.

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Examine the tax implication of the above-mentioned transaction and compute the income
chargeable to tax in such case(s).
Cost Inflation Index: F.Y. 2013-14: 220; F.Y. 2025-26: 376
SOLUTION
Taxability in case of succession of Neerja Textiles by New Look Textile Private Limited
As per provisions of section 47(xiv), in case a proprietorship concern is succeeded by a company
in the business carried by it and as a result of which any capital asset or intangible asset is
transferred to the company, then the same shall not be treated as transfer and will not be
chargeable to capital gain tax in case the following conditions are satisfied:
(1) all the assets and liabilities of sole proprietary concern becomes the assets and liabilities of
the company.

(2) the shareholding of the sole proprietor in the company is not less than 50% of the total
voting power of the company and continues to remain as such for a period of 5 years from
the date of succession.

(3) the sole proprietor does not receive any consideration or benefit in any form from the
company other than by way of allotment of shares in the company.
In the present case, all the conditions mentioned above are satisfied therefore, the transfer of
capital asset by Neerja Textiles to New Look Textile Private Limited shall not attract capital gain
tax provided Neerja continues to hold 50% or more of voting power of New Look Textiles Private
Limited for a minimum period of 5 years.
Taxability in case of transfer of land by New Look Textile Private Limited
As per the provisions of section 49(1) and Explanation 1 to section 2(42A), in case a capital asset
is transferred in the circumstances mentioned in section 47(xiv), the cost of the asset in the hands
of the company shall be the cost of the asset in the hands of the sole proprietor. Consequently, for
the determining the period of holding of the asset, the period for which the asset is held by the sole
proprietor shall also be considered.

Therefore, in the present case, the urban land shall be a long-term capital asset since it is held for
more than 24 months by New Look Textile Private Limited and Neerja Textiles taken together.
Cost of acquisition of land in the hands of the company shall be ` 9,80,000 i.e., the purchase cost
of the land in the hands of Neerja.

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 CAPITAL GAINS 4.85 a

Computation of capital gain chargeable to tax in the hands of New Look Textile Private Ltd.
Particulars `
Net Sale Consideration 16,00,000
Less: Cost of acquisition 9,80,000
Long-term capital gain 6,20,000

Note: Indexation benefit would not be available to New Look Textile Private Ltd. since transfer
took place on or after 23.7.2024.

4.13 COST OF ACQUISITION [SECTION 55(2)]

Cost of acquisition is the price that the assessee has paid, or the amount that the assessee has
incurred, for acquisition of the asset. Expenses incurred for completing the title are a part of the
cost of acquisition. For eg: Stamp duty.

Cost of acquisition in relation to the following assets is as follows:

(1) Goodwill of a business or profession or a trademark or brand name associated with a

business or profession or any other intangible asset or a right to manufacture,
produce or process any article or thing, or right to carry on any business or
profession, tenancy rights, stage carriage permits and loom hours, or any other right

(i) In case of acquisition from previous owner: In the case of the above capital
assets, if the assessee has purchased them from a previous owner, the cost of
acquisition means the amount of the purchase price.

Example:
If A purchases a stage carriage permit from B for ` 2 lakhs, ` 2 lakhs will be the cost
of acquisition for A.

However, in case of a capital asset, being goodwill of a business or profession, in

respect of which depreciation under section 32(1) has been obtained by the
assessee in any previous year (upto P.Y.2019-20), the cost of acquisition of such
goodwill would be the amount of the purchase price as reduced by the total amount
of depreciation (upto P.Y.2019-20) obtained by the assessee under section 32(1).
(ii) In case of circumstances mentioned under section 49(1)(i)/(ii)/(iii)/(iv) : In cases
where the capital asset became the property of the assessee by any of the following
modes from the previous owner, and such capital assets were acquired by the

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previous owner by purchase, cost of acquisition to the assessee will be the amount
of the purchase price for such previous owner:-
(1) On any distribution of assets on the total or partial partition of a Hindu
undivided family.
(2) Under a gift or will by an individual or HUF (Upto A.Y. 2024-25, gift or will by
any person).
(3) By succession, inheritance or devolution.
(4) On any distribution of assets on the liquidation of a company.

(5) Under a transfer to a revocable or an irrevocable trust.

(6) Under any transfer of a capital asset referred to in section 47(iv)/(v)/(vi)/(via)/
(via)/(viaa)/(viab)/(vib)/(vic)/(vica)/(vicb)/(vicc)/(viiac)/(viiad)/(viiae)/(viiaf)/(xiii)/
(xiiib)/(xiv)
(7) Where the assessee is a Hindu undivided family, by the mode referred to in
section 64(2) i.e., conversion of self-acquired property of a member of a HUF
into the property of the HUF (For details, read Chapter 6).
However, in case of a capital asset, being goodwill of a business or profession, in
respect of which depreciation under section 32(1) has been obtained by the
assessee in any previous year (upto P.Y.2019-20), the cost of acquisition of such
goodwill would be the amount of the purchase price for such previous owner as
reduced by the total amount of depreciation (upto P.Y.2019-20) obtained by the
assessee under section 32(1).
(iii) In any other case [i.e., in case of self-generated assets]: In case of self-generated
assets namely, goodwill of a business or profession or a trademark or brand name
associated with a business or profession or any other intangible asset or a right to
manufacture, produce or process any article or thing, or right to carry on any business
or profession, tenancy rights, stage carriage permits, or loom hours, or any other
right, the cost of acquisition will be taken to be Nil.
(2) Financial assets - Many a time, persons who own shares or other securities become
entitled to subscribe to any additional shares or securities. Further, they are also allotted
additional shares or securities without any payment. Such shares or securities are referred
to as financial assets in Income-tax Act. Section 55 provides the basis for ascertaining the
cost of acquisition of such financial assets.

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(i) Original shares (which form the basis of entitlement of rights shares): In
relation to the original financial asset on the basis of which the assessee becomes
entitled to any additional financial assets, cost of acquisition means the amount
actually paid for acquiring the original financial assets.
(ii) Rights entitlement (which is renounced by the assessee in favour of a person):
In relation to any right to renounce the said entitlement to subscribe to the financial
asset, when such a right is renounced by the assessee in favour of any person, cost
of acquisition shall be taken to be nil in the case of such assessee.
(iii) Rights shares acquired by the assessee: In relation to the financial asset, to which
the assessee has subscribed on the basis of the said entitlement, cost of acquisition
means the amount actually paid by him for acquiring such asset.

(iv) Rights shares which are purchased by the person in whose favour the
assessee has renounced the rights entitlement: In the case of any financial asset
purchased by the person in whose favour the right to subscribe to such assets has
been renounced, cost of acquisition means the aggregate of the amount of the
purchase price paid by him to the person renouncing such right and the amount paid
by him to the company or institution for acquiring such financial asset.

(v) Bonus Shares: In relation to the financial asset allotted to the assessee without any
payment and on the basis of holding of any other financial assets, cost of
acquisition shall be taken to be nil in the case of such assessee.
In other words, where bonus shares are allotted without any payment on the basis of
holding of original shares, the cost of such bonus shares will be nil in the hands of
the original shareholder.
Bonus shares allotted before 01.04.2001: However, in respect of bonus shares
allotted before 1.4.2001, although the cost of acquisition of the shares is nil, the
assessee may opt for the fair market value as on 1.4.2001 as the cost of acquisition
of such bonus shares.
Bonus shares allotted before 1.2.2018, on which STT has been paid at the time
of transfer – In case of transfer of bonus shares allotted before 1.2.2018 on which
STT has been paid at the time of transfer, the cost would be the higher of –
(i) Actual cost of acquisition (i.e., Nil, in case of bonus shares allotted on or
after 1.4.2001; and FMV on 1.4.2001, in case of business shares allotted
before 1.4.2001)

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(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration
(3) Equity shares received on demutualisation or corporatisation of a recognised stock
exchange – In relation to equity shares allotted to a shareholder of a recognised stock
exchange in India under a scheme for demutualisation or corporatisation approved by SEBI,
the cost of acquisition of such shares shall be the cost of acquiring his original membership
of the exchange.

(4) Clearing or trading right acquired on demutualisation or corporatisation of a recognised

stock exchange – The cost of a capital asset, being trading or clearing rights of a recognised
stock exchange acquired by a shareholder (who has been allotted equity share or shares under
such scheme of demutualisation or corporatisation), shall be deemed to be nil.
(5) Long-term capital assets referred to in section 112A
The cost of acquisition in relation to the long-term capital assets being,
➢ equity shares in a company on which STT is paid both at the time of purchase and
transfer or
➢ unit of equity oriented fund or unit of business trust on which STT is paid at the time
of transfer.
acquired before 1 st February, 2018 shall be the higher of
(i) cost of acquisition of such asset; and
(ii) lower of
(a) the fair market value of such asset; and
(b) the full value of consideration received or accruing as a result of the transfer
of the capital asset.
Meaning of Fair Market Value:
[Link]. Circumstance Fair Market Value
(i) In a case where the capital asset is If there is trading in such asset on
listed on any recognised stock such exchange on 31.01.2018
exchange as on 31.01.2018 The highest price of the capital asset
quoted on such exchange on the said
date

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If there is no trading in such asset on

such exchange on 31.01.2018
The highest price of such asset on such
exchange on a date immediately
preceding 31.01.2018 when such asset
was traded on such exchange.
(ii) In a case where the capital asset is The net asset value of such unit as on the
a unit which is not listed on any said date
recognised stock exchange as on
31.01.2018
(iii) In a case where the capital asset is An amount which bears to the cost of
an equity share in a company which acquisition the same proportion as CII for
is the financial year 2017-18 bears to the
- not listed on a recognised stock CII for the first year in which the asset
exchange as on 31.01.2018 but was held by the assessee or on
listed on such exchange on the 01.04.2001, whichever is later.
date of transfer
- not listed on a recognized stock
exchange as on 31.01.2018 or
which became the property of
the assessee in consideration
of shares which is not listed on
such exchange as on
31.1.2018 by way of
transaction covered under
section 47 but listed on such
exchange subsequent to the
date of transfer (where transfer
is in respect of sale of unlisted
equity shares under an offer for
sale to the public included in an
initial public offer)
- listed on a recognised stock
exchange on the date of
transfer and which became the
property of the assessee in
consideration of share which is
not listed on such exchange as
on 31.01.2018 by way of
transaction not regarded as
transfer under section 47

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(6) Any other capital asset–

(i) Where the capital asset become the property of the assessee before 1 -4-2001,
cost of acquisition means the cost of acquisition of the asset to the assessee or the
fair market value of the asset on 1-4-2001 at the option of the assessee.
However, in case of capital asset, being land or building or both, the fair market
value of such asset on 1-4-2001 shall not exceed the stamp duty value, wherever
available, of such asset as on 1-4-2001.
(ii) Where the capital asset became the property of the assessee by any of the
modes specified in section 49(1): The cost of acquisition to the assessee will be
the cost of acquisition to the previous owner. Even in such cases, where the capital
asset became the property of the previous owner before 1-4-2001, the assessee has
got a right to opt for the fair market value as on 1-4-2001.
However, in case of capital asset, being land or building or both, the fair market
value of such asset on 1-4-2001 shall not exceed the stamp duty value, wherever
available, of such asset as on 1-4-2001.
Note: The provisions contained in (i) & (ii) of (6) above shall also apply to the financial
assets mentioned in (i) to (v) of (2) and long term capital assets referred to in section 112A
of (5) above.

(iii) Where the capital asset became the property of the assessee on the
distribution of the capital assets of a company on its liquidation and the
assessee has been assessed to capital gains in respect of that asset under section
46, the cost of acquisition means the fair market value of the asset on the date of
distribution.
(iv) A share or a stock of a company may become the property of an assessee under
the following circumstances:
(a) the consolidation and division of all or any of the share capital of the company
into shares of larger amount than its existing shares.
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller
amount, or
(e) the conversion of one kind of shares of the company into another kind.

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In the above circumstances the cost of acquisition to the assessee will mean the cost
of acquisition of the asset calculated with reference to the cost of acquisition of the
shares or stock from which such asset is derived.
(7) Where the cost for which the previous owner acquired the property cannot be
ascertained, the cost of acquisition to the previous owner means the fair market value on
the date on which the capital asset became the property of the previous owner.
Cost of Acquisition of assets: At a Glance

Sl. No. Nature of asset Cost of acquisition

1 Goodwill of business or profession,
trademark, brand name or any other
intangible asset etc., -
- Self generated Nil
- Acquired from previous owner Purchase price
However, in case of capital asset, being Purchase price as reduced by the total
goodwill of a business or profession, in amount of depreciation obtained by the
respect of which depreciation u/s 32(1) assessee under section 32(1).
has been obtained by the assessee in
any P.Y. (upto P.Y.2019-20)
- became the property of the assessee Purchase price for such previous owner
by way of distribution of assets on total
or partial partition of HUF, under a gift
or will by an individual or HUF (by any
person upto 31.3.2024), by succession,
inheritance, distribution of assets on
liquidation of a company, etc. and
previous owner has acquired it by
purchase
However, in case of capital asset, being Purchase price for such previous owner
goodwill of a business or profession as reduced by the total amount of
which was acquired by the previous depreciation obtained by the assessee u/s
owner by purchase and in respect of 32(1).
which depreciation u/s 32(1) has been
obtained by the assessee in any P.Y.
(upto P.Y.2019-20)
2. Bonus Shares:
Allotted before 1.4.2001 FMV as on 1.4.2001
Allotted on or after 1.4.2001 Nil

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Bonus shares allotted before 1.2.2018, on The higher of –

which STT has been paid at the time of (i) Actual cost of acquisition (i.e., Nil, in
transfer case of bonus shares allotted on or
after 1.4.2001; and
FMV on 1.4.2001, in case of bonus
shares allotted before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration
3 Right Shares:
Original shares (which form the basis of Amount actually paid for acquiring the
entitlement of rights shares) original shares
Rights entitlement (which is renounced by Nil
the assessee in favour of a person)
Rights shares acquired by the assessee Amount actually paid for acquiring the
rights shares
Rights shares which are purchased by the Purchase price paid to the renouncer of
person in whose favour the assessee has rights entitlement as well as the amount paid
renounced the rights entitlement to the company which has allotted the rights
shares.
4. Equity shares received on demutualisation Cost of acquisition of such shares shall be
or corporatisation of a recognised stock the cost of acquiring his original membership
exchange of the exchange.
5. Clearing or trading right acquired on NIL
demutualisation or corporatisation of a
recognised stock exchange
6. Long term capital assets being, Cost of acquisition shall be the higher of
- equity shares in a company on (i) cost of acquisition of such asset;
which STT is paid both at the time of and
purchase and transfer or (ii) lower of
- unit of equity oriented fund or unit - the fair market value of such
of business trust on which STT is asset; and
paid at the time of transfer,
- the full value of consideration
acquired before 1st February, 2018 received or accruing as a
result of the transfer of the
capital asset.

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7. Any other capital asset

Where such capital asset became the Cost of the asset to the assessee, or FMV
property of the assessee before 1.4.2001 as on 1.4.2001, at the option of the
assessee.
However, in case of capital asset being
land or building, FMV as on 1.4.2001 shall
not exceed stamp duty value as on
1.4.2001.
Where capital assets became the property Cost to the previous owner or FMV as
of the assessee by way of distribution of on 1.4.2001, at the option of the
assets on total or partial partition of HUF, assessee.
under a gift or will by an individual or HUF However, in case of capital asset being
(by any person upto 31.3.2024), by land or building, FMV as on 1.4.2001
succession, inheritance, distribution of shall not exceed stamp duty value as on
assets on liquidation of a company, etc. 1.4.2001.
and the capital asset became the property
of the previous owner before 1.4.2001
The provisions contained in (7) above shall also apply to the assets mentioned in (2), (3)
and (6) above.
8. Where cost of the property in the hands of The FMV on the date on which the
previous owner cannot be ascertained capital asset become the property of
the previous owner would be considered
as cost of acquisition.

ILLUSTRATION 6
ABC Ltd. converts its capital asset acquired for an amount of ` 50,000 in June, 2004 into stock-in-
trade in the month of November, 2024. The fair market value of the asset on the date of
conversion is ` 4,50,000. The stock-in-trade was sold for an amount of ` 6,50,000 in the month of
September, 2025. What will be the tax treatment?
SOLUTION
The capital gains on the sale of the capital asset converted to stock -in-trade is taxable in the given
case. It arises in the year of conversion (i.e. P.Y. 2024-25) but will be taxable only in the year in
which the stock-in-trade is sold (i.e. P.Y. 2025-26). Profits from business will also be taxable in the
year of sale of the stock-in-trade (P.Y. 2025-26).

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The long-term capital gains and business income for the A.Y.2026-27 are calculated as under:
Particulars ` `
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of conversion) 4,50,000 2,00,000

Long Term Capital Gains

Full value of the consideration (FMV on the date of the conversion) 4,50,000
Less: Cost of acquisition 50,000 4,00,000

Note: For the purpose of indexation, the cost inflation index of the year in which the asset is
converted into stock-in-trade should be considered. However, since capital asset is converted on
or after 23.7.2024, no indexation benefit is allowed.
ILLUSTRATION 7
Ms. Usha purchases 1,000 equity shares in X (P) Ltd., an unlisted company, at a cost of ` 30 per
share (brokerage 1%) in January 1996. She gets 100 bonus shares in August 2000. She again
gets 1,100 bonus shares by virtue of her holding in February 2006. Fair market value of the shares
of X (P) Ltd. on April 1, 2001 is ` 80.

On 1st January 2026, she transfers all her shares @ ` 200 per share (brokerage 2%).
Compute the capital gains taxable in the hands of Ms. Usha for the A.Y. 2026-27
Cost Inflation Index for F.Y. 2001-02: 100, F.Y.2005-06: 117 & F.Y.2025-26: 376.
SOLUTION
Computation of capital gains for the A.Y. 2026-27
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 200) 2,00,000
Less: Brokerage paid (2% of ` 2,00,000) 4,000
Net sale consideration 1,96,000
Less: Cost of acquisition [` 80 × 1000] 80,000
Long term capital gains (A) 1,16,000
100 Bonus shares
Sale proceeds (100 × ` 200) 20,000
Less: Brokerage paid (2% of ` 20,000) 400

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Net sale consideration 19,600

Less: Cost of acquisition [` 80 × 100] [See Note below] 8,000
Long term capital gains (B) 11,600
1100 Bonus shares
Sale proceeds (1100 × ` 200) 2,20,000
Less: Brokerage paid (2% of `2,20,000) 4,400
Net sale consideration 2,15,600
Less: Cost of acquisition NIL
Long term capital gain (C) 2,15,600
 Long term capital gain (A+B+C) 3,43,200

Note: Cost of acquisition of bonus shares acquired before 1.4.2001 is the FMV as on 1.4.2001
(being the higher of the cost or the FMV as on 1.4.2001).
ILLUSTRATION 8
Mr. R holds 1,000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001 -02 at
a cost of ` 75,000. He has been offered right shares by the company in the month of April, 2025 at
` 160 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the
balance right shares in favour of Mr. Q for ` 30 per share in May 2025. All the shares are sold by
Mr. R for ` 300 per share on 15.7.2025 and Mr. Q sells his shares in December 2025 at ` 280 per
share. What are the capital gains taxable in the hands of Mr. R and Mr. Q?
Financial year Cost Inflation Index
2001-02 100
2025-26 376
SOLUTION
Computation of capital gains in the hands of Mr. R for the A.Y.2026-27
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 300) 3,00,000
Less: Cost of acquisition [Note 1] 75,000
Long-term capital gain (A) 2,25,000
200 Right shares
Sale proceeds (200 × ` 300) 60,000
Less: Cost of acquisition [` 160 × 200] [Note 2] 32,000
Short-term capital gain (B) 28,000

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Sale of Right Entitlement

Sale proceeds (200 × ` 30) 6,000
Less: Cost of acquisition [Note 3] NIL
Short-term capital gain (C) 6,000
Capital Gains (A+B+C) 2,59,000

Note 1: The benefit of indexation is not available, since the transfer took place on or after
23.07.2024.
Note 2: Since the holding period of these shares is less than 24 months, they are short term
capital assets.
Note 3: The cost of the rights renounced in favour of another person for a consideration is taken to
be nil. The consideration so received is taxed as short-term capital gains in full. The period of
holding is taken from the date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y.2026-27
Particulars `
Sale proceeds (200 shares × ` 280) 56,000
Less: Cost of acquisition [200 shares × (` 30 + ` 160)] [See Note below] 38,000
Short-term capital gain 18,000

Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the
company. Since the holding period of these shares is less than 24 months, they are short term
capital assets.

4.14 COST OF IMPROVEMENT [SECTION 55(1)]

(1) Goodwill or any other intangible asset of a business, etc. [Section 55(1)(b)(1)]: In
relation to a capital asset being goodwill or any other intangible asset of a business or a
right to manufacture, produce or process any article or thing, or right to carry on any
business or profession or any other right, the cost of improvement shall be taken to be Nil.

(2) Any other capital asset [Section 55(1)(b)(2)]:

Circumstance Cost of improvement
(i) Where the capital asset became the property of the previous owner or the
assessee before 1.4.2001
(a) In a case covered u/s 49(1), where All expenditure of a capital nature
the capital asset became the property incurred in making any addition or

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of the previous owner and the alteration to the capital asset on or

assessee before 1.4.2001 after 1.4.2001 by the assessee.
(b) In a case covered u/s 49(1), where All expenditure of a capital nature
the capital asset became the property incurred in making any addition or
of the previous owner before alteration to the capital asset on or
1.4.2001 but became the property of after 1.4.2001 by the previous
the assessee on or after 1.4.2001 owner and the assessee.
(c) In a case not covered u/s 49(1) All expenditure of a capital nature
incurred in making any addition or
alteration to the capital asset on or
after 1.4.2001 by the assessee.
(ii) Where the capital asset became the property of the previous owner and the
assessee on or after 1.4.2001
(a) In a case covered u/s 49(1) All expenditure of a capital nature
incurred in making any addition or
alteration to the capital asset by the
previous owner and the assessee.
(b) In a case not covered u/s 49(1) All expenditure of a capital nature
incurred in making any addition or
alteration to the capital asset by the
assessee after it became the
assessee’s property.

In a nutshell, in a case covered under section 49(1), cost of improvement would include
expenditure of a capital nature on addition or alteration to the capital asset by the previous
owner or the assessee or both on or after 1.4.2001. In a case not covered under section
49(1), cost of improvement would include expenditure of a capital nature on addition or
alteration to the capital asset by the assessee on or after 1.4.2001.
However, cost of improvement does not include any expenditure which is deductible in
computing the income chargeable under the head “Income from house property”, “Profits
and gains of business or profession” or “Income from other sources”. Routine expenses on
repairs and maintenance do not form part of cost of improvement.
ILLUSTRATION 9
X & sons, HUF, purchased a land for ` 1,20,000 in the P.Y. 2002-03. In the P.Y. 2006-07, a
partition took place when Mr. A, a coparcener, is allotted this plot valued at ` 1,50,000. In P.Y.
2007-08, he had incurred expenses of ` 2,35,000 towards fencing of the plot. Mr. A sells this plot
of land for ` 15,00,000 in June 2025 after incurring expenses to the extent of ` 20,000. You are
required to compute the capital gain for the A.Y.2026-27.

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Financial year Cost Inflation Index

2002-03 105
2006-07 122
2007-08 129
2025-26 376

SOLUTION
Computation of taxable capital gains for the A.Y.2026-27

Particulars ` `
Sale consideration 15,00,000
Less: Expenses incurred for transfer 20,000
14,80,000
Less: (i) Cost of acquisition 1,20,000
(ii) Cost of improvement 2,35,000 3,55,000
Long term capital gains 11,25,000

Note – The benefit of indexation is not available, since the transfer took place on or after
23.07.2024.
ILLUSTRATION 10
Mr. C purchases a house property for ` 1,06,000 on May 15, 1975. The following expenses are
incurred by him for making addition/alternation to the house property:
Particulars `
a. Cost of construction of first floor in 1982-83 3,10,000
b. Cost of construction of the second floor in 2002-03 7,35,000
c. Reconstruction of the property in 2012-13 5,50,000

Fair market value of the property on April 1, 2001 is ` 8,50,000 and stamp duty value on the said
date was ` 8,10,000. The house property is sold by Mr. C on July 10, 2025 for ` 78,00,000
(expenses incurred on transfer: ` 50,000). Compute the capital gain for the assessment year
2026-27.
Cost Inflation Index: F.Y. 2001-02: 100, F.Y. 2002-03: 105, F.Y. 2012-13: 200, F.Y. 2025-26: 376

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SOLUTION
Computation of capital gain of Mr. C for the A.Y.2026-27
Particulars ` `
Gross sale consideration 78,00,000
Less: Expenses on transfer 50,000
Net sale consideration 77,50,000
Less: Cost of acquisition (Note 1) 8,10,000
Less: Cost of improvement (Note 2) 12,85,000 20,95,000
Long-term capital gain 56,55,000
Notes:
1. Fair market value on April 1, 2001 (actual cost of acquisition is ignored as it is lower than
market value on April 1, 2001) however, it should not exceed ` 8,10,000, being the stamp
duty value on 1.4.2001.
2. Cost of improvement is determined as under:
Particulars `
Construction of first floor in 1982-83 Nil
(Expenses incurred prior to April 1, 2001 are not considered)
Construction of second floor in 2002-03 7,35,000
Alternation/reconstruction in 2012-13 5,50,000
Cost of improvement 12,85,000

4.15 COMPUTATION OF CAPITAL GAINS IN CASE OF

DEPRECIABLE ASSETS [SECTIONS 50 & 50A]
(1) Transfer of depreciable assets [Section 50]: Section 50 provides for the computation of
capital gains in case of depreciable assets. It may be noted that where the capital asset is a
depreciable asset forming part of a block of assets, section 50 will have overriding effect in
spite of anything contained in section 2(42A) which defines a short -term capital asset.

Accordingly, where the capital asset is an asset forming part of a block of assets in respect
of which depreciation has been allowed, the provisions of sections 48 and 49 shall be
subject to the following modifications:
• Where the full value of consideration received or accruing for the transfer of the
asset plus the full value of such consideration for the transfer of any other capital

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 4.100 DIRECT TAX LAWS

asset falling with the block of assets during previous year exceeds the aggregate of
the following amounts namely:
(1) expenditure incurred wholly and exclusively in connection with such
transfer(s);
(2) WDV of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block of assets acquired during
the previous year
such excess shall be deemed to be the capital gains arising from the transfer of
short-term capital assets.
• Where all assets in a block are transferred during the previous year, the block itself
will cease to exist. In such a situation, the difference between the sale value of the
assets and the WDV of the block of assets at the beginning of the previous year
together with the actual cost of any asset falling within that block of ass ets acquired
by the assessee during the previous year will be deemed to be the capital gains
arising from the transfer of short- term capital assets.

Transfer of depreciable assets : Tax consequences

No Yes
Is V > C ? Does the C (-) V is
block cease STCL
to exist?
Yes No
V (-) C is C (-) V is the Closing
STCG WDV of the block

Symbol Description
V Full value of consideration
C Opening WDV of Block (+) Actual Cost of Asset acquired in the Block
during the P.Y. (+) Expenses in connection with transfer of asset
STCG Short Term Capital Gain
STCL Short Term Capital Loss
WDV Written Down Value

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 CAPITAL GAINS 4.101 a

(2) Cost of acquisition in case of power sector assets [Section 50A]: With respect to the
power sector, in case of depreciable assets referred to in section 32(1)(i), the provisions of
sections 48 and 49 shall apply subject to the modification that the WDV of the asset [as
defined in section 43(6)], as adjusted, shall be taken to be the cost of acquisition.
ILLUSTRATION 11
Rajawat & Co., a sole proprietorship owns six machines, put in use for business in March, 2024.
The depreciation on these machines is charged @15%. The opening balance of these machines
after providing depreciation for P.Y. 2024-25 was ` 8,50,000. Three of the old machines were sold
on 10th June, 2025 for ` 11,00,000. A second hand plant was bought for ` 8,50,000 on
30th November, 2025.
You are required to:
(i) determine the claim of depreciation for Assessment Year 2026-27.
(ii) compute the capital gains liable to tax for Assessment Year 2026-27.
(iii) If Rajawat & Co. had sold the three machines in June, 2025 for ` 21,00,000, will there be
any difference in your above workings? Examine.
SOLUTION
(i) Computation of depreciation for A.Y.2026-27

Particulars `
Opening balance of the block as on 1.4.2025 [i.e., W.D.V. as on 31.3.2025 8,50,000
after providing depreciation for P.Y. 2024-25]
Add: Purchase of second hand plant during the year in November, 2025 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2026 6,00,000

Since the value of the block as on 31.3.2026 comprises of a new asset which has been put
to use for less than 180 days, depreciation is restricted to 50% of the prescribed percentage
of 15% i.e. depreciation is restricted to 7½%. Therefore, the depreciation allowable for the
year is ` 45,000, being 7½% of ` 6,00,000.
(ii) The provisions under section 50 for computation of capital gains in the case of depreciable
assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than
the value of the block.

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 4.102 DIRECT TAX LAWS

(b) When all the assets are transferred for a consideration more than the value of the
block.
(c) When all the assets are transferred for a consideration less than the value of the
block.
Since in the first two cases, the sale consideration is more than the written down value of
the block, the computation would result in short term capital gains.
In the third case, since the written down value exceeds the sale consideration, the resultant
figure would be a short-term capital loss.

In the given case, capital gains will not arise as the block of asset continues to exist, and some
of the assets are sold for a price which is lesser than the written down value of the block.
(iii) If the three machines are sold in June, 2025 for ` 21,00,000, then short term capital gains
would arise, since the sale consideration is more than the aggregate of the written down
value of the block at the beginning of the year and the additions made during the year.

Particulars ` `
Sale consideration 21,00,000
Less: Opening balance of the block as on 1.4.2025 [i.e., 8,50,000
W.D.V. as on 31.3.2025 after providing depreciation for
P.Y. 2024-25]
Purchase of second hand plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000

4.16 COMPUTATION OF CAPITAL GAINS IN CASE OF

MARKET LINKED DEBENTURES [SECTION 50AA]
(1) Transfer of unit of a Specified Mutual Fund or Market Linked Debenture or unlisted
bond or unlisted debenture: Section 50AA provides for the computation of capital gains in
case of transfer or redemption or maturity of

- unit(s) of a Specified Mutual Fund acquired on or after 1.4.2023 or

- a Market Linked Debenture or

- an unlisted bond or unlisted debentures

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 CAPITAL GAINS 4.103 a

Section 50AA will have an overriding effect in spite of anything contained in section 2(42A)
which defines a short-term capital asset and section 48 providing the manner of
computation of capital gains.

Accordingly, capital gain arising from the transfer or redemption or maturity of unit of a
Specified Mutual Fund acquired on or after 1.4.2023 or Market Linked Debenture or an
unlisted bond or unlisted debentures would be deemed to be short term capital gains and
chargeable to tax at normal rate of tax.
(2) Computation of capital gains: The full value of consideration received or accruing as a
result of the transfer or redemption or maturity of such debenture or unit or bond as reduced
by the cost of acquisition of the debenture or unit and the expenditure incurred wholly and
exclusively in connection with such transfer or redemption or maturity would be deemed to
be the capital gains.
(3) No deduction in respect of STT: No deduction would be allowed in computing the income
chargeable under the head “Capital Gains” in respect of any sum paid on account of
securities transaction tax (STT).

(4) Meaning of certain terms:

Term Meaning
Market A security
Linked (i) which has an underlying principal component in the form of debt
Debenture security; and
(ii) where the returns are linked to market returns on other underlying
securities or indices.
It includes any security classified or regulated as a market linked debenture
by the SEBI.
Specified A Mutual Fund which invests more than 65% of its total proceeds in debt
Mutual and money instruments or a fund which invests 65% or more of its total
Fund proceeds in units of above fund.
However, the percentage of investment in debt and money market
instruments or in units of a fund in respect of the Specified Mutual Fund,
shall be computed with reference to the annual average of the daily closing
figures.
Debt and It includes any securities classified or regulated as debt and money market
money instruments by the SEBI.
market
instrument

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4.17 CAPITAL GAINS IN RESPECT OF SLUMP SALE

[SECTION 50B]
(1) Meaning of slump sale [Section 2(42C)] – Slump sale means transfer of one or more
undertakings, by any means, for a lump sum consideration without values being assigned to
the individual assets and liabilities in such transfer.
Term Meaning
Undertaking It includes any part of an undertaking, or a unit or division of an
[Explanation 1] undertaking or a business activity taken as a whole, but does not
include individual assets or liabilities or any combination thereof
not constituting a business activity.
Transfer Meaning assigned to it in section 2(47) [It would include sale,
[Explanation 3] exchange, relinquishment of capital asset, extinguishment of any
rights therein, compulsory acquisition under any law etc. – See
detailed definition in page 4.13]

Note - The determination of the value of an asset or liability for the sole purpose of payment
of stamp duty, registration fees or other similar taxes or fees shall not be regarded as
assignment of values to individual assets or liabilities.
(2) Capital gains – Whether long-term or short-term? [Section 50B(1)] - Any profits or gains
arising from the slump sale of one or more undertakings held for more than 36 months,
shall be chargeable to income-tax as capital gains arising from the transfer of long-term
capital assets and shall be deemed to be the income of the previous year in which the
transfer took place.
Any profits and gains arising from such transfer of one or more undertakings held by the
assessee for not more than 36 months shall be deemed to be short-term capital gains.
(3) Deemed cost of acquisition and cost of improvement [Section 50B(2)(i)] - The net
worth of the undertaking or the division, as the case may be, shall be deemed to be the cost
of acquisition and the cost of improvement for the purposes of sections 48 and 49 in relation
to capital assets of such undertaking or division transferred. No indexation benefit would be
available.
(4) Deemed full value of consideration [Section 50B(2)(ii)] – Fair market value of the capital
assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to
be the full value of the consideration received or accruing as a result of the transfer of such
capital asset.

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 CAPITAL GAINS 4.105 a

Accordingly, the CBDT has inserted Rule 11UAE to determine fair market value of the
capital assets.
The fair market value of the capital assets shall be the FMV1 or FMV2, whichever is
higher.
FMV1 = The fair market value of the capital assets transferred by way of slump sale
determined in accordance with the formula

A+B+C+D - L, where,

A = Book value of all the assets (other than jewellery, artistic work, shares,
securities and immovable property) as appearing in the books of accounts of
the undertaking or the division transferred by way of slump sale as reduced by
the following amount which relate to such undertaking or the division, —

(i) any amount of income-tax paid, if any, less the amount of income-tax
refund claimed, if any; and

(ii) any amount shown as asset including the unamortised amount of

deferred expenditure which does not represent the value of any asset;

B = The price which the jewellery and artistic work would fetch if sold in the open
market on the basis of the valuation report obtained from a registered valuer;

C = Fair market value of shares and securities as determined in the manner

provided in rule 11UA(1);

D = The value adopted or assessed or assessable by any authority of the

Government for the purpose of payment of stamp duty in respect of the
immovable property;

L = Book value of liabilities as appearing in the books of accounts of the

undertaking or the division transferred by way of slump sale, but not including
the following amounts which relates to such undertaking or division, namely: —

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and
equity shares where such dividends have not been declared before the
date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting
figure is negative, other than those set apart towards depreciation;

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 4.106 DIRECT TAX LAWS

(iv) any amount representing provision for taxation, other than amount of
income-tax paid, if any, less the amount of income-tax claimed as refund,
if any, to the extent of the excess over the tax payable with reference to
the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other
than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of

dividends payable in respect of cumulative preference shares
FMV2 = The fair market value of the consideration received or accruing as a result of
transfer by way of slump sale determined in accordance with the formula –

E+F+G+H, where,

E = value of the monetary consideration received or accruing as a result of the transfer;

F = fair market value of non-monetary consideration received or accruing as a

result of the transfer represented by property referred to in rule 11UA(1)
determined in the manner provided in rule 11UA(1) for the property covered in
that sub-rule;

G = the price which the non-monetary consideration received or accruing as a

result of the transfer represented by property, other than immovable property,
which is not referred to in rule 11UA(1) would fetch if sold in the open market
on the basis of the valuation report obtained from a registered valuer, in
respect of property;

H = the value adopted or assessed or assessable by any authority of the

Government for the purpose of payment of stamp duty in respect of the
immovable property (i.e., Stamp duty value) in case the non-monetary
consideration received or accruing as a result of the transfer is represented by
the immovable property.
The fair market value of the capital assets shall be determined on the date of slump
sale and for this purpose, valuation date shall also mean the date of slump sale.

(5) Report of a Chartered Accountant - Every assessee, in the case of slump sale, shall
furnish in the prescribed form on or before 30 th September of the A.Y. [i.e., the specified
date referred under section 44AB, being the date one month prior to the due date for filing
return of income under section 139(1)], a report of a chartered accountant indicating the
computation of net worth of the undertaking or division, as the case may be, and certifying

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 CAPITAL GAINS 4.107 a

that the net worth of the undertaking or division has been correctly arrived at in accordance
with the provisions of this section [Sub-section (3)].
(6) Meaning of Certain Terms:

Explanation Term Particulars

1 Net worth Aggregate value of total assets of the

undertaking or division as reduced by the
value of liabilities of such undertaking or
division as appearing in the books of account.
However, any change in the value of assets on
account of revaluation of assets shall not be
considered for this purpose.

2 Aggregate value of total In the case of depreciable assets: The

assets of undertaking or written down value of block of assets
division determined in accordance with the provisions
contained in sub-item (C) of item (i) of section
43(6)(c);
In case of capital asset, being goodwill of a
business or profession, which has not
been acquired by the assessee by
purchase from a previous owner [self-
generated goodwill]: Nil
Capital asset in respect of which 100%
deduction is claimed: In case of capital assets
in respect of which the whole of the
expenditure has been allowed or is allowable
as a deduction under section 35AD: Nil;
For all other assets: Book value

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 4.108 DIRECT TAX LAWS

Capital Gains on Slump Sale of an Undertaking [Section 50B]

Is the undertaking held for more than 36 months before
transfer?

Yes No

Resultant capital gain is LTCG Resultant capital gain is STCG

(No indexation benefit would be available))

LTCG is taxable@ 12.5% Normal rates of taxation

Computation of capital gains on slump sale

Full value of Consideration = Fair

Deemed cost of acquisition/cost of
market value of the capital assets (-) improvement
on the date of transfer*

Net Worth

Aggregate value of total Value of liabilities of the

assets of the undertaking** (-) undertaking appearing in the
books of account

In case of In case of In case of capital

In case of
self- assets, where the
depreciable generated other
whole expd has been
assets goodwill allowed u/s 35AD assets

WDV as per section (+) Nil (+) (+)

Nil Book value
43(6)(c)
*
Higher of FMV1 and FMV2
**Ignore revaluation effect

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 CAPITAL GAINS 4.109 a

ILLUSTRATION 12
M/s Sriram Enterprises, a proprietorship having 2 units. Unit 1 is transferred on 1.4.2025 by way of
slump sale for a total consideration of ` 14 lakhs. Unit 1 was started in the year 2005-06. The
expenses incurred for this transfer were ` 38,000. Balance Sheet as on 31.3.2025 is as under:
Liabilities Total Assets Unit 1(`) Unit 2 Total
(`) (`) (`)
Own Capital 17,00,000 Land 13,00,000 3,00,000 16,00,000
Revaluation Reserve (for land 5,00,000 Machinery 4,00,000 2,00,000 6,00,000
of unit 1)
Bank loan (70% for unit 1) 4,00,000 Debtors 2,00,000 1,40,000 3,40,000
Trade creditors (25% for unit 1) 3,50,000 Patents 2,50,000 1,60,000 4,10,000
Total 29,50,000 Total 21,50,000 8,00,000 29,50,000

Other information:
(i) Revaluation reserve is created by revising upward the value of the land of Unit 1. The
stamp duty value on 1.4.2025 is ` 10 lakhs.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Patents were acquired on 1.7.2023 on which no depreciation has been charged.
(iv) The value of machinery represents the written down value as per the Income-tax Act, 1961.
Compute the capital gain for the assessment year 2026-27.
SOLUTION
Computation of capital gains on slump sale of Unit 1

Particulars `
Full value of consideration [Fair market value on 1.4.2025] 14,82,500
Less: Expenses on sale 38,000
Net sale consideration 14,44,500
Less: Net worth (See Note 1 below) 11,73,125
Long-term capital gain 2,71,375

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Notes:
1. Computation of Full value of consideration
Particulars `
Fair market value of the capital assets transferred by way of slump sale
Land, being an immovable property [stamp duty value on 1.4.2025, being 10,00,000
the date of slump sale] [A]
Machinery [Book value as appearing in the books of accounts] [B] 4,00,000
Debtors [Book value as appearing in the books of accounts] [C] 2,00,000
Patents [Book value as appearing in the books of accounts] [D] 2,50,000
18,50,000
Less: Liabilities of Unit 1 [` 29,50,000 - ` 1,20,000 - ` 2,62,500] [L]
25,67,500
Excluding
(i) Own Capital 17,00,000
(ii) Revaluation reserve 5,00,000 22,00,000 3,67,500
Fair market value of the capital assets transferred by way of slump sale 14,82,500
[A+B+C+D- L] [FMV1]
Fair market value of the consideration received or accruing as a result of 14,00,000
transfer by way of slump sale [Value of the monetary consideration
received] [FMV2]
Full value of consideration [Higher of FMV1 or FMV2] 14,82,500

2. Computation of net worth of Unit 1 of Akash Enterprises

Particulars ` `
Land (excluding ` 5 lakhs on account of revaluation) 8,00,000
Machinery 4,00,000
Debtors 2,00,000
Patents (See Note 2 below) 1,40,625
Total assets 15,40,625
Less: Creditors [` 3,50,000 x 25%] 87,500
Bank Loan [` 4,00,000 x 70%] 2,80,000 3,67,500
Net worth 11,73,125

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 CAPITAL GAINS 4.111 a

3. Written down value of patents as on 1.4.2025

Value of patents `
Cost as on 1.7.2023 2,50,000
Less: Depreciation @ 25% for Financial Year 2023-24 62,500
WDV as on 1.4.2024 1,87,500
Less: Depreciation for Financial Year 2024-25 46,875
WDV as on 1.4.2025 1,40,625

For the purposes of computation of net worth, the written down value determined as per
section 43(6) has to be considered in the case of depreciable assets. The problem has been
solved assuming that the Balance Sheet values of ` 4 lakh represent the written down value
of machinery of Unit 1.
4. Since the Unit is held for more than 36 months, capital gain arising would be long -term
capital gain.

4.18 DEEMED FULL VALUE OF CONSIDERATION FOR

COMPUTING CAPITAL GAINS [SECTION 50C, 50CA & 50D]
S. Capital Section Circumstance Deemed Full Value of
No. Asset consideration for
computing Capital
Gains
1. Land or 50C (1) If Stamp Duty Value > 110% of Stamp Duty Value
Building or consideration received or
both accruing as a result of transfer
(a) If date of agreement is Stamp Duty Value on
different from the date of the date of agreement
transfer and whole or part
of the consideration is
received by way of account
payee cheque or bank draft
or ECS or through such
other prescribed electronic
mode (IMPS, UPI, RTGS,
NEFT, Net banking, debit
card, credit card or BHIM
Aadhar Pay) on or before
the date of agreement

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(b) If date of agreement is Stamp Duty Value on

different from the date of the date of transfer
transfer but the whole or
part of the consideration
has not been received by
way of account payee
cheque or bank draft or
ECS or through such other
prescribed electronic mode
(IMPS, UPI, RTGS, NEFT,
Net banking, debit card,
credit card or BHIM Aadhar
Pay) on or before the date
of agreement
However, if the stamp duty value Actual consideration so
on the date of agreement or the received
date of transfer, as the case may
be  110% of the sale
consideration received.
Example:
Let us take a case where for
transfer of building –
• the actual consideration is
` 100 lakh;
• the stamp duty value on the
date of agreement is ` 109
lakh; and
• the stamp duty value on the
date of transfer is ` 112 lakh
(i) If any part of the
consideration is paid by
prescribed electronic
mode on or before the
date of agreement
The actual consideration of
` 100 lakh would be the full
value of consideration, since
stamp duty value of ` 109
lakhs on the date of
agreement does not exceed
110% of actual
consideration of ` 100
lakhs.

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(ii) If no part of the

consideration is paid by
prescribed electronic
mode on or before the
date of agreement
Stamp duty value of ` 112
lakhs on the date of transfer
would be the full value of
consideration, since the
same exceeds 110% of
actual consideration of ` 100
lakhs.
(2) Where the Assessing Officer
refers the valuation to a
Valuation Officer, on the
assessee’s claim that the stamp
duty value exceeds the FMV of
the property on the date of
transfer and the stamp duty
value has not been disputed in
any appeal or revision or no
reference has been made before
any other authority, court or High
Court
(a) If Valuation by Valuation Stamp Duty Value
Officer > Stamp Duty Value
(b) If Valuation by Valuation Valuation by Valuation
Officer < Stamp Duty Value Officer
155(15) (3) If stamp duty value has been Value so revised in
adopted as full value of such appeal or revision
consideration, and subsequently
the value is revised in any
appeal or revision
2. Shares 50CA If consideration received or accruing FMV of such share
other than as a result of transfer < FMV of such determined in the
quoted share determined in the prescribed prescribed manner
shares manner
The provisions of this section would
not, however, be applicable to any
consideration received or accruing as
a result of transfer by such class of
persons and subject to such
conditions as may be prescribed.

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Prescribed class of persons for the purpose of section 50CA

Rule 11UAD provides that the provisions of section 50CA shall not apply to transfer of any
movable property, being unquoted shares, of a company and its subsidiary and the
subsidiary of such subsidiary by an assessee, where -
(i) the Tribunal, on an application moved by the Central Government under section 241 of
the Companies Act, 2013, has suspended the Board of Directors of such company and
has appointed new directors nominated by the Central Government under section 242
of the said Act; and
(ii) share of such company and its subsidiary and the subsidiary of such subsidiary has
been transferred pursuant to a resolution plan approved by the Tribunal under section
242 of the Companies Act, 2013 after affording a reasonable opportunity of being
heard to the jurisdictional Principal Commissioner or Commissioner.
Meaning of certain terms
(1) A company shall be a subsidiary of another company, if such other company holds
more than half in nominal value of the equity share capital of the company.
(2) Tribunal shall have the same meaning assigned to it in section 2(90) of the
Companies Act, 2013 i.e., National Company Law Tribunal constituted under section
408 of the said Act.
Note: The fair market value of the shares other than quoted shares would be determined in the
manner provided in sub-clause (b) or sub-clause (c), as the case may be, of Rule 11UA(1)(c) and
for this purpose the reference to valuation date in the Rule 11U and 11UA shall mean the date on
which the capital asset, being share other than quoted shares of a company is transferred (Rule
11UAA) 4.
3. Any Capital 50D Where the consideration received or FMV of the said asset
asset accruing as a result of the transfer of on the date of transfer
a capital asset by an assessee is not
ascertainable or cannot be determined
Meaning of certain terms:

S. Term Section Meaning

No.
(i) Stamp Duty 50C The value adopted or assessed or assessable by any authority of
Value a State Government (Stamp Valuation Authority) for the purpose
of payment of stamp duty
(ii) Assessable 50C The term ‘assessable’ has been defined to mean the price which
the stamp valuation authority would have, notwithstanding
anything to the contrary contained in any other law for the time
being in force, adopted or assessed, if it were referred to such

4
For detailed reading of Rule 11U to 11UAA of the Income-tax Rules, 1962, refer to Annexure 3 at the end
of this module

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 CAPITAL GAINS 4.115 a

authority for the purposes of the payment of stamp duty. The

term “assessable” has been added to cover transfers executed
through power of attorney.
(iii) Quoted 50CA The share quoted on any recognised stock exchange with
Shares regularity from time to time, where the quotation of such share is
based on current transaction made in the ordinary course of
business.

4.19 ADVANCE MONEY RECEIVED [SECTION 51]

It is possible for an assessee to receive some advance in regard to the transfer of capital asset.
Due to the break-down of the negotiation, the assessee may have retained the advance.
Section 51 provides that while calculating capital gains, the above advance retained by the
assessee must go to reduce the cost of acquisition. However, if advance has been received and
retained by the previous owner and not the assessee himself, then the same will not go to reduce
the cost of acquisition of the assessee.
Section 56(2)(ix) provides for the taxability of any sum of money, received as an advance or
otherwise in the course of negotiations for transfer of a capital asset. Consequently, such sum
shall be chargeable to income-tax under the head ‘Income from other sources’, if such sum is
forfeited on or after 1 st April, 2014 and the negotiations do not result in transfer of such capital
asset.
In order to avoid double taxation of the advance received and retained, section 51 provides that
where any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset has been included in the total income of the assessee for any previous
year in accordance with section 56(2)(ix), then, such amount shall not be deducted from the cost
for which the asset was acquired or the written down value or the fair market value, as the case
may be, in computing the cost of acquisition.

However, any such sum of money forfeited before 1 st April, 2014, will be deducted from the cost of
acquisition before applying indexation, if any, for computing capital gains.

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Tax treatment of advance money forfeited on

failure of negotiations for transfer of a capital
asset [Sections 51 & 56(2)(ix)]

If advance was If advance was

received and received and
forfeited forfeited on or
before 1-4-2014 after 1-4-2014

Advance forfeited to be deducted while Advance forfeited to be taxed

determining Cost of acquisition for under 56(2)(ix) as Income
computing capital gains from other sources

Taxability is postponed to Tax liability is attracted in

the year of actual transfer of the year of forfeiture of
capital asset. advance

ILLUSTRATION 13
Mr. Kay purchases a house property on April 10, 1992 for ` 65,000. The fair market value of the
house property on April 1, 2001 was ` 2,70,000 and Stamp duty value was ` 2,20,000. On August
31, 2004, Mr. Kay enters into an agreement with Mr. Jay for sale of such property for ` 3,70,000
and received an amount of ` 60,000 as advance. However, as Mr. Jay did not pay the balance
amount, Mr. Kay forfeited the advance. In May 2008, Mr. Kay constructed the first floor by
incurring a cost of ` 2,35,000. Subsequently, in January 2009, Mr. Kay gifted the house to his
brother Mr. Dee. On June 10, 2025, Mr. Dee sold the house for ` 15,00,000.
CII for F.Y.2001-02: 100; 2004-05: 113; 2008-09: 137; 2025-26: 376.
Compute the capital gains in the hands of Mr. Dee for A.Y.2026-27.
SOLUTION
Computation of taxable capital gains of Mr. Dee for A.Y.2026-27

Particulars ` `
Sale consideration 15,00,000
Less: Cost of acquisition 2,20,000
Cost of improvement 2,35,000 4,55,000
Long-term capital gain 10,45,000

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Note: For the purpose of capital gains, holding period is considered from the date on which the
house was purchased by Mr. Kay, till the date of sale. The house property was acquired before
1st April, 2001, higher of fair market value on 1.4.2001 or actual cost of acquisition can be considered
as cost of acquisition. However, fair market value cannot exceed stamp duty value on 1.4.2001.
Amount forfeited by previous owner, Mr. Kay, shall not be deducted from cost of acquisition.
Note 1- Since the property was gifted prior to 1.10.2009, it is a case falling u/s 49(1) and not 49(4).
Accordingly, the cost of acquisition of the previous owner, Mr. Kay, or the FMV as on 1.4.2001 (since
the asset was acquired by the previous owner, Mr. Kay, before 1.4.2001), has to be considered.
Note 2- Since the property was acquired before 23.7.2024, while computing tax on such LTCG,
Mr. Dee has the option to pay tax under section 112 at lower of 12.5% on LTCG computed without
indexation benefit or 20% on LTCG computed with indexation benefit.
ILLUSTRATION 14
Mr. X purchases a house property in December 1993 for ` 5,25,000 and an amount of ` 1,75,000
was spent on the improvement and repairs of the property in March, 1997. The property was
proposed to be sold to Mr. Z in the month of May, 2007 and an advance of ` 40,000 was taken
from him. As the entire money was not paid in time, Mr. X forfeited the advance and subsequently
sold the property to Mr. Y in the month of March, 2026 for ` 52,00,000. The fair value of the
property on April 1, 2001 was ` 11,90,000 and Stamp duty value on the said date was
` 10,20,000. What is the capital gain chargeable in the hands of Mr. X for the A.Y. 2026-27?
Financial year Cost Inflation Index
2001-02 100
2007-08 129
2025-26 376
SOLUTION
Capital gains in the hands of Mr. X for the A.Y.2026-27 is computed as under
Particulars `
Sale proceeds 52,00,000
Less: Cost of acquisition [Note 1] 9,80,000
Cost of improvement [Note 2] -
Long term capital gains 42,20,000

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Note 1: Computation of cost of acquisition

Cost of acquisition (higher of fair market value as on April 1, 2001 and the 10,20,000
actual cost of acquisition. Fair market value, however, should not exceed
` 10,20,000, being the stamp duty value on 1.4.2001)
Less: Advance taken and forfeited before 1.4.2014 40,000
Note 2: Any improvement cost incurred prior to 1.4.2001 is to be ignored.
Note 3: Since the house property was acquired before 23.7.2024, while computing tax on such
LTCG, Mr. X has the option to pay tax under section 112 at lower of 12.5% on LTCG computed
without indexation benefit or 20% on LTCG computed with indexation benefit.

4.20 EXEMPTION OF CAPITAL GAINS

Exemption of Capital Gains

Exemption under section

Exemption under Section 10 54/54B/54D/54EC/54F/
54G/54GA

(1) Exemption under section 10

The following are the exemption in respect of capital gains under section 10 :
(i) Exemption of capital gain on transfer of a unit of Unit Scheme, 1964 (US 64) [Section
10(33)]
This clause provides that any income arising from the transfer of unit of US 64, shall be
exempt from tax. Such transfer should take place on or after 1.4.2002.

(ii) Exemption of capital gains on compulsory acquisition of agricultural land situated

within specified urban limits [Section 10(37)]
With a view to mitigate the hardship faced by the farmers whose agricultural land situated in
specified urban limits has been compulsorily acquired, clause (37) provide to exempt the
capital gains arising to an individual or a HUF from transfer of urban agricultural land by
way of compulsory acquisition.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received on or after 1.4.2004.

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The exemption is available only when such land has been used for agricultural purposes
during the immediately preceding two years from the date of transfer by such individual
or a parent of his or by such HUF.

Clarification on taxability of the compensation received by the land owners for the
land acquired under the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) [Circular No.
36/2016, dated 25-10-2016]
The RFCTLARR Act which came into effect from 1st January, 2014, in section 96, inter alia
provides that income-tax shall not be levied on any award or agreement made (except
those made under section 46) under the RFCTLARR Act. Therefore, compensation received
for compulsory acquisition of land under the RFCTLARR Act (except those made under
section 46 of RFCTLARR Act), is exempted from the levy of income-tax.
As no distinction has been made between compensation received for compulsory
acquisition of agricultural land and non-agricultural land in the matter of providing
exemption from income-tax under the RFCTLARR Act, the exemption provided under
section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under
the existing provisions of Income-tax Act, 1961.
The CBDT has clarified that compensation received in respect of award or agreement which
has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall
also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific
provision for exemption of such compensation in the Income-tax Act, 1961.
ILLUSTRATION 15
Mr. Kumar has an agricultural land costing ` 6 lakh in Lucknow on 1.4.2003 and has been
using it for agricultural purposes till 1.8.2012 when the Government took over compulsory
acquisition of this land. A compensation of ` 12 lakhs was settled. The compensation was
received by Mr. Kumar on 1.7.2025. Compute the amount of capital gains taxable in the
hands of Mr. Kumar.
Cost Inflation Index: 2003-04: 109, 2012-13: 200, 2025-26: 376
SOLUTION
In the given problem, compulsory acquisition of an urban agricultural land has taken place and
the compensation is received after 1.4.2004. This land had also been used for at least 2 years
by the assessee himself for agricultural purposes. Thus, as per section 10(37), entire capital
gains arising on such compulsory acquisition will be fully exempt and nothing is taxable in the
hands of Mr. Kumar in the year of receipt of compensation i.e., A.Y.2026-27.

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ILLUSTRATION 16
Will your answer be different if Mr. Kumar had on his own will sold this land to his friend
Mr. Sharma? Examine.
SOLUTION
As per section 10(37), exemption is available if compulsory acquisition of urban agricultural
land takes place. Since the sale is out of own will and desire, the provisions of this section
are not attracted and the capital gains arising on such sale will be taxable in the hands of
Mr. Kumar.
ILLUSTRATION 17
Will your answer be different if Mr. Kumar had not used this land for agricultural activities?
Examine and compute the amount of capital gains taxable in the hands of Mr. Kumar, if any.

SOLUTION
As per section 10(37), exemption is available only when such land has been used for
agricultural purposes during the preceding two years by such individual or his parent or by
such HUF. Since the assessee has not used it for agricultural activities, the provisions of this
section are not attracted and the capital gains arising on such compulsory acquisition will be
taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e., A.Y. 2026-27.
Computation of capital gains

Particulars Amount (`)

Sales consideration 12,00,000
Less: Indexed Cost of acquisition [` 6,00,000 x 200/109] 11,00,917
Long term capital Gains 99,083

ILLUSTRATION 18
Will your answer be different if the land belonged to ABC Ltd. and not Mr. Kumar and
compensation on compulsory acquisition was received by the company? Examine.

SOLUTION
Section 10(37) exempts capital gains arising to an individual or a HUF from transfer of
agricultural land by way of compulsory acquisition. If the land belongs to ABC Ltd., a
company, the provisions of this section are not attracted and the capital gains arising on
such compulsory acquisition will be taxable in the hands of ABC Ltd.

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(2) Exemption of Capital Gains under section 54/54B/54D/54EC/54F/54G/54GA

(i) Capital Gains on sale of residential house [Section 54]
Eligible assessees – Individual & HUF
Conditions to be fulfilled
• There should be a transfer of residential house (buildings or lands appurtenant
thereto)
• It must be a long-term capital asset
• Income from such house should be chargeable under the head “Income from house
property”
• Where the amount of capital gains exceeds ` 2 crore
Where the amount of capital gain exceeds ` 2 crore, one residential house in India
should be –
▪ purchased within 1 year before or 2 years after the date of transfer (or)
▪ constructed within a period of 3 years after the date of transfer.
• Where the amount of capital gains does not exceed ` 2 crore
Where the amount of capital gains does not exceed ` 2 crore, the assessee i.e.,
individual or HUF, may at his option,
▪ purchase two residential houses in India within 1 year before or 2 years
after the date of transfer (or)
▪ construct two residential houses in India within a period of 3 years after the
date of transfer.
Where during any assessment year, the assessee has exercised the option to
purchase or construct two residential houses in India, he shall not be subsequently
entitled to exercise the option for the same or any other assessment year.
This implies that if an assessee has availed the option of claiming benefit of section
54 in respect of purchase of two residential houses in Jaipur and Jodhpur, say, in
respect of capital gains of ` 1.50 crores arising from transfer of residential house at
Mumbai in the P.Y.2025-26 then, he will not be entitled to avail the benefit of section
54 again in respect of purchase of two residential houses in, say, Pune and Baroda,
in respect of capital gains of ` 1.20 crores arising from transfer of residential house

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in Jaipur in the P.Y.2028-29, even though the capital gains arising on transfer of the
residential house at Jaipur does not exceed ` 2 crore.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the Capital Gains Account Scheme (CGAS)
[Refer points (viii) and (ix) of this sub-heading (2)]. However, the capital gain in excess
of ` 10 crore would not be taken into account for the purpose of deposit in CGAS.
• Amount utilised by the assessee for purchase or construction of new asset and the
amount so deposited shall be deemed to be the cost of new asset. The deemed cost
of the new asset would be restricted to ` 10 crores for the purpose of exemption
under section 54.
Quantum of Exemption
• If cost of new residential house or houses, as the case may be ≥ long-term capital
gains, entire long-term capital gains is exempt.
• If cost of new residential house or houses, as the case may be < long-term capital
gains, long-term capital gains to the extent of cost of new residential house is exempt
However, if the cost of new residential house(s) exceeds ` 10 crores, the amount
exceeding ` 10 crore would not be taken into account for exemption. It means the maximum
exemption that can be claimed by the assessee u/s 54 is ` 10 crore.

Examples
1. If the long-term capital gains is ` 2.05 crores and the cost of the new house is
` 3 crores, then, the entire long-term capital gains of ` 2.05 crores is exempt.
2. If long-term capital gains is ` 2.05 crores and cost of new house is ` 1.55 crores,
then, long-term capital gains is exempt only upto ` 1.55 crores. Balance ` 50 lakhs
is taxable u/s 112.
Example
(1) (2) (3) (4) (5)
S. LTCG Cost of new Amount in column (3) Exempt LTCG [Lower
No. computed residential or ` 10 crore, of column (2) and
house whichever is lower column (4)]
(1) ` 7 crore ` 12 crore ` 10 crore ` 7 crore
(2) ` 12 crore ` 14 crore ` 10 crore ` 10 crore
(3) ` 11 crore ` 9 crore ` 9 crore ` 9 crore
(4) ` 15 crore ` 13 crore ` 10 crore ` 10 crore

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Examples
1. If the LTCG is ` 8 crore and the assessee has incurred ` 5 crore in construction of
new residential house upto the due date u/s 139(1) i.e., 31.7.2026/ 31.10.2026, as
the case may be, then, as per section 54(2), he can deposit the amount of ` 3 crore
not appropriated by him towards construction of house upto 31.7.2026/31.10.2026,
as the case may be, in Capital Gains Account Scheme (CGAS) for claiming
exemption under section 54. If he deposits, say, ` 2 crore, in CGAS on or before the
due date u/s 139(1), the deemed cost of the new residential house would be ` 7
crore (` 5 crore + ` 2 crore). The amount exempt u/s 54 would be ` 7 crore.
2. If the LTCG is ` 14 crore and the assessee has already incurred ` 7 crore in
construction of new residential house upto 31.7.2026/31.10.2026, as the case may
be, then, as per section 54(2), he can deposit the difference of ` 3 crore (` 10 crore
- ` 7 crore) in CGAS for claiming exemption u/s 54. If he deposits, say, ` 2 crore in
CGAS on or before the due date u/s 139(1), the deemed cost of the new residential
house would be ` 9 crore (` 7 crore + ` 2 crore). The amount exempt under section
54 would be ` 9 crore.

Consequences of transfer of new asset before 3 years

• If the new asset is transferred before 3 years from the date of its acquisition or
construction, then, cost of the asset will be reduced by capital gains exempted earlier
for computing capital gains.
• Example: The long-term capital gains is ` 2.05 crore and the cost of the new house
is ` 3 crore, the entire long-term capital gains of ` 2.05 crore will be exempt. If the
new house was sold after 18 months for ` 5 crore, then, short term capital gain
chargeable to tax would be –

Particulars `
Net Consideration 5,00,00,000
Less: Cost of acquisition minus capital gains exempt earlier
(` 3,00,00,000 – ` 2,05,00,000) 95,00,000
Short term capital gains chargeable to tax 4,05,00,000

ILLUSTRATION 19

Mr. Cee purchased a residential house on July 20, 2023 for ` 10,00,000 and made some
additions to the house incurring ` 2,00,000 in August 2023. He sold the house property in

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April, 2025 for ` 20,00,000. Out of the sale proceeds, he spent ` 5,00,000 to purchase
another house property in September, 2025.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y. 2026-27?
SOLUTION
The house is sold before 24 months from the date of purchase. Hence, the house is a short-
term capital asset and no benefit of indexation would be available.
Particulars `
Sale consideration 20,00,000
Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Short-term capital gains 8,00,000

Note: The exemption of capital gains under section 54 is available only in case of long -term
capital asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption
under section 54. Thus, the amount of taxable short-term capital gains is ` 8,00,000.
(ii) Capital Gains on transfer of agricultural land [Section 54B]
Eligible assessee – Individual & HUF
Conditions to be fulfilled
• There should be a transfer of urban agricultural land.
• Such land must have been used for agricultural purposes by the assessee, being an
individual or his parent, or a HUF in the 2 years immediately preceding the date of
transfer.
• He should purchase another agricultural land (urban or rural) within 2 years from the
date of transfer.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) and (ix) of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and
the amount so deposited shall be deemed to be the cost of new asset.
Quantum of exemption
• If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.
• If cost of new agricultural land < capital gains, capital gains to the extent of cost of
new agricultural land is exempt.

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Examples
1. If the capital gains is ` 3 lakhs and the cost of the new agricultural land is ` 4 lakhs,
then the entire capital gains of ` 3 lakhs is exempt.
2. If capital gains is ` 3 lakhs and cost of new agricultural land is ` 2 lakhs, then capital
gains is exempt only upto ` 2 lakhs.

Consequences of transfer of new agricultural land before 3 years

• If the new agricultural land is transferred before 3 years from the date of its
acquisition, then cost of the land will be reduced by capital gains exempted earlier
for computing capital gains of new agricultural land.
• However, if the new agricultural land is a rural agricultural land, there would be no
capital gains on transfer of such land.

• Continuing in the above example, if the new agricultural land (urban land) is sold
after, say, 1 year for ` 6 lakhs, then short-term capital gain chargeable to tax would
be –
Particulars `
Net consideration 6,00,000
Less: Cost of acquisition minus capital gains exempt earlier 1,00,000
(` 4,00,000 – ` 3,00,000)
Short-term capital gains chargeable to tax 5,00,000

(iii) Capital Gains on transfer by way of compulsory acquisition of land and building of an
industrial undertaking [Section 54D]
Eligible assessee – Any assessee
Conditions to be fulfilled
• There must be compulsory acquisition of land and building or any right in land or
building forming part of an industrial undertaking.

• The land and building should have been used by the assessee for purposes of the
business of the industrial undertaking in the 2 years immediately preceding the date
of transfer.
• The assessee must purchase any other land or building or any right in land or
building or construct any building (for shifting or re-establishing the existing

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undertaking or setting up a new industrial undertaking) within 3 years from the date
of transfer.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) and (ix) of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and the
amount so deposited shall be deemed to be the cost of new asset.
Quantum of exemption
• If cost of new asset ≥ Capital gains, entire capital gains is exempt.

• If cost of new asset < Capital gains, capital gains to the extent of cost of new asset is
exempt.

Note: The exemption in respect of capital gains from transfer of capital asset would be
available even in respect of short-term capital asset, being land or building or any right in
any land or building, provided such capital asset is used by assessee for the industrial
undertaking belonging to him, even if he was not the owner for the said period of 2 years.

Consequences of transfer of new asset before 3 years

• If the new asset is transferred before 3 years from the date of its purchase or
construction, then cost of the asset will be reduced by capital gains exempted earlier
for computing capital gains.
ILLUSTRATION 20
PQR Ltd. purchased a land for industrial undertaking in May 2004, at a cost of ` 3,50,000.
The above property was compulsorily acquired by the State Government at a compensation
of ` 13,00,000 in the month of January, 2026. The compensation was received in February,
2026. The company purchased another land for its industrial undertaking at a cost of
` 2,00,000 in the month of March, 2026. What is the amount of the capital gains chargeable
to tax in the hands of the company for the A.Y. 2026-27?
Financial year Cost Inflation Index
2004-05 113
2025-26 376

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SOLUTION
Computation of capital gains in the hands of PQR Ltd. for the A.Y.2026-27
Particulars `
Sale proceeds (Compensation received) 13,00,000
Less: Cost of acquisition 3,50,000
9,50,000
Less: Exemption under section 54D (Cost of acquisition of land for its 2,00,000
undertaking)
Taxable long-term capital gain 7,50,000

(iv) Capital Gains not chargeable on investment in certain bonds [Section 54EC]
Eligible assessee – Any assessee
Conditions to be fulfilled
• There should be transfer of a long-term capital asset being land or building or both.
• Such asset can also be a depreciable asset being a building held for more than 24
months. [CIT v. Dempo Company Ltd (2016) 387 ITR 354 (SC)]
• The capital gains arising from such transfer should be invested in a long-term
specified asset within 6 months from the date of transfer.

• Long-term specified asset means specified bonds, redeemable after 5 years, issued
on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural
Electrification Corporation Limited (RECL) or any other bond notified by the Central
Government in this behalf [Bonds of Power Finance Corporation (PFC), Indian
Railways Finance Corporation (IRFC)]. Bonds, redeemable after 5 years, issued on
or after 1.4.2025 by Housing and Urban Development Corporation Limited (HUDCO)
and bonds, redeemable after 5 years, issued on or after 9.7.2025 by the Indian
Renewable Energy Development Agency (IREDA) are also specified by the Central
Government for this purpose.

• The assessee should not transfer or convert or avail loan or advance on the security
of such bonds for a period of 5 years from the date of acquisition of such bonds.

Note - In case of conversion of capital asset into stock in trade and subsequent sale
of stock in trade - Period of 6 months to be reckoned from the date of sale of stock in trade
for the purpose of section 54EC exemption [CBDT Circular No.791 dated 2-6-2000].

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Quantum of exemption

Capital gains or amount invested in specified bonds, whichever is lower.

Ceiling limit for investment in long-term specified asset

The maximum investment which can be made in notified bonds or bonds of NHAI and
RECL, out of capital gains arising from transfer of one or more assets, during the previous
year in which the original asset is transferred and in the subsequent financial year cannot
exceed ` 50 lakhs.

Violation of condition

In case of transfer or conversion of such bonds or availing loan or advance on security of

such bonds before the expiry of 5 years, the capital gain exempted earlier shall be taxed as
long-term capital gain in the year of violation of condition.

ILLUSTRATION 21

Long-term capital gain of ` 75 lakh arising from transfer of building on 1.5.2025 will be fully
exempt from tax if such capital gain is invested in the bonds redeemable after five years,
issued by NHAI under section 54EC. Examine with reasons whether the given statement is
true or false having regard to the provisions of the Income-tax Act, 1961.

SOLUTION

False: The exemption under section 54EC has been restricted, by limiting the maximum
investment in long term specified assets (i.e., bonds of NHAI or RECL or any other bond
notified by Central Government in this behalf, redeemable after 5 years) to ` 50 lakh,
whether such investment is made during the relevant previous year or the subsequent
previous year, or both. Therefore, in this case, the exemption under section 54EC can be
availed only to the extent of ` 50 lakh, provided the investment is made before 1.11.2025
(i.e., within six months from the date of transfer).

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Exemption of Long-term capital gains on sale of residential house

Investment in one or two residential Investment in bonds of NHAI/RECL or

houses, as the case may be, in India any other notified bond

Exemption u/s 54 Exemption u/s 54EC*

Purchase within 1 year before or 2 Investment within 6 months

years after and construction within 3 from the date of transfer
years after the date of transfer

Capital Gains or Cost of new house Capital Gains or amount invested in bonds,
(subject to a maximum of ` 10 crore) whichever is lower, is exempt maximum upto
whichever is lower, is exempt ` 50 lakhs

* Theexemption under section 54EC is available in respect of capital gains on transfer of capital
asset being land or building or both.
(v) Capital gains in cases of investment in residential house [Section 54F]
Eligible assessees: Individuals/ HUF
Conditions to be fulfilled
• There must be transfer of a long-term capital asset, not being a residential house.
• Transfer of plot of land is also eligible for exemption
• The assessee should -
 Purchase one residential house situated in India within a period of 1 year
before or 2 years after the date of transfer; or
 Construct one residential house in India within 3 years from the date of
transfer.

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• If such investment is not made before the date of filing of return of income, then the
net sale consideration has to be deposited under the CGAS [Refer points (viii) and
(ix) of this sub-heading (2)]. However, the net consideration in excess of ` 10 crore
would not be taken into account for the purpose of deposit in CGAS.
• Amount utilised by the assessee for purchase or construction of new asset and the
amount so deposited shall deemed to be the cost of new asset. The deemed cost of
new asset would be restricted to ` 10 crores for the purpose of exemption under
section 54F.
• The assessee should not own more than one residential house on the date of
transfer.
• The assessee should not –
 purchase any other residential house within a period of 2 years or
 construct any other residential house within a period of 3 years
from the date of transfer of the original asset.
Quantum of exemption
• If cost of new residential house ≥ Net sale consideration of original asset, entire
capital gains is exempt.
• If cost of new residential house < Net sale consideration of original asset, only
proportionate capital gains is exempt i.e.
Amount invested in new residential house
LTCG×
Net sale consideration
However, if the cost of new residential house/ amount invested in new residential house
exceeds ` 10 crore, the amount exceeding ` 10 crore would not be taken into account for
exemption.
Example
(1) (2) (3) (4) (5)
Net LTCG Cost of Amount in Exempt LTCG
Consider- computed new column (3) or
ation residential ` 10 crores,
house whichever is
lower
(1) ` 15 crore ` 7.5 crore ` 12 crore ` 10 crore ` 7.5 crore x 10/15 = ` 5 crore

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(2) ` 20 crore ` 12 crore ` 15 crore ` 10 crore ` 12 crore x 10/20 = ` 6 crore

(3) ` 16 crore ` 12 crore ` 8 crore ` 8 crore ` 12 crore x 8/16 = ` 6 crore
(4) ` 10 crore ` 6 crore ` 10 crore ` 10 crore ` 6 crore x 10/10 = ` 6 crore
(5) ` 12 crore ` 6 crore ` 12 crore ` 10 crore ` 6 crore x 10/12 = ` 5 crore
Examples
1. If the net consideration is ` 9 crore, the capital gain is ` 4.50 crore and the amount
incurred for construction of new residential house upto 31.7.2026/31.10.2026, as the
case may be, is ` 5 crore, then, as per section 54F(4), the assessee can deposit the
amount of ` 4 crore (i.e., ` 9 crore – ` 5 crore) not appropriated towards construction
upto 31.7.2026/ 31.10.2026, as the case may be, in CGAS for claiming exemption u/s
54F. If the assessee has deposited, say, ` 3 crore on or before 31.7.2026/
31.10.2026, as the case may be, the deemed cost of new residential house would be
` 8 crore (` 5 crore + ` 3 crore). The exemption u/s 54F would be ` 4 crore [i.e.,
` 4.50 crore x ` 8 crore/` 9 crore].
2. If the net consideration is ` 15 crore, the capital gain is ` 7.50 crore and the amount
incurred for construction of new residential house upto 31.7.2026/31.10.2026, as the
case may be, is ` 6 crore, the assessee can deposit ` 4 crore [i.e., ` 10 crore – ` 6
crore] on or before 31.7.2026/31.10.2026, as the case may be, in CGAS for claiming
exemption u/s 54F. If the assessee has deposited, say, ` 3 crore on or before the due
date of filing return u/s 139(1), the deemed cost of new residential house would be ` 9
crore (` 6 crore + ` 3 crore). The exemption u/s 54F would be ` 4.50 crore [i.e.,
` 7.50 crore x ` 9 crore/` 15crore].
ILLUSTRATION 22
From the following particulars, compute the taxable capital gains of Mr. D for A.Y.2026-27 -
Particulars Amount (`)
Cost of jewellery [Purchased in F.Y.2005-06] 4,52,000
Sale price of jewellery sold in June 2025 14,50,000
Expenses on transfer 7,000
Residential house purchased in March 2026 5,00,000

The Cost Inflation Index are as follows:

Financial Year Cost Inflation Index
2005-06 117
2025-26 376

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SOLUTION
Computation of taxable capital gains for A.Y.2026-27
Particulars `
Gross consideration 14,50,000
Less: Expenses on transfer 7,000
Net consideration 14,43,000
Less: Cost of acquisition 4,52,000
9,91,000
Less: Exemption under section 54F (` 9,91,000 × ` 5,00,000/` 14,43,000) 3,43,382
Taxable long-term capital gains 6,47,618

Consequences if the new house is transferred within 3 years from the date of its
purchase

If the new asset is transferred before the expiry of 3 years from the date of its purchase or
construction, as the case may be, then capital gains arises on transfer of the new house
and the capital gains exempted earlier under section 54F would be taxable as long-term
capital gains.

Note – In case the new residential house is sold after 2 years, the capital gains would be long-
term capital gains and indexation benefit would be available.

Consequences where assessee purchases any other residential house within 2 years
or constructs within 3 years from the date of transfer of original asset
The capital gain exempted earlier under section 54F would be deemed to be long-term
capital gains and chargeable to tax in the previous year in which such residential house is
purchased or constructed.
(vi) Exemption of capital gains for shifting of industrial undertaking from urban areas
[Section 54G]

Eligible assessees: Any assessee

Conditions to be fulfilled
• There should be a shifting of the industrial undertaking from an urban area to any
other area other than an urban area.

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• There should be a transfer of machinery, plant, building or land or any right in

building or land used for the business of an industrial undertaking situated in an
urban area.
• Such transfer should be in the course of, or in consequence of, shifting the industrial
undertaking from an urban area to any other area other than an urban area.
• The capital gain (short-term or long-term) should be utilised for any of the following
purposes within 1 year before or 3 years after the date of transfer –
 purchase of new plant and machinery for the purposes of business of the
industrial undertaking in the area to which the said undertaking is shifted;
 acquisition of building or land or construction of building for the purposes of
his business in the said area;

 shifted the original asset and transferred the establishment of such industrial
undertaking from the urban area to the other area;
 incurred expenses on such other purpose as may be specified in a scheme
framed by the Central Government.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS. [Refer points (viii) at the end of
this sub-heading (2)]. Amount utilised by the assessee for purchase of new asset
and expenses of shifting and the amount so deposited shall be deemed to be the
cost of new asset.
Quantum of exemption
• If cost of new assets plus expenses incurred for the specified purpose ≥ Capital
gains, entire capital gains (short-term or long-term) is exempt.
• If cost of new assets plus expenses incurred for the specified purpose < Capital
gains, capital gains (short-term or long-term) to the extent of such cost and expenses
is exempt.

Consequences if the new asset is transferred within a period of 3 years

If the new asset is transferred within a period of 3 years of its purchase or construction,
then the capital gain, which was exempt earlier under section 54G would be deducted from
the cost of acquisition of the new asset for the purpose of computation of capital gains in
respect of the transfer of the new asset.

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(vii) Exemption of capital gains on transfer of certain capital assets in case of shifting of
an industrial undertaking from an urban area to any SEZ [Section 54GA]
Eligible assesses – Any assessee
Conditions to be fulfilled
• There must be transfer of capital assets
• Such transfer must be effected in the course of, or in consequence of the shifting of
an industrial undertaking from an urban area to any SEZ, whether developed in an
urban area or not.

• The capital asset should be either machinery or plant or building or land or any rights
in building or land used for the purposes of the business of an industrial undertaking
situated in an urban area.

• The assessee should, within a period of 1 year before or 3 years after the date of
transfer,
 purchase machinery or plant for the purposes of business of the industrial
undertaking in the SEZ;
 acquire building or land or construct building for the purposes of his business
in the SEZ;

 shifted the original asset and transferred the establishment of such industrial
undertaking from the urban area to the SEZ; and
 incurred expenses for such other purposes as may be specified in a scheme
framed by the Central Government.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) at the end of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and
expenses of shifting and the amount so deposited shall be deemed to be the cost of
new asset.
Quantum of exemption
• If cost of new assets plus expenses incurred for shifting ≥ Capital gains, entire
capital gains (short-term or long-term) is exempt.
• If cost of new assets plus expenses incurred for shifting < Capital gains, capital gains
(short-term or long-term) to the extent of such cost and expenses is exempt.

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Consequences if the new asset is transferred within a period of 3 years

• If the new asset is transferred within a period of 3 years of its purchase or
construction, then the capital gain, which was exempt earlier under section 54G A
would be deducted from the cost of acquisition of the new asset for the purpose of
computation of capital gains in respect of the transfer of the new asset.
(viii) Capital Gains Account Scheme (CGAS)
Under sections 54, 54B, 54D, 54F, 54G and 54GA, capital gains is exempt to the extent of
investment of such gains/ net consideration (in the case of section 54F) in specified assets
within the specified time. If such investment is not made before the date of filing of return of
income, then the capital gain or net consideration (in case of exemption under section 54F)
has to be deposited under the CGAS. However, the capital gain in excess of ` 10 crore
would not be taken into account for the purpose of deposit in CGAS in case of section 54
and the net consideration in excess of ` 10 crore would not be taken into account for the
purpose of deposit in CGAS in case of section 54F.
Time limit
Such deposit in CGAS should be made before filing the return of income or on or before the
due date of filing the return of income, whichever is earlier. In such cases, the amount
already utilized for purchase or construction of new asset plus the amount deposited under
the CGAS on or before due date u/s 139(1) would be deemed to be the cost of new asset.
However, for the purpose of sections 54 and 54F, the amount so deemed to be the cost of
the new asset cannot exceed ` 10 crore.
Proof of such deposit should be attached with the return. The deposit can be withdrawn for
utilization for the specified purposes in accordance with the scheme.
Consequences if the amount deposited in CGAS is not utilized within the stipulated
time of 2 years / 3 years
If the amount deposited is not utilized for the specified purpose within the stipulated period,
then the unutilized amount shall be charged as capital gain of the previous year in
which the specified period expires. In the case of section 54F and 54GB, proportionate
amount will be taxable.
CBDT Circular No.743 dated 6.5.96 clarifies that in the event of death of an individual
before the stipulated period, the unutilized amount is not chargeable to tax in the hands of
the legal heirs of the deceased individual. Such unutilized amount is not income but is a
part of the estate devolving upon them.

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(ix) Extension of time for acquiring new asset or depositing or investing amount of
Capital Gain [Section 54H]
In case of compulsory acquisition of the original asset, where the compensation is not
received on the date of transfer, the period available for acquiring a new asset or making
investment in CGAS under sections 54, 54B, 54D, 54EC and 54F would be considered from
the date of receipt of such compensation and not from the date of the transfer.

4.21 REFERENCE TO VALUATION OFFICER [SECTION

55A]
Section 55A provides that the Assessing Officer may refer the valuation of a capital asset to a
Valuation Officer in the following circumstances with a view to ascertaining the fair market value of
the capital asset for the purposes of capital gains -

(i) In a case where the value of the asset as claimed by the assessee is in accordance with the
estimate made by a registered valuer, if the Assessing Officer is of the opinion that the
value so claimed is at variance with its fair market value.

Under this provision, the Assessing Officer can make a reference to the Valuation Officer in
cases where the fair market value is taken to be the sale consideration of the asset. An
Assessing Officer can also make a reference to the Valuation Officer in a case where the
fair market value of the asset as on 01.04.2001 is taken as the cost of the asset, if he is of
the view that there is any variation between the value as on 01.04. 2001 claimed by the
assessee in accordance with the estimate made by a registered valuer and the fair market
value of the asset on that date.

(ii) If the Assessing Officer is of the opinion that the fair market value of the asset exceeds the
value of the asset as claimed by the assessee by more than 15% of the value of asset as so
claimed or by more than ` 25,000.

(iii) The Assessing Officer is of the opinion that, having regard to the nature of asset and other
relevant circumstances, it is necessary to make the reference.

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4.22 TAX ON SHORT TERM CAPITAL GAINS IN RESPECT

OF EQUITY SHARES/ UNITS OF AN EQUITY
ORIENTED FUND/ UNITS OF A BUSINESS TRUST
[SECTION 111A]
(1) Applicability of concessional rate of tax: This section provides for a concessional rate of
tax on the short-term capital gains on transfer of -
(i) an equity share in a company or
(ii) a unit of an equity oriented fund or
(iii) a unit of a business trust.

(2) Concessional rate of tax in respect of STCG on transfer of certain assets: The
concessional rate of tax on the short-term capital in respect of transfer of above-mentioned
assets is 20%

(3) Conditions: The conditions for availing the benefit of this concessional rate are –
(i) the transaction of sale of such equity share or unit should be entered into on or after
1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act, 2004
came into force; and
(ii) such transaction should be chargeable to securities transaction tax under the said
Chapter.

However, short-term capital gains arising from transactions undertaken in foreign currency
on a recognized stock exchange located in an International Financial Services Centre
(IFSC) would be taxable at a concessional rate of 20%, even though STT is not leviable in
respect of such transaction.
(4) Adjustment of Unexhausted Basic Exemption Limit: In the case of resident individuals
or HUF, if the basic exemption is not fully exhausted by any other income, then, such short -
term capital gain will be reduced by the unexhausted basic exemption limit and only the
balance would be taxed at 20%. However, the benefit of availing the basic exemption limit is
not available in the case of non-residents.

(5) No deduction under Chapter VI-A against STCG taxable under section 111A:
Deductions under Chapter VI-A cannot be availed in respect of such short-term capital

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gains on equity shares of a company or units of an equity oriented fund or unit of a

business trust included in the total income of the assessee.

4.23 TAX ON LONG TERM CAPITAL GAINS [SECTION 112]

(1) Concessional rate of tax: Long term capital gains on transfer of all long-term capital
assets (other than referred to in u/s 112A) would be taxable 12.5%.

However, in case of an individual or HUF, being a resident in India, capital gains arising on
transfer of long-term capital asset, being land or building or both if acquired before
23.7.2024 would be taxable –

- @ 12.5% without indexation; or

- @ 20% with indexation

whichever is beneficial.

Further, in case of non-residents, LTCG on transfer of unlisted securities, or shares of a

closely held company, would be taxable @12.5% without foreign currency fluctuation.

Important Points to remember –

(1) For Individuals or HUF (Residents): In the case of resident individuals or HUF, if
the basic exemption is not fully exhausted by any other income, then, such long -term
capital gain will be reduced by the unexhausted basic exemption limit. However, the
benefit of adjustment of unexhausted basic exemption limit is not available in the
case of non-residents.

(2) Non-Residents and Foreign Companies: Long-term capital gains from the transfer
of listed shares (other than listed equity shares covered u/s 112A) or debentures of
an Indian company (acquired in foreign currency) will be taxed at 12.5% with foreign
currency fluctuation adjustments.

(3) No Chapter VI-A deduction against LTCG: The provisions of section 112 make it
clear that the deductions under Chapter VIA cannot be availed in respect of the long -
term capital gains included in the total income of the assessee.

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4.24 TAX ON LONG TERM CAPITAL GAINS ON CERTAIN

ASSETS [SECTION 112A]
(1) Applicability of concessional rate of tax: Section 112A provides that notwithstanding
anything contained in section 112, a concessional rate of tax of 12.5% will be leviable on
the long-term capital gains exceeding ` 1,25,000 on transfer of –

(a) an equity share in a company or

(b) a unit of an equity oriented fund or
(c) a unit of a business trust.

(2) Conditions: The conditions for availing the benefit of this concessional rate are–
(a) In case of equity share in a company, STT has been paid on acquisition and transfer
of such capital asset
(b) In case of unit of an equity oriented fund or unit of business trust, STT has been paid
on transfer of such capital asset.
However, the Central Government may, by notification in the Official Gazette, specify the
nature of acquisition of equity share in a company on which the condition of payment of
STT on acquisition would not be applicable.
Accordingly, the Central Government has, vide notification No. 60/2018, dated 1 st October,
2018, notified that the condition of chargeability of STT shall not apply to the acquisition of
equity shares entered into
- before 1 st October, 2004 or

- on or after 1 st October, 2004 which are not chargeable to STT, other than the
following transactions.
In effect, only in respect of the following transactions mentioned in column (2), the
requirement of paying STT at the time of acquisition for availing the benefit of concessional
rate of tax under section 112A would apply. In may be noted that the exceptions are listed
in column (3) against the transaction. The requirement of payment of STT at the time of
acquisition for availing benefit of concessional tax rate under section 112A will not apply to
acquisition transactions mentioned in column (3).

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(1) (2) (3)

Transaction Non-applicability of condition of chargeability of STT
(a) Where acquisition Where acquisition of listed equity share in a company –
of existing listed
(i) has been approved by the Supreme Court, High
equity share in a
Court, National Company Law Tribunal, Securities
company whose
and Exchange Board of India or Reserve Bank of
equity shares are
India in this behalf;
not frequently
traded in a (ii) is by any non-resident in accordance with foreign direct
recognised stock investment guidelines issued by the Government of
exchange of India India;
is made through a
(iii) is by an investment fund referred to in clause (a) of
preferential issue
Explanation 1 to section 115UB or a venture capital
fund referred to in section 10(23FB) or a Qualified
Institutional Buyer;
(iv) is through preferential issue to which the provisions of
chapter VII of the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 does not apply.
(b) Where transaction Following acquisitions of listed equity share in a company
for acquisition of made in accordance with the provisions of the Securities
existing listed Contracts (Regulation) Act, 1956:
equity share in a
(i) acquisition through an issue of share by a company
company is not
other than through preferential issue referred to in (a);
entered through a
recognised stock (ii) acquisition by scheduled banks, reconstruction or
exchange in India securitisation companies or public financial institutions
during their ordinary course of business;
(iii) acquisition approved by the Supreme Court, High
Courts, National Company Law Tribunal, Securities and
Exchange Board of India or Reserve Bank of India in this
behalf;
(iv) acquisition under employee stock option scheme or
employee stock purchase scheme framed under the
Securities and Exchange Board of India (Employee
Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines,1999;
(v) acquisition by any non-resident in accordance with
foreign direct investment guidelines of the
Government of India;

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(vi) acquisition in accordance with Securities and

Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulation, 2011;
(vii) acquisition from the Government;
(viii) acquisition by an investment fund referred to in clause
(a) to Explanation 1 to section 115UB or a venture
capital fund referred to in section 10(23FB) or a
Qualified Institutional Buyer;
(ix) acquisition by mode of transfer referred to in section
47 (e.g., transfer of capital asset under a gift, an
irrevocable trust, transfer of capital asset between
holding company and its subsidiary, transfer pursuant
to amalgamation, demerger, etc.) or section 50B
(slump sale) or section 45(3) (Introduction of capital
asset as capital contribution in firm/ AOPs/ BOIs) or
section 45(4) (Tax implications on receipt of money or
capital assets or both on reconstitution of firm/AOP or
BOI) of the Income-tax Act, if the previous owner or
the transferor, as the case may be, of such shares
has not acquired them by any mode referred to in (a),
(b) or (c) listed in column (2) [other than the
exceptions listed in column (3)]
(c) acquisition of equity share of a company during the period beginning from the date
on which the company is delisted from a recognised stock exchange and ending on
the date immediately preceding the date on which the company is again listed on a
recognised stock exchange in accordance with the Securities Contracts
(Regulation) Act, 1956 read with SEBI Act,1992 and the rules made thereunder.

Further, long-term capital gains arising from transaction undertaken on a recognized stock
exchange located in an International Financial Service Centre (IFSC) would be taxable at a
concessional rate of 12.5%, where the consideration for transfer is received or receivable in
foreign currency, even though STT is not leviable in respect of such transaction.

(3) Adjustment of Unexhausted Basic Exemption Limit: In the case of resident individuals
or HUF, if the basic exemption is not fully exhausted by any other income, then such long -
term capital gain exceeding ` 1,25,000 will be reduced by the unexhausted basic exemption
limit and only the balance would be taxed at 12.5%.

However, the benefit of adjustment of unexhausted basic exemption limit is not available in
the case of non-residents. It is also not available in case of resident AOPs and BOIs.

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(4) No deduction under Chapter VI-A against LTCG taxable under section 112A:
Deductions under Chapter VI-A cannot be availed in respect of such long-term capital gains
on equity shares of a company or units of an equity oriented fund or unit of a business trust
included in the total income of the assessee.

(5) No benefit of rebate under section 87A against LTCG taxable under section 112A: In
case the assessee opts out of the default tax regime, rebate under section 87A is not available
in respect of tax payable @12.5% on LTCG under section 112A.

Subsequent to insertion of section 112A, the CBDT has issued clarification F. No.
370149/20/2018-TPL dated 04.02.2018 in the form of a Question and Answer format to clarify
certain issues raised in different fora on various issues relating to the new tax regime for taxation
of long-term capital gains. The relevant questions raised and answers to such questions as per the
said Circular are given hereunder. [Answers to certain questions have been revised to reflect the
latest position of law]:
Q 1. What is the meaning of long term capital gains under the new tax regime for long
term capital gains?
Ans 1. Long term capital gains mean gains arising from the transfer of long -term capital asset.
It provides for a new long-term capital gains tax regime for the following assets –
(i). Equity Shares in a company listed on a recognised stock exchange;
(ii). Unit of an equity oriented fund; and
(iii). Unit of a business trust.
The concessional tax rate u/s 112A applies to the above assets, if–
a. the assets mentioned are held for a period of “more than 12 months” from the date of
acquisition; and
b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the
case of equity shares acquired after 1.10.2004, STT is required to be paid even at
the time of acquisition (subject to notified exemptions).
Q 2. What is the point of chargeability of the tax?
Ans 2. The tax will be levied only upon transfer of the long-term capital asset on or after 1st April,
2018, as defined in section 2(47) of the Act.

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Q 3. What is the method for calculation of long-term capital gains?

Ans 3. The long-term capital gains will be computed by deducting the cost of acquisition from the
full value of consideration on transfer of the long-term capital asset.
Q 4. How do we determine the cost of acquisition for assets acquired on or before 31st
January, 2018?
Ans 4. The cost of acquisition for the long-term capital asset acquired on or before 31st January,
2018 will be the actual cost.
However, if the actual cost is less than the fair market value of such asset as on 31st
January, 2018, the fair market value will be deemed to be the cost of acquisition.
Further, if the full value of consideration on transfer is less than the fair market value, then
such full value of consideration or the actual cost, whichever is higher, will be deemed to be
the cost of acquisition.
Q 5. Please provide illustrations for computing long-term capital gains in different
scenarios, in the light of answer to question 4.
Ans 5. The computation of long-term capital gains in different scenarios is illustrated as under
Scenario 1 – An equity share is acquired on 1 st January, 2017 at ` 100, its fair market
value is ` 200 on 31 st January, 2018 and it is sold on 1st April, 2025 at ` 250. As the actual
cost of acquisition is less than the fair market value as on 31 st January, 2018, the fair
market value of ` 200 will be taken as the cost of acquisition and the long-term capital gain
will be ` 50 (` 250 – ` 200).
Scenario 2 – An equity share is acquired on 1 st January, 2017 at ` 100, its fair market
value is ` 200 on 31st January, 2018 and it is sold on 1st April, 2025 at ` 150. In this case,
the actual cost of acquisition is less than the fair market value as on 31 st January, 2018.
However, the sale value is also less than the fair market value as on 31 st January, 2018.
Accordingly, the sale value of ` 150 will be taken as the cost of acquisition and the long-
term capital gain will be NIL (` 150 – ` 150).
Scenario 3 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market
value is ` 50 on 31st January, 2018 and it is sold on 1st April, 2024 at ` 150. In this case,
the fair market value as on 31 st January, 2018 is less than the actual cost of acquisition,
and therefore, the actual cost of ` 100 will be taken as actual cost of acquisition and the
long-term capital gain will be ` 50 (` 150 – ` 100).
Scenario 4 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market value
is ` 200 on 31st January, 2018 and it is sold on 1st April, 2025 at ` 50. In this case, the actual
cost of acquisition is less than the fair market value as on 31 st January, 2018. The sale value

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is less than the fair market value as on 31 st January, 2018 and also the actual cost of
acquisition. Therefore, the actual cost of ` 100 will be taken as the cost of acquisition in this
case. Hence, the long-term capital loss will be ` 50 (` 50 – ` 100) in this case.
Q 6. What will be the tax treatment of transfer made on or after 1st April 2018?
Ans 6. The long-term capital gains exceeding ` 1,25,000 arising from transfer of listed equity
shares/ units of equity oriented fund/business trust on or after 1st April, 2018 will be taxed at
12.5%. However, there will be no tax on gains accrued upto 31 st January, 2018.
Q 7. What is the date from which the holding period will be counted?
Ans 7. The holding period will be counted from the date of acquisition.
Q 8. Whether tax will be deducted at source in case of gains by resident tax payer?
Ans 8. No. There will be no deduction of tax at source from the payment of long -term capital gains
to a resident tax payer.
Q 9. What will be the cost of acquisition in the case of bonus shares acquired before
1st February 2018?
Ans 9. The cost of acquisition of bonus shares acquired before 31 st January, 2018 will be
determined as per section 55(2)(ac). Therefore, the fair market value of the bonus shares as
on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations
explained in Ans 5), and hence, the gains accrued upto 31 st January, 2018 will continue to
be exempt5.
Q 10. What will be the cost of acquisition in the case of right share acquired before 1st
February 2018?
Ans 10. The cost of acquisition of right share acquired before 31st January, 2018 will be
determined as per section 55(2)(ac). Therefore, the fair market value of right share as on
31st January, 2018 will be taken as cost of acquisition (except in some typical situations
explained in Ans 5), and hence, the gains accrued upto 31 st January, 2018 will continue to
be exempt.
Q 11. What will be the treatment of long-term capital loss arising from transfer made on or
after 1st April, 2018?
Ans 11. Long-term capital loss arising from transfer made on or after 1 st April, 2018 will be allowed
to be set-off and carried forward in accordance with existing provisions of the Act.

5Subject to the notification issued by the Central Government to specify the nature of acquisition of equity
share in a company on which the condition of payment of STT on acquisition would not be applicable.

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Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss
can be carried forward to subsequent eight years for set-off against long-term capital gains.

ILLUSTRATION 23
Calculate the income-tax liability for the assessment year 2026-27 in the following cases:
Mr. A Mrs. B Mr. C Mr. D
(age 45) (age 62) (age 81) (age 82)
Status Non-resident Non-resident Resident Non-
resident
Total income other than 2,40,000 4,10,000 5,90,000 4,80,000
long-term capital gain
Long-term capital gain 85,000 10,000 60,000 Nil
from sale of from sale of listed from sale of
vacant site equity shares (STT agricultural
paid on sale and land in rural
purchase of shares) area

(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax regime
and pay tax under the optional tax regime as per the normal provisions of the Act.
SOLUTION
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC
Computation of income-tax liability for the A.Y.2026-27
Particulars Mr. A Mrs. B Mr. C Mr. D
(age 45) (age 62) (age 81) (age 82)
Residential Status Non-resident Non-resident Resident Non-resident
Applicable basic ` 4,00,000 ` 4,00,000 ` 4,00,000 ` 4,00,000
exemption limit
Asset sold Vacant site Listed equity Rural -
shares (STT paid agricultural
on both sale and land
purchase of shares)
Long-term capital gain ` 85,000 ` 10,000 ` 60,000 -
(on sale of above asset) [Taxable [exempt u/s 112A (Exempt –not
@12.5% u/s since it is less than a capital
112] ` 1,25,000] asset)
Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000

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Tax liability
On LTCG ` 10,625 - - -
On Other income Nil ` 500 ` 9,500 ` 4,000
` 10,625 ` 500 ` 9,500 ` 4,000
Less: Rebate u/s 87A - - ` 9,500 -
` 10,625 ` 500 Nil ` 4,000
Add: Health & education ` 425 ` 20 Nil ` 160
cess (HEC) @4%
Total tax liability ` 11,050 ` 520 Nil ` 4,160

Note: Since Mr. C is a resident whose total income does not exceed ` 12 lakhs, he is eligible for
rebate of ` 60,000 or the actual tax payable, whichever is lower, under section 87A.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax
regime and pay tax under the optional tax regime as per the normal provisions of the
Act
Computation of income-tax liability for the A.Y.2026-27
Particulars Mr. A Mrs. B Mr. C Mr. D
(age 45) (age 62) (age 81) (age 82)
Residential Status Non-resident Non-resident Resident Non-resident
Applicable basic ` 2,50,000 ` 2,50,000 ` 5,00,000 ` 2,50,000
exemption limit
Asset sold Vacant site Listed equity shares Rural agricultural -
(STT paid on both land
sale and purchase
of shares)
Long-term capital ` 85,000 ` 10,000 ` 60,000 -
gain (on sale of [Taxable [exempt u/s 112A (Exempt –not a
above asset) @12.5% u/s since it is less than capital asset)
112] ` 1,25,000]
Other income ` 2,40,000 ` 4,10,000 ` 5,90,000 ` 4,80,000
Tax liability
On LTCG ` 10,625 - - -
On Other income Nil ` 8,000 ` 18,000 ` 11,500
` 10,625 ` 8,000 ` 18,000 ` 11,500
Less: Rebate u/s - - - -
87A
` 10,625 ` 8,000 ` 18,000 ` 11,500

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Add: Health & ` 425 ` 320 ` 720 ` 460

education cess (HEC)
@4%
Total tax liability ` 11,050 ` 8,320 ` 18,720 ` 11,960
Notes:
Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of
` 3,00,000 and ` 5,00,000 for persons over the age of 60 years and 80 years, respectively. Also,
they along with Mr. A, being non-residents are not eligible for rebate under section 87A even
though their total income does not exceed ` 5 lakh.

4.25 SURPLUS ON SALE OF SHARES AND SECURITIES -

WHETHER TAXABLE AS CAPITAL GAINS OR
BUSINESS INCOME? [CIRCULAR NO. 06/2016,
DATED 29-2-2016]
Section 2(14) defines the term "capital asset" to include property of any kind held by an assessee,
whether or not connected with his business or profession, but does not include any stock -in-trade
or personal assets subject to certain exceptions. As regards shares and other securities, the same
can be held either as capital assets or stock-in-trade/trading assets or both.
Determination of the character of a particular investment in shares or other securities, whether the
same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination
and has led to a lot of uncertainty and litigation in the past.
Parameters laid down by CBDT and Courts to distinguish shares held as investments and
shares held as stock in trade
Over the years, the courts have laid down different parameters to distinguish the shares held as
investments from the shares held as stock-in-trade. The CBDT has also, through Instruction
No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the
said principles for guidance of the field formations.
Principles to determine whether gains on sale of listed shares and other securities would
constitute capital gains or business income
Disputes, however, continue to exist on the application of these principles to the facts of an
individual case since the taxpayers find it difficult to prove the intention in acquiring such
shares/securities. In this background, while recognizing that no universal principle in absolute

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terms can be laid down to decide the character of income from sale of shares and securities (i.e.
whether the same is in the nature of capital gain or business income), CBDT realizing that major
part of shares/securities transactions takes place in respect of the listed ones and with a view to
reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars,
further instructs the Assessing Officers to take into account the following while deciding whether
the surplus generated from sale of listed shares or other securities would be treated as Capital
Gain or Business Income—
a) Where assessee opts to treat such shares and securities as stock-in-trade: Where the
assessee itself, irrespective of the period of holding the listed shares and securities, opts to
treat them as stock-in-trade, the income arising from transfer of such shares/securities
would be treated as its business income,

b) Listed shares and securities held for a period of more than 12 months: In respect of
listed shares and securities held for a period of more than 12 months immediately
preceding the date of its transfer, if the assessee desires to treat the income arising from
the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing
Officer. However, this stand, once taken by the assessee in a particular Assessment Year,
shall remain applicable in subsequent Assessment Years also and the ta xpayers shall not
be allowed to adopt a different/contrary stand in this regard in subsequent years ;
c) Other cases: In all other cases, the nature of transaction (i.e. whether the same is in the
nature of capital gain or business income) shall continue to be decided keeping in view the
aforesaid Circulars issued by the CBDT.
Principles listed above not to apply in case of sham transactions
It is, however, clarified that the above shall not apply in respect of such transactions in
shares/securities where the genuineness of the transaction itself is questionable, such as bogus
claims of Long-term Capital Gain/Short Term Capital Loss or any other sham transactions.
Objective of formulation of principles: Reducing litigation and ensuring consistency
It is reiterated that the above principles have been formulated with the sole objective of reducing
litigation and maintaining consistency in approach on the issue of treatment of income derived
from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply
on the transactions involving transfer of shares and securities.

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SIGNIFICANT SELECT CASES

[Link]. Case Law
1. PCIT and another vs Jupiter Capital Pvt. Ltd. [2025] 472 ITR 616 (SC)
Issue Facts, Analysis and Decision
Whether the reduction in Facts of the case: The assessee company held
share capital by a 15,33,40,900 shares, representing 99.88% of total shares of
company, without any an Indian company. That company incurred losses, as a
change in the result of which the net worth of the company got eroded. On
shareholding pattern and petition filed by the Company, the High Court ordered a
face value of shares, reduction in the share capital of the company from
constitutes a "transfer" 15,35,05,750 shares to 10,000 shares. Consequently, the
under section 2(47) in the shareholding of the assessee was reduced proportionately
hands of shareholders? from 15,33,40,900 shares to 9,988 shares. However, the
face value of the shares remained the same at ` 10 even
after the reduction in the share capital. The High Court also
directed the company to pay ` 3,17,83,474 to the assessee
as consideration. The assessee claimed long-term capital
loss accrued on the reduction in share capital. However, the
Assessing Officer and CIT(A) disallowed the assessee's
claim for capital loss, arguing there was no "transfer". The
Tribunal reversed the order passed by CIT (A) and High
Court also affirmed the order passed by the Tribunal.
Analysis: The Apex Court observed that the expression
"extinguishment of any right therein" is of wide import. It
covers every possible transaction which results in the
destruction, annihilation, extinction, termination, cessation or
cancellation, by satisfaction or otherwise, of all or any of the
bundle of rights qualitative or quantitative, which the
assessee has in a capital asset, whether such asset is
corporeal or incorporeal.
In the present case, the face value per share has remained
the same before the reduction of share capital and after the
reduction of share capital. However, as the total number of
shares have been reduced from 15,35,05,750 to 10,000 and
out of this the assessee was holding 15,33,40,900 shares
prior to reduction and 9,988 shares after reduction, it can be
said that on account of reduction in the number of shares,
the assessee has extinguished its right of 15,33,40,900
shares, and in lieu thereof, the assessee received 9,988
shares at ` 10 each along with an amount of ` 3,17,83,474.

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The Supreme Court in the case of Karthikeya V. Sarabhai v.

CIT6 observed that reduction of right in a capital asset would
amount to "transfer" under section 2(47). Sale is only one of
the modes of transfer envisaged by section 2(47).
Relinquishment of any rights in it, which may not amount to
sale, can also be considered as transfer and any profit or
gain which arises from the transfer of such capital asset is
taxable under section 45.
Accordingly, the Apex Court held that reduction in share
capital results in “transfer” under the provisions of the
Income-tax Act, 1961 as there is extinguishment of rights
qua such shares. The capital loss arising on proportionate
reduction in share capital of the company is admissible even
if the overall shareholding of the taxpayer in the company
remains unchanged post reduction.
2. Seshasayee Steels P. Ltd. v. ACIT (2020) 421 ITR 46 (SC)

Issue Analysis & Decision

Can any transaction Any transaction which has the effect of transferring or
which enables the enabling the enjoyment of any immovable property would
enjoyment of immovable come within the of purview u/s 2(47)(vi). Section 2(47)(vi)
property be considered as appears to be to bring within its tax net, a de facto
enjoyment as a purported transfer of any immovable property. The expression
owner thereof for being 'enabling the enjoyment of' takes colour from the earlier
treated as a “transfer” of a expression 'transferring', so that it is clear that any
capital asset u/s 2(47)(vi) transaction which enables the enjoyment of immovable
and levy of tax on capital property must be enjoyment as a purported owner
gains arising therefrom? thereof. The idea is to bring within the tax net, transactions,
where, though title may not be transferred in law, there is, in
substance, a transfer of title in fact.
In this case, the assessee's rights in the immovable property
were extinguished on the receipt of the last cheque. Further,
the compromise deed could be stated to be a transaction
which had the effect of transferring the immovable property
in question. Accordingly, the transaction fell u/s 2(47)(ii) and
(vi). Hence, it is a transfer in relation to the capital asset and
capital gains tax liability would be attracted.

6
[1997] 228 ITR 163

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3. Balakrishnan v. Union of India & Others (2017) 391 ITR 178 (SC)

Issue Analysis & Decision

Would receipt of higher When proceedings were initiated under the Land Acquisition
compensation after Act, 1894, even if the compensation is negotiated and fixed, it
notification of compulsory would continue to remain as compulsory acquisition. Merely
acquisition change the because the compensation amount is agreed upon, the
character of transaction character of acquisition will not change from compulsory
into a voluntary sale, so as
acquisition to a voluntary sale. The claim of exemption from
to deny exemption u/s
capital gains u/s 10(37)(iii) is, therefore, tenable in law.
10(37)(iii)?

4. CIT v. V.S. Dempo Company Ltd (2016) 387 ITR 354 (SC)

Issue Analysis & Decision

In a case where a The assessee cannot be denied exemption u/s 54EC, because
depreciable asset (building) firstly, there is nothing in section 50 to suggest that the fiction
held for more than 24 created therein is not restricted to only sections 48 and 49.
months is transferred, can Secondly, fiction created by the legislature has to be confined
benefit of exemption u/s for the purpose for which is created. Thirdly, section 54EC
54EC be claimed, if the does not make any distinction between depreciable and
capital gains on sale of non-depreciable asset for the purpose of re-investment of
such asset are reinvested capital gains in long term specified assets for availing the
in long-term specified exemption thereunder. Further, section 54EC specifically
assets within the specified provides that when the capital gain arising on the transfer a
time? long-term capital asset (being land or building or both) is
invested or deposited in long-term specified assets, the
assessee shall not be subject to capital gains to that extent.
Therefore, the exemption u/s 54EC cannot be denied to the
assessee on account of the fiction created in section 50.

5. Fibre Boards (P) Ltd v. CIT (2015) 376 ITR 596 (SC)

Issue Analysis & Decision

Can advance given for For the purpose of availing exemption, all that was required for
purchase of land, building, the assessee is to “utilise” the amount of capital gain for
plant and machinery purchase and acquisition of new machinery or plant and
tantamount to utilization of building or land. Since the entire amount of capital gain, in

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capital gain for purchase this case, was utilized by the assessee by way of advance
and acquisition of new for acquisition of land, building, plant and machinery, the
machinery or plant and assessee is entitled to avail exemption/deduction u/s 54G.
building or land, for claim of
exemption u/s 54G?

6. CIT v. Aditya Kumar Jajodia (2018) 407 ITR 107 (Cal)

Issue Analysis & Decision

Can the amount incurred The assessee had inherited the immovable property under a
by the assessee towards will and the costs incurred by him for perfection of the title
perfecting title of property from perpetual leasehold rights to the complete ownership
acquired through will, for had to be regarded as a cost of acquisition within the
making further sale, be meaning of sections 48 and 55, as the assessee was
included in the cost of transferring the complete ownership rights to the transferee,
acquisition for computing and not the leasehold rights.
capital gains?

7. CIT v. Manjula J. Shah (2013) 355 ITR 474 (Bom.)

Issue Decision

Would indexation benefit in The indexed cost of acquisition in case of gifted asset has
respect of the gifted asset to be computed with reference to the year in which the
apply from the year in previous owner first held the asset and not the year in
which the asset was first which the assessee became the owner of the asset.
held by the assessee or
The benefit of indexation can be opted by a resident
from the year in which the
individual or HUF while computing tax liability u/s 112 only
same was first acquired by
for long-term capital assets, being land or building or both
the previous owner?
which are acquired before 23.7.2024.

8. Sakthi Metal Depot v. CIT [2021] 436 ITR 1 (SC)

Issue Analysis & Decision

Would the depreciable The depreciable asset forming a part of block of assets within
asset forming part of block the meaning section 2(11) would not cease to be a part of the
of assets on which block of assets so long as the assessee continued business. In
depreciation is being this case, the building forming part of the block of assets would

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allowed since its retain its character as such, even if one or two of the assets in
acquisition change its the block were not used for the business purposes in the last
character if it is not used couple of years. Consequently, the profits arising on sale of
for business purpose for such asset would be short-term capital gains.
the last two years, to the
effect that gain arising from
its transfer be considered
as long term capital gain
instead of short-term
capital gains?

9. CIT v. Syed Ali Adil (2013) 352 ITR 0418 (A.P.)

CIT v. Ananda Basappa (2009) 309 ITR 329
CIT v. K.G. Rukminiamma (2011) 331 ITR 211

Issue Decision

Would an assessee be The assessee is entitled to investment in both the flats

entitled to exemption under purchased by him, since they were adjacent to each other
section 54 in respect of and had a common meeting point, thus, making it a single
purchase of two flats, residential unit.
adjacent to each other and
Note – Section 54 has been amended by the Finance Act,
having a common meeting
2019 to permit claim of deduction in respect of two residential
point?
houses purchased/constructed, where long-term capital gains
on sale of residential house does not exceed ` 2 crores.
However, this case law will still hold good since the exemption
for investment in two residential houses cannot be availed -
- where long term capital gains > ` 2 crores; and
- where long term capital gains ≤ ` 2 crores and
exemption of acquiring two properties was already
availed once
Even in these cases, the benefit of treating adjacent flats as
one residential house for the purpose of exemption under
section 54 would be available as per this High Court ruling.

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Furthermore, even in cases where long term capital gains ≤

` 2 crores, the benefit of this case law can be availed and
benefit of one time exemption under section 54 can be
deferred and availed at a later point of time.

10. CIT v. Gurnam Singh (2010) 327 ITR 278 (P&H)

Issue Analysis & Decision

Can exemption u/s 54B be The agricultural land sold belonged to the assessee and the
denied solely on the ground sale proceeds were also used for purchasing agricultural land.
that the new agricultural land The possession of the said land was also taken by the
purchased is not wholly assessee. Merely because the assessee’s son was shown
owned by the assessee, as in the sale deed as co-owner, deduction u/s 54B cannot be
the assessee’s son is a co- denied. Therefore, the assessee was entitled to deduction u/s
owner as per the sale deed? 54B.

11. CIT v. Kamal Wahal (2013) 351 ITR 4 (Delhi)

Issue Analysis & Decision

Can exemption u/s 54F be For the purpose of section 54F, a new residential house need not
denied solely on the necessarily be purchased by the assessee in his own name nor is
ground that the new it necessary that it should be purchased exclusively in his name.
residential house is
Having regard to the rule of purposive construction and the
purchased by the assessee
object of enactment of section 54F, the assessee is entitled
exclusively in the name of
to claim exemption u/s 54F in respect of utilization of sale
his wife?
proceeds of capital asset for investment in residential
house property in the name of his wife.

12. CIT v. Ravinder Kumar Arora (2012) 342 ITR 38 (Delhi)

Issue Analysis & Decision

In case of a house property The inclusion of his wife’s name in the sale deed was just to
registered in joint names, avoid any litigation after his death. All the funds invested in
can exemption u/s 54F be the said house were provided by the assessee, including the
allowed fully to the co- stamp duty and corporation tax paid at the time of the
owner who has paid whole registration of the sale deed of the said house. This fact was
of the purchase also clearly evident from the bank statement of the assessee.

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consideration of the house Section 54F mandates that the house should be purchased
property or will it be by the assessee but it does not stipulate that the house
restricted to his share in should be purchased only in the name of the assessee. In
the house property? this case, the house was purchased by the assessee in his name
and his wife's name was also included additionally. Therefore,
the conditions stipulated in section 54F stand fulfilled and the
entire exemption claimed in respect of the purchase price of the
house property shall be allowed to the assessee.

13. CIT v. Sambandam Udaykumar (2012) 345 ITR 389 (Kar.)

Issue Analysis & Decision

Can exemption u/s 54F be The condition precedent for claiming the benefit u/s 54F is that
denied to an assessee in capital gains realized from sale of capital asset should have
respect of investment been invested either in purchasing a residential house or in
made in construction of a constructing a residential house within the stipulated period. If
residential house, on the the assessee has invested the money in the construction of a
ground that the residential house, merely because the construction was not
construction was not completed in all respects and possession could not be taken
completed within 3 years within the stipulated period, would not disentitle him from
after the date on which claiming exemption u/s 54F. In fact, in this case, the assessee
transfer took place, on has taken possession of the residential building and is
account of pendency of living in the said premises despite the pendency of
certain finishing work like flooring work, electricity work, fitting of door and window
flooring, electrical fittings, shutters. Therefore, the assessee is entitled to exemption
fittings of door shutter etc.? u/s 54F in respect of the amount invested in construction
within the prescribed period.

14. Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)

Issue Analysis & Decision

Where the stamp duty When capital gain is assessed on notional basis as per the
value under section 50C provisions of section 50C, and the higher value i.e., the stamp
has been adopted as the duty value under section 50C has been adopted as the full value
full value of consideration, of consideration, the entire amount reinvested in the residential
can the reinvestment house within the prescribed period should be considered for the
made in acquiring a
purpose of exemption under section 54F, irrespective of the
residential property, which
source of funds for such reinvestment.

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is in excess of the actual For eg: if stamp duty value = ` 50 lakh, actual consideration =
net sale consideration, be ` 40 lakh, capital gains = ` 12 lakh, if ` 47 lakh is re-invested in
considered for the residential house, then exemption u/s 54F = ` 12 lakh x ` 47 lakh/
purpose of computation of ` 50 lakh = ` 11.28 lakh (assuming gross and net consideration
exemption under section are same), irrespective of the source of balance ` 7 lakh (` 47
54F, irrespective of the
lakh - ` 40 lakh) over and above actual consideration.
source of funds for such
reinvestment?

15. Hindustan Unilever Ltd. v. DCIT (2010) 325 ITR 102 (Bom.)

Issue Analysis & Decision

Can exemption u/s 54EC In order to avail the exemption u/s 54EC, the capital gains have
be denied on account of to be invested in a long-term specified asset within a period of
the bonds being issued six months from the date of transfer. Where the assessee has
after six months of the made the payment within the six month period, and the
date of transfer even same is reflected in the bank account and a receipt has
though the payment for been issued as on that date, the exemption u/s 54EC cannot
the bonds was made by be denied merely because the bond was issued after the expiry
the assessee within the of the six month period or the date of allotment specified therein
six-month period? was after the expiry of the six month period.

16. Principal CIT v. Gujarat State Fertilizers and Chemicals Limited (2018) 409 ITR 378 (Guj)

Issue Analysis & Decision

Would sale of fertilizer Fertilizer subsidy given to an assessee to compensate the loss
bonds (issued in lieu of on sale of fertilisers should be treated as business income of the
government subsidy) at assessee. Due to cash crunch, the Government of India had
loss be treated as a discharged its dues of paying the subsidy by issue of fertilizer
business loss or a loss bonds. These bonds are saleable in the open market and the
under the head “Capital prices of such bonds are varying. In this case also, the assessee
gains”? received fertilizer bonds (in lieu of subsidy) which were sold at a
loss in the open market.
Since the subsidy would have been treated as business income,
loss on sale of fertilizer bonds issued is to be allowed as
business loss.

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TEST YOUR KNOWLEDGE

Questions
1. Hari has acquired a residential house property in Delhi on 15th April, 2002 for ` 9,00,000
and decided to sell the same on 3 rd May, 2005 to Ms. Pari and an advance of ` 25,000 was
taken from her. The balance money was not paid by Ms. Pari and Hari has forfeited the
entire advance sum. On 3 rd June, 2025, he has sold this house to Mr. Suri for ` 43,00,000.
On 4th April, 2025, he had purchased a residential house in Delhi for ` 7,00,000, where he
was staying with his family on rent for the last 5 years and paid the full amount as per the
purchase agreement. However, Hari does not possess any legal title till 31 st March, 2026,
as such transfer was not registered with the registration authority.
Hari has purchased another old house in Chennai on 14 th October, 2025 from Mr. X, an
Indian resident, by paying ` 5,00,000 and the purchase was registered with the
appropriate authority.
Determine the taxable capital gain arising from above transactions in the hands of Hari for
Assessment Year 2026-27.
[Cost inflation Index - 2002-03: 105; 2005-06: 117; 2025-26: 376]
2. Mr. Ganesh sold his residential house in Mumbai and earned long term capital gain of
` 2.5 crores. He purchased two residential flats adjacent to each other on the same day
vide two separate registered sale deeds from two different persons. The builder had
certified that he had effected necessary modification to make it one residential apartment.
Mr. Ganesh sought exemption under section 54 in respect of the investment made in
purchase of the two residential flats. The Assessing Officer, however, gave exemption
under section 54 to the extent of purchase of one residential flat only contending that since
the long-term capital gain exceeds ` 2 crore, sub-section (1) of section 54 clearly restricts
the benefit of exemption to purchase one residential house only and the two flats cannot
be treated as one residential unit since –

(i) the flats were purchased through different sale deeds; and
(ii) it was found by the Inspector that, before its sale to the assessee, the residential
flats were in occupation of two different tenants.
Examine the correctness of the contention of the Assessing Officer.

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3. Vijay, an individual, owned three residential houses which were let out. Besides, he and his
four brothers co-owned a residential house in equal shares. He sold one residential house
owned by him during the previous year relevant to the assessment year 2026-27. Within a
month from the date of such sale, the four brothers executed a release deed in respect of their
shares in the co-owned residential house in favour of Vijay for a monetary consideration.
Vijay utilised the entire long-term capital gain arising out of the sale of the residential
house for payment of the said consideration to his four brothers. Vijay is not using the
house, in respect of which his brothers executed a release deed, for his own residential
purposes, but has let it out to another person, who is using it for his residential purposes.
Is Vijay eligible for exemption under section 54 of the Income-tax Act, 1961 for the
assessment year 2026-27 in respect of the long-term capital gain arising from the sale of
his residential house, which he utilised for acquiring the shares of his brothers in the co -
owned residential house? Will the non-use of the new house for his own residential
purposes disentitle him to exemption?

4. Aries Tubes Private Ltd. went into liquidation on 1.6.2025. The company possessed of the
following funds prior to the distribution of assets to the shareholders:
`
Share Capital (issued on 1.4.2013) 5,00,000
Reserves prior to 1.6.2025 3,00,000
Excess realization in the course of liquidation 5,00,000
Total 13,00,000

There are 5 shareholders, each of whom received ` 2,60,000 from the liquidator in full
settlement. The shareholders desire to invest the resultant element of capital gain in long
term specified assets as defined in section 54EC. You are required to examine the various
issues and advice the shareholders about their liability to income tax.

5. Xavier had taken a loan under registered mortgage deed against the house, which was
purchased by him on 26.5.2002 for ` 5 lakhs. The said property was inherited by his son
Abraham in financial year 2009-10 as per Will.

For obtaining a clear title thereof, Abraham paid the outstanding amount of loan on
12.2.2010 of ` 15 lakhs. The said house property was sold by Abraham on 16.4.2025 for
` 55 lakhs. Examine with reasons the amount chargeable to capital gains for A.Y. 2026-27
(Cost Inflation Index 2002-03: 105, 2009-10: 148 and 2025-26: 376).

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6. Gama Ltd, located within the corporation limits decided in December, 2025 to shift its
industrial undertaking to non-urban area. The company sold some of the assets and
acquired new assets in the process of shifting. The relevant details are as follows :

(` in lakhs)
Particulars Land Building Plant & Furniture
Machinery
(i) Sale proceeds (sale effected in March, 8 18 16 3
2026)
(ii) Cost of acquisition 4 10 12 2
(iii) WDV in terms of section 50 -- 4 5 2
(iv) Cost of new assets purchased in July,
2026 for the purpose of business in the 4 7 17 2
new place

Compute the capital gains of Gama Ltd for the assessment year 2026-27.
7. The assessee was a company carrying on business of manufacture and sale of art -silk
cloth. It purchased machinery worth ` 4 lakhs on 1.5.2020 and insured it with United India
Assurance Ltd against fire, flood, earthquake etc., The written down value of the asset as
on 01.04.2025 was ` 1,87,850. The insurance policy contained a reinstatement clause
requiring the insurance company to pay the value of the machinery, as on the date of fire
etc., in case of destruction of loss. A fire broke out in August, 2025 causing extensive
damage to the machinery of the assessee rendering them totally useless. The assessee
company received a sum of ` 4 lakhs from the insurance company on 15 th March, 2026.
Examine the issues arising on account on the transactions and their tax treatment.
(Cost inflation index for financial year 2020-21 and 2025-26 are 301 and 376, respectively)
8. Tani purchased a land at a cost of ` 35 lakhs in the financial year 2004-05 and held the
same as her capital asset till 31 st May, 2024. Tani started her real estate business on
1st June, 2024 and converted the said land into stock-in-trade of her business on the said
date, when the fair market value of the land was ` 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each
flat is ` 10 lakhs. Construction was completed in January, 2026. She sold 10 flats at ` 30
lakhs per flat between January, 2026 and March, 2026. The remaining 5 flats were held in
stock as on 31 st March, 2026.

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She invested ` 50 lakhs in bonds issued by National Highway Authority of India on

31st March, 2026 and another ` 50 lakhs in bonds of Rural Electrification Corporation Ltd. in
April, 2026.
Compute the amount of chargeable capital gain and business income in the hands of Tani
arising from the above transactions for Assessment Year 2026-27 indicating clearly the
reasons for treatment of each item.
Cost Inflation Index: F.Y. 2004-05: 113; F.Y. 2024-25: 363; F.Y. 2025-26: 376.
9. Following are the details of income provided by Mr. Singh, the assessee for the financial
year ended 31 st March, 2026:
(i) Rental income from property at Bangalore - ` 3 lakhs, Standard Rent - ` 2,50,000,
Fair Rent - ` 2,80,000.

(ii) Municipal and water tax paid during 2025-26: Current year ` 35,000, Arrears -
` 1,50,000.
(iii) Interest on loan borrowed towards major repairs to the property: ` 1,50,000.

(iv) Arrears of rent of ` 30,000 received during the year, which was not charged to tax in
earlier years.
Further, the assessee furnished following additional information regarding sale of property
at Chennai:
(i) Mr. Singh's father acquired a residential house in April 2006 for ` 1,25,000 and
thereafter gifted this property to the assessee, Mr. Singh on 1 st March, 2007.
(ii) The property, so gifted, was sold by Mr. Singh on 10 th August 2025. The
consideration received was ` 25,00,000.
(iii) Stamp duty charges paid by the purchaser at the time of registration @ 13% (as per
statutory guidelines) was ` 3,90,000.
(iv) Out of the sale consideration received:
(a) On 02/01/2026, the assessee had purchased two adjacent flats, in the same
building, and made suitable modification to make it as one unit. The
investment was made by separate sale deeds, amount being ` 8,00,000 and
` 7,00,000, respectively.

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(b) On 10/l0/2025, ` 10 lakhs were invested in bonds issued by National

Highways Authority of India, but the allotment of the bonds was made on
1.2.2026.
Compute Mr. Singh's taxable income for assessment year 2026-27 assuming he has
exercised the option to shift out of the default tax regime under section 115BAC.
Cost inflation index: F.Y. 2006-07: 122; F.Y. 2025-26: 376
10. SS(P) Ltd., an Indian company having two undertakings engaged in manufacture of cement
and steel, decided to hive off cement division to RV(P) Ltd., an Indian company, by way of
demerger. The net worth of SS(P) Ltd. immediately before demerger was ` 40 crores. The
net book value of assets transferred to RV(P) Ltd. was ` 10 crores. The demerger was
made in January 2026. In the scheme of demerger, it was fixed that for each equity share of
` 10 each (fully paid up) of SS(P) Ltd., two equity shares of ` 10 each (fully paid up) were
to be issued.
One Mr. N.K. held 25,000 equity shares in SS(P) Ltd. which were acquired in the financial
year 2004-05 for ` 6,00,000. Mr. N.K. received 50,000 equity shares from RV(P) Ltd.
consequent to demerger in January 2026. He sold all the shares of RV(P) Ltd. for
` 8,00,000 in March, 2026. In this background you are requested to answer the following:
(i) Does the transaction of demerger attract any income tax liability in the hands of
SS(P) Ltd. and RV(P) Ltd.?
(ii) Compute the capital gain that could arise in the hands of Mr. N.K. on receipt of
shares of RV(P) Ltd.
(iii) Compute the capital gain that could arise in the hands of Mr. N.K. on sale of shares of
RV(P) Ltd.
(iv) Will the sale of shares by Mr. N.K. affect the tax benefits availed by SS(P) Ltd. and/or
RV(P) Ltd.?
(v) Is Mr. N.K. eligible to avail any tax exemption under any of the provisions of the
Income-tax Act, 1961 on the sale of shares of RV(P) Ltd.? If so, mention in brief.
Note: Financial Year Cost inflation index
2004-05 113
2025-26 376

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11. PQR Limited has two units - one engaged in manufacture of computer hardware and the
other involved in developing software. As a restructuring drive, the company has decided to
sell its software unit as a going concern by way of slump sale for ` 385 lakhs to a new
company called S Limited, in which it holds 74% equity shares.
The balance sheet of PQR limited as on 31 st March 2026, being the date on which software
unit has been transferred, is given hereunder –
Balance Sheet as on 31.3.2026

Liabilities ` (in lakhs) Assets ` (in lakhs)

Paid up Share Capital 300 Fixed Assets
General Reserve 150 Hardware unit 170
Share Premium 50 Software unit 200
Revaluation Reserve 120 Debtors
Current Liabilities (Ascertained Hardware unit 140
liabilities)
Hardware unit 40 Software unit 110
Software unit 90 Inventories
Hardware unit 95
Software unit 35
750 750

Following additional information are furnished by the management:

(i) The Software unit is in existence since May, 2015.
(ii) Fixed assets of Software unit includes land which was purchased at ` 40 lakhs in the
year 2016 and revalued at ` 60 lakhs as on March 31, 2026. The stamp duty value
on 31.3.2026 is ` 55 lakhs.
(iii) Fixed assets of Software unit mirrored at ` 140 lakhs (` 200 lakhs minus land value
` 60 lakhs) is written down value of depreciable assets (Furniture and Plant &
machinery) as per books of account. However, the written down value of these assets
under section 43(6) of the Income-tax Act, 1961 is ` 90 lakhs.

(a) Ascertain the tax liability, which would arise from slump sale to PQR Limited ,
assuming it does not opt for section 115BAA.
(b) What would be your advice as a tax-consultant to make the restructuring plan of the
company more tax-savvy, without changing the amount of sale consideration?

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12. Determine the capital gains/loss on transfer of listed equity shares (STT paid both at the
time of acquisition and transfer of shares) and units of equity oriented mutual fund (STT
paid at the time of transfer of units) for the A.Y.2026-27 and tax, if any, payable thereon, in
the following cases, assuming that these are the only transactions covered under section
112A during the P.Y.2025-26 in respect of these assessees:
(i) Mr. Prasun purchased 300 shares in A Ltd. on 20.5.2017 at a cost of ` 400 per
share. He sold all the shares of A Ltd. on 31.5.2025 for ` 1200. The price at which
these shares were traded in National Stock Exchange on 31.1.2018 is as follows –

Particulars Amount in `
Highest Trading Price 700
Average Trading Price 680
Lowest Trading Price 660

(ii) Mr. Raj purchased 200 units each of equity oriented funds, Fund A and Fund B on
1.2.2017 at a cost of ` 550 per unit. The units were not listed at the time of purchase.
Subsequently, units of Fund A were listed on 1.1.2018 and units of Fund B were listed on
1.2.2018 on the National Stock Exchange. Mr. Raj sold all the units on 3.8.2025 for
` 900 each. The details relating to quoted price on National Stock Exchange and net
asset value of the units are given hereunder:
Particulars Fund A Fund B
Amount in ` Amount in `
Highest Trading Price 750 (on 31.1.2018) 800 (on 1.2.2018)
Average Trading Price 700 (on 31.1.2018) 750 (on 1.2.2018)
Lowest Trading Price 650 (on 31.1.2018) 700 (on 1.2.2018)
Net Asset Value on 31.1.2018 800 950

13. Mr. Shyam purchased a house property on February 15, 1979 for ` 3,24,000. In addition,
he has also paid stamp duty @10% on the stamp duty value of ` 3,50,000.
In April, 2008, Mr. Shyam entered into an agreement with Mr. Mohan for sale of such
property for ` 14,35,000 and received an amount of ` 1,11,000 as advance. However, the
sale consideration did not materialize and Mr. Shyam forfeited the advance. In May 2015,
he again entered into an agreement for sale of said house for ` 20,25,000 to
Ms. Deepshikha and received ` 1,51,000 as advance. However, as Ms. Deepshikha did not
pay the balance amount, Mr. Shyam forfeited the advance. In August, 2015, Mr. Shyam
constructed the first floor by incurring a cost of ` 3,90,000.

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On November 15, 2025, Mr. Shyam entered into an agreement with Mr. Manish for sale of
such house for ` 30,50,000 and received an amount of ` 1,50,000 as advance through an
account payee cheque. Mr. Manish paid the balance entire sum and Mr. Shyam transferred
the house to Mr. Manish on February 20, 2026. Mr. Shyam has paid the brokerage @1% of
sale consideration to the broker.
On April 1, 2001, fair market value of the house property was ` 11,85,000 and Stamp duty
value was ` 10,70,000. Further, the Valuation as per Stamp duty Authority of such house
on 15th November, 2025 was ` 39,00,000 and on 20 th February, 2026 was ` 41,00,000.
Compute the capital gains in the hands of Mr. Shyam for A.Y.2026-27. Also, compute the
tax liability under section 112, assuming that the basic exemption limit has been fully
exhausted against other income.
CII for F.Y. 2001-02: 100; F.Y. 2008-09: 137; F.Y. 2015-16: 254; F.Y. 2025-26: 376

Answers
1. Computation of taxable capital gain of Mr. Hari for the A.Y.2026-27

Particulars `
Sale proceeds 43,00,000
Less: Cost of acquisition [See Note (i) and (ii)] 8,75,000
Long Term Capital Gain 34,25,000
Less: Exemption under section 54 in respect of investment in house at Delhi
[See Note (iii)] 7,00,000
Exemption under section 54 in respect of investment in house at 5,00,000
Chennai [See Note (iv)]
Taxable long-term capital gain 22,25,000

Notes:
(i) Cost of acquisition

Particulars `
Cost of acquisition 9,00,000
Less: Advance taken and forfeited 25,000
8,75,000

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Advance received and forfeited on or after 01.04.2014 is taxable under section

56(2)(ix). Such amount would not be reduced to compute cost of acquisition while
determining capital gains on sale of such property.
However, in this case, since the advance was received and forfeited in the year
2005, such advance has to be reduced for calculating cost of acquisition for the
purpose of arriving at capital gains.
(ii) Since the house property was acquired before 23.7.2024, while computing tax on
such LTCG, Mr. Hari has the option to pay tax under section 112 at lower of 12.5%
on LTCG computed without indexation benefit or 20% on LTCG computed with
indexation benefit.
(iii) In order to avail exemption of capital gains under section 54, residential house
should be purchased within 1 year before or 2 years after the date of transfer or
constructed within a period of 3 years after the date of transfer. In this case, Hari has
purchased the residential house in Delhi within one year before the date of transfer
and paid the full amount as per the purchase agreement, though he does not
possess any legal title till 31.3.2026 since the transfer was not registered with the
registration authority. However, for the purpose of claiming exemption under section
54, holding of legal title is not necessary. If the taxpayer pays the full consideration
in terms of the purchase agreement within the stipulated period, the exemption under
section 54 would be available. It was so held in Balraj v. CIT(2002) 254 ITR 22 (Del.)
and CIT v. Shahzada Begum (1988) 173 ITR 397 (A.P.).
(iv) As per section 54, since the amount of capital gain does not exceed ` 2 crore,
Mr. Hari can claim exemption thereunder in respect of investment made in two
residential houses situated in India.
However, if Mr. Hari exercises the option to claim exemption in respect of two
residential houses in Delhi and Chennai in P.Y. 2025-26, he shall not be
subsequently entitled to exercise the option for the same or any other assessment
year.
2. This issue came up before the Karnataka High Court in CIT v. D. Ananda Basappa (2009)
309 ITR 329. The Court observed that the assessee had shown that the flats were situated
side by side and the builder had also certified that he had effected modification of the flats
to make them one unit by opening the door between the apartments. Therefore, it was
immaterial that the flats were occupied by two different tenants prior to sale or that it was

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purchased through different sale deeds. The Court observed that these were not the
grounds to hold that the assessee did not have the intention to purchase the two flats as
one unit. The Court held that the assessee was entitled to exemption under section 54 in
respect of purchase of both the flats to form one residential house.
Applying the ratio of the above decision to the case on hand, Mr. Ganesh is entitled to
exemption under section 54 in respect of purchase of two flats to form one residential
house. Therefore, the contention of the Assessing Officer is not correct.
3. The long-term capital gain arising on sale of residential house would be exempt under
section 54 if it is utilized, inter alia, for purchase of one residential house situated in India
within one year before or two years after the date of transfer. Release by the other co -
owners of their share in co-owned property in favour of Vijay would amount to “purchase” by
Vijay for the purpose of claiming exemption under section 54 [CIT v. T.N. Arvinda Reddy
(1979) 120 ITR 46 (SC)]. Since such purchase is within the stipulated time of two years
from the date of transfer of asset, Vijay is eligible for exemption under section 54. As Vijay
has utilised the entire long-term capital gain arising out of the sale of the residential house
for payment of consideration to the other co-owners who have released their share in his
favour, he can claim full exemption under section 54.

There is no requirement in section 54 that the new house should be used by the assessee
for his own residence. The condition stipulated is that the new house should be utilised for
residential purposes and its income is chargeable under the head “Income from house
property”. This requirement would be satisfied even when the new house is let out for
residential purposes.
4. Under section 46(1), where the assets of a company are distributed to its shareholders on
its liquidation, such distribution shall not be regarded as transfer in the hands of the
company for the purpose of section 45.
However, under section 46(2), where the shareholder, on liquidation of a company, receives
any money or other assets from the company, he shall be chargeable to income -tax under
the head “capital gains”, in respect of the money so received or the market value of the
other assets on the date of distribution as reduced by the amount of dividend deemed under
section 2(22)(c) [chargeable to tax in the hands of shareholders under the head “Income
from other sources”] and the sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.

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As per section 2(22)(c), dividend includes any distribution made to the shareholders of a
company on its liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation, whether capitalized
or not.
In this case, the accumulated profits immediately before liquidation is ` 3,00,000. The share
of each shareholder is ` 60,000 (being one-fifth of ` 3,00,000). An amount of ` 60,000 is
the deemed dividend under section 2(22)(c). The same is taxable in the hands of the
shareholder under the head “Income from other sources”.
Therefore, ` 2,00,000 [i.e. ` 2,60,000 minus ` 60,000, being the deemed dividend under
section 2(22)(c)] is the full value of consideration in the hands of each shareholder as per
section 46(2). Against this, the investment of ` 1,00,000 by each shareholder is to be
deducted to arrive at the capital gains of ` 1,00,000 of each shareholder. Since the equity
shares are not listed, it would not be liable for securities transaction tax and hence, the
capital gain (long term) would be taxable under section 112. Such long-term capital gain
would be taxable @12.5%.
Exemption under section 54EC is available only where there is an actual transfer of capital
assets and not in the case of deemed capital gain as per the decision rendered in the case
of CIT v. Ruby Trading Co (P) Ltd (2003) 259 ITR 54 (Raj). Therefore, exemption under
section 54EC will not be available in this case since it is deemed transfer and not actual
transfer. Furthermore, exemption under section 54EC is available only on transfer of long -
term capital asset, being land or building or both.
5. The cost of inherited property to Mr. Abraham shall be the cost to the previous owner as per
provisions of section 49(1)(iiia) and therefore, ` 5 lakhs, being the cost to his father
(amount paid by his father on 26.5.2002 for acquiring the property) shall be the cost to
Mr. Abraham, who is the new owner. Payment of outstanding loan of the predecessor by the
successor for obtaining a clear title of the property by release of Mortgage Deed shall be
the cost of acquisition of the successor under section 48 read with section 55(2) of the Act
as held by the Apex Court in case of RM. Arunachalam v. CIT [1997] 227 ITR 222.
Computation of Taxable Capital Gain for the A.Y. 2026-27

Particulars `
Sale consideration of house property 55,00,000
Less: Cost of acquisition (See Note below)
(i) Cost to previous owner 5,00,000

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(ii) Loan amount paid by Mr. Abraham 15,00,000 20,00,000

Capital gains 35,00,000

Note: Since the property was acquired by Mr. Abraham through inheritance, the cost of
acquisition will be cost to the previous owner.
Since the house property was acquired before 23.7.2024, while computing tax on such
LTCG, Mr. Abraham has the option to pay tax under section 112 at lower of 12.5% on LTCG
computed without indexation benefit or 20% on LTCG computed with indexation benefit.
6. Section 54G deals with deduction in respect of any capital gain that may arise from the
transfer of an industrial undertaking situated in an urban area in the course of or in
consequence of shifting to a non-urban area.
If the assessee purchases new machinery or plant or acquires a building or land or
constructs a new building or shifts the original asset and transfers the establishment to the
new area, within 1 year before or 3 years after the date on which the transfer takes place,
then, instead of the capital gain being charged to tax, it shall be dealt with as under:

1. If the capital gain is greater than the cost of the new asset, the difference between
the capital gain and the cost of the new asset shall be chargeable as income ‘under
section 45’.

2. If the capital gain is equal to or less than the cost of the new asset, section 45 is not
to be applied.
The capital assets referred to in section 54G are machinery or plant or land or building or
any rights in building or land. Capital gain arising on transfer of furniture does not qualify for
exemption under section 54G. No exemption is therefore available under section 54G in
respect of investment of ` 2 lakhs in acquiring furniture.
The first step therefore is to determine the capital gain arising out of the transfer and
thereafter apply the provisions of section 54G.
Particulars `
(a) Land – Sale proceeds (Non-depreciable asset) 8,00,000
Less: Cost of acquisition 4,00,000
Long term capital gain 4,00,000
Less: Cost of new assets purchased within three year after the date
of transfer (under section 54G) (See Note below) 3,00,000
Taxable Long-term capital gain 1,00,000

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(b) Building – sale proceeds (depreciable assets) 18,00,000

Less: W.D.V. is deemed as cost of acquisition under section 50 4,00,000
Short-term capital gain 14,00,000
(c) Plant & machinery- sale proceeds (depreciable asset) 16,00,000
Less: WDV is deemed cost under section 50 5,00,000
Short-term capital gain 11,00,000
(d) Furniture - sale proceeds (depreciable asset) 3,00,000
Less: WDV is deemed cost under section 50 2,00,000
Short-term capital gain (A) 1,00,000

Summary `
Short term capital gain : Building 14,00,000
Short term capital gain : Plant & machinery 11,00,000
25,00,000
Less: Section 54G [New assets purchased] (See Note below) 25,00,000
Net short term capital gain (B) Nil
Total short-term capital gain (A)+(B) = ` 1 lakh

Note – Total exemption available under section 54G is ` 28 lakhs (` 4 lakhs + ` 7 lakhs +
` 17 lakhs). The exemption should first be exhausted against short term capital gain as the
incidence of tax in case of short-term capital gain is more than in case of long-term capital
gain. Therefore, ` 25 lakhs is exhausted against short term capital gain and the balance of
` 3 lakhs against long term capital gain.
The taxable capital gains would be:
Long-term capital gains ` 1,00,000 (taxable @12.5% under section 112)
Short-term capital gains (furniture) ` 1,00,000 (taxable at applicable tax rates)
` 2,00,000
7. As per section 45(1A), where any person receives any money or other assets under an
insurance from an insurer on account of damage to or destruction of capital asset as a
result of, inter alia, accidental fire then, any profits and gains arising from the receipt of
such money or other assets, shall be chargeable to income tax under the head “Capital
Gains” and shall be deemed to be the income of such person of the previous year in which
such money or asset was received.

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For the purpose of section 48, the money received or the market value of the asset shall be
deemed to be the full value of the consideration accruing as a result of the transfer of such
capital asset. Since the asset was destroyed and the money from the insurance company
was received in the previous year, there will be a liability to compute capital gains in respect
of the insurance moneys received by the assessee.
Under section 45(1A) any profits and gains arising from receipt of insurance moneys is
chargeable under the head “Capital gains”. For the purpose of section 48, the moneys
received shall be deemed to be the full value of the consideration accruing or arising. Under
section 50 the capital gains in respect of depreciable assets had to be computed in the
following manner (assuming it was the only asset in the block).
The computation of capital gain and tax implication is given below:
Full value of the consideration ` 4,00,000
Less: Written down value as on April 1st, 2025 ` 1,87,850
Short term capital gains ` 2,12,150

8. Computation of capital gains and business income of Tani for A.Y. 2026-27
Particulars `
Capital Gains
Fair market value of land on the date of conversion deemed as the full 2,10,00,000
value of consideration for the purposes of section 45(2)
Less: Indexed cost of acquisition [` 35,00,000 × 363/113] 1,12,43,363
97,56,637
Proportionate capital gains arising during A.Y.2026-27 65,04,425
[` 97,56,637 × 2/3]
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y.2026-27 15,04,425
Business Income
Sale price of flats [10 × ` 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion 1,40,00,000
[` 210 lakhs × 2/3]
Cost of construction of flats [10 × ` 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2026-27 60,00,000

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Notes:
(i) The conversion of a capital asset into stock-in-trade is treated as a transfer under
section 2(47). It would be treated as a transfer in the year in which the capital asset
is converted into stock-in-trade.
(ii) However, as per section 45(2), the capital gains arising from the transfer by way of
conversion of capital assets into stock-in-trade will be chargeable to tax only in the
year in which the stock-in-trade is sold.
(iii) The indexation benefit for computing indexed cost of acquisition would, however, be
available only up to the year of conversion of capital asset to stock -in-trade and not
up to the year of sale of stock-in-trade.
(iv) For the purpose of computing capital gains in such cases, the fair market value of
the capital asset on the date on which it was converted into stock-in-trade shall be
deemed to be the full value of consideration received or accruing as a result of the
transfer of the capital asset.

In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the
P.Y.2025-26, only proportionate capital gains (i.e., 2/3rd) would be chargeable in the
A.Y.2026-27.

(v) On sale of such stock-in-trade, business income would arise. The business income
chargeable to tax would be computed after deducting the fair market value on the
date of conversion of the capital asset into stock-in-trade and cost of construction of
flats from the price at which the stock-in-trade is sold.
(vi) In case of conversion of capital asset into stock-in-trade and subsequent sale of
stock-in-trade, the period of 6 months is to be reckoned from the date of sale of
stock-in-trade for the purpose of exemption under section 54EC [CBDT Circular
No.791 dated 2.6.2000]. In this case, since the investment in bonds of NHAI has
been made within 6 months of sale of flats, the same qualifies for exemption under
section 54EC. With respect to long-term capital gains arising in any financial year,
the maximum deduction under section 54EC would be ` 50 lakhs, whether the
investment in bonds of NHAI or RECL are made in the same financial year or next
financial year or partly in the same financial year and partly in the next financial year.
Therefore, even though investment of ` 50 lakhs has been made in bonds of NHAI
during the P.Y.2025-26 and investment of ` 50 lakhs has been made in bonds of RECL
during the P.Y.2026-27, both within the stipulated six month period, the maximum

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deduction allowable for A.Y.2026-27, in respect of long-term capital gain arising on sale
of long-term capital asset(s) during the P.Y.2025-26, is only ` 50 lakhs.
9. Computation of taxable income of Mr. Singh for A.Y.2026-27
Particulars ` `
Income from house property
Gross Annual Value [Higher of Expected Rent & Actual Rent] 3,00,000
Expected Rent [lower of Fair Rent and Standard Rent] 2,50,000
Actual Rent 3,00,000
Less: Municipal taxes paid by Mr. Singh during the year
(including arrears) [` 35,000 + ` 1,50,000] 1,85,000
Net Annual Value (NAV) 1,15,000
Less: Deductions under section 24
(a) 30% of NAV 34,500
(b) Interest on loan borrowed for major repairs 1,50,000 1,84,500
(69,500)
Arrears of rent taxable under section 25A 30,000
Less: Deduction@30% 9,000 21,000
(48,500)
Capital Gains
Full value of consideration 30,00,000
As per section 50C, the full value of consideration would be
the higher of -
Actual Consideration 25,00,000
Stamp Duty Value [` 3,90,000/13%] 30,00,000
Since stamp duty value > 110% of actual consideration
Less: Cost of acquisition
As per section 49(1), cost of acquisition of the
residential house gifted by Mr. Singh’s father to
Mr. Singh would be the cost for which Mr. Singh’s
father acquired the asset 1,25,000
28,75,000

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Less: Exemption under section 54 (` 8,00,000 + ` 7,00,000)

Purchase of residential house within the stipulated
time (within one year before or two years after the date
of sale) [Where the flats are situated side by side and
the builder had effected the necessary modification to
make it as one house, the assessee would be entitled
to exemption under section 54 in respect of investment
in both the flats, despite the fact that they were
purchased by separate sale deeds] 15,00,000
[CIT v. Ananda Basappa (2009) 331 ITR 211 (Kar.)]
Note: Since two adjacent flats are treated as one
residential house, Mr. Singh can defer availing
exemption under section 54 in respect of two
residential houses (where capital gains do not exceed
` 2 crores) to a later assessment year.
Exemption under section 54EC
Investment in bonds of NHAI within six months from
the date of transfer. Where the payment for bonds has
been made within the six months period, exemption
under section 54EC would be available even if the
allotment of bonds was made after the expiry of the six
months [Hindustan Unilever Ltd. v. DCIT (2010) 325 10,00,000 25,00,000
ITR 102 (Bom.)]
Long-term capital gains 3,75,000
Total Income 3,26,500

Note: It may be noted that since Mr. Singh has transferred residential house property which
was acquired before 23.7.2024, he can opt to pay tax @20% on LTCG computed with
indexation or 12.5% on LTCG computed without indexation, whichever is beneficial to him.
10. (i) No, the transaction of demerger would not attract any income-tax liability in the
hands of SS(P) Ltd. or RV(P) Ltd.
As per section 47(vib), any transfer in a demerger, of a capital asset, by the
demerged company to the resulting company would not be regarded as “transfer” for
levy of capital gains tax if the resulting company is an Indian company.

Hence, capital gains tax liability would not be attracted in the hands of SS(P) Ltd.,
the demerged company, in this case, since RV(P) Ltd. is an Indian company .

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(ii) There would be no capital gains tax liability in the hands of Mr. N.K. on receipt of
shares of RV (P) Ltd., since as per section 47(vid), any issue of shares by the
resulting company in a scheme of demerger to the shareholders of the demerged
company will not be regarded as “transfer” for levy of capital gains tax, if the issue is
made in consideration of demerger of the undertaking.
(iii) Yes, capital gains would arise in the hands of Mr. N.K. on sale of shares of RV (P)
Ltd.
Sale consideration 8,00,000

Less: Indexed cost of acquisition of shares of RV (P) Ltd.

Cost of acquisition of shares of RV(P) Ltd. as per section 49(2C):
Net book Value of assets transferred in a demerger
Cost of acquisition of shares of SS(P) Ltd. x
Net worth of the demerged company immidiately before demerger

10 crore
`6,00,000 = `1,50,000
40 crore

Cost of acquisition of shares of RV (P) Ltd. ` 1,50,000

Long-term capital gain (since period of holding of shares in demerged
company is also to be considered) ` 6,50,000
(iv) No, sale of shares by Mr. N.K. would not affect the tax benefits availed by SS(P) Ltd.
or RV (P) Ltd.
One of the conditions to be satisfied is that the shareholders holding not less than
three-fourths in value of the shares in the demerged company become shareholders
of the resulting company by virtue of the demerger. It is presumed that the condition
is satisfied in this case.
There is no stipulation that they continue to remain shareholders for any period of time
thereafter.
(v) Since the resultant capital gain on sale of shares of RV(P) Ltd. is a long -term capital
gain (on account of the period of holding of shares in demerged company being
considered by virtue of section 2(42A)(g)), Mr. N.K. can avail exemption under
section 54F by investing the entire net consideration in purchase (within one year
before and two years after the date of transfer) or construction (within three years
after the date of transfer) of one residential house in India. If part of the net
consideration is invested, only proportionate exemption would be available.

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11. (a) As per section 50B, any profits and gains arising from the slump sale effected in the
previous year shall be chargeable to income-tax as capital gains arising from the
transfer of capital assets and shall be deemed to be the income of the previous year
in which the transfer took place.
If the assessee owned and held the undertaking transferred under slump sale for
more than 36 months before slump sale, the capital gain shall be deemed to be long -
term capital gain. Indexation benefit is not available in case of slump sale as per
section 50B(2).
Ascertainment of tax liability of PQR Limited from slump sale of Software unit
Particulars ` (in lakhs)
Full value of consideration for slump sale of Software Unit 385
Less: Cost of acquisition, being the net worth of Software Unit 185
Long term capital gains arising on slump sale 200
(The capital gains is long-term as the Software Unit is held for
more than 36 months)
Tax liability on LTCG
Under section 112 @ 12.5% on ` 200 lakhs 25.00
Add: Surcharge@ 7% 1.75
26.75
Add: Health and Education cess@4% 1.07
27.82

Working Note:
Computation of Full value of consideration
` (in lakhs)
Fair market value of the capital assets transferred by way of slump
sale
Land, being an immovable property [stamp duty value on 31.3.2026, 55
being the date of slump sale] [A]
Other Fixed assets (Furniture and Plant & machinery) [Book value 140
as appearing in the books of accounts] [ ` 200 lakhs - ` 60 lakhs]
[B]
Debtors [Book value as appearing in the books of accounts] [C] 110
Inventories [Book value as appearing in the books of accounts] [D] 35
340

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Less: Liabilities of Software Unit [` 750 - ` 40] [L] 710

Excluding
(i) Paid up share capital 300
(ii) General Reserve 150
(ii) Share Premium 50
(iii) Revaluation reserve 120 620 90
Fair market value of the capital assets transferred by way of slump
sale [A+B+C+D- L] [FMV1] 250
Fair market value of the consideration received or accruing as a 385
result of transfer by way of slump sale [value of the monetary
consideration received] [FMV2]
Full value of consideration [Higher of FMV1 or FMV2] 385
Computation of net worth of Software Unit
` (in lakhs)
(1) Book value of non-depreciable assets
(i) Land (Revaluation not to be considered) 40
(ii) Debtors 110
(iii) Inventories 35

(2) Written down value of depreciable assets under section

43(6) (See Note below) 90
Aggregate value of total assets 275
Less: Current liabilities of Software unit 90
Net worth of software unit 185

Note: For computing net worth, the aggregate value of total assets in the case of
depreciable assets shall be the written down value of the block of assets as per
section 43(6).
(b) Tax advice
(i) Transfer of any capital asset by a holding company to its 100% Indian
subsidiary company is exempt from capital gains under section 47(iv). Hence,
PQR Limited should try to acquire the remaining 26% equity shares in S Limited
then make the slump sale in the above said manner, in which case the slump
sale shall be exempt from tax. For this exemption, PQR Limited will have to

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 CAPITAL GAINS 4.177 a

keep such 100% holding in S Limited for a period of 8 years from the date of
slump sale, otherwise the amount exempt would be deemed to be income
chargeable under the head “Capital Gains” of the previous year in which such
transfer took place.
(ii) Alternatively, if acquisition of 26% share is not feasible, PQR Limited may think
about demerger plan of Software Unit to get benefit of section 47(vib) of the
Income-tax Act, 1961.
12. (i) For the purpose of computation of long-term capital gains chargeable to tax under
section 112A, the cost of acquisition in relation to the long-term capital asset, being
an equity share in a company or a unit of an equity oriented fund or a unit of a
business trust acquired before 1 st February, 2018 shall be the higher of

(a) cost of acquisition of such asset, i.e., actual cost; and

(b) lower of
(i) the fair market value of such asset as on 31.1.2018; and

(ii) the full value of consideration received or accruing as a result of the

transfer of the capital asset.
The fair market value of listed equity shares as on 31.1.2018 is the highest price
quoted on the recognized stock exchange as on that date.
Accordingly, long-term capital gain on transfer of STT paid listed equity shares by
Mr. Prasun would be determined as follows:
The FMV of shares of A Ltd. would be ` 700, being the highest price quoted on
National Stock Exchange on 31.1.2018. The cost of acquisition of each equity share
in A Ltd. would be ` 700, being higher of actual cost i.e., ` 400 and ` 700 [being the
lower of FMV of ` 700 as on 31.1.2018 (i.e., the highest trading price) and actual
sale consideration of ` 1,200]. Thus, the long-term capital gain would be ` 1,50,000
i.e., (` 1,200 – ` 700) x 300 shares. The long-term capital gain of ` 25,000 (i.e., the
amount in excess of ` 1,25,000) would be subject to tax@12.5% under section 112A
(plus cess@4%), without benefit of indexation. The tax on capital gain @13% would
be ` 3,250 (` 25,000 x 13%)
(ii) In the case of units listed on recognised stock exchange on the date of transfer, the
FMV as on 31.1.2018 would be the highest trading price on recognised stock
exchange as on 31.1.2018 (if units are listed on that date), else, it would be the net
asset value as on 31.1.2018 (where units are unlisted on that date).

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Accordingly, the FMV of units of Fund A as on 31.1.2018 would be ` 750 (being the
highest trading price on 31.1.2018, since the units of Fund A are listed on that date)
and the FMV of units of Fund B as on 31.1.2018 would be ` 950 (being the net asset
value as on 31.1.2018, since the units of Fund B are unlisted on that date).
The cost of acquisition of a unit of Fund A would be ` 750, being higher of actual
cost i.e., ` 550 and ` 750 (being the lower of FMV of ` 750 as on 31.1.2018 and
actual sale consideration of ` 900). Thus, the long-term capital gains on sale of
units of Fund A would be ` 30,000 (` 900 – ` 750) x 200 units.
The cost of acquisition of a unit of Fund B would be ` 900, being higher of actual
cost i.e., ` 550 and ` 900 (being the lower of FMV of ` 950 as on 31.1.2018 (net
asset value) and actual sale consideration of ` 900). Thus, the long-term capital
gains on sale of units of Fund B would be Nil (` 900 – ` 900) x 200 units.
Since the long-term capital gains on sale of units is ` 30,000, which is less than
` 1,25,000, the said sum is not chargeable to tax under section 112A.
13. Computation of Capital gains in the hands
of Mr. Shyam for A.Y. 2026-27
Particulars Amount (`) Amount (`)
Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the date of 39,00,000
agreement
(Where the actual sale consideration is less than the value
adopted by the Stamp Valuation Authority for the purpose
of charging stamp duty, and such stamp duty value
exceeds 110% of the actual sale consideration then, the
value adopted by the Stamp Valuation Authority shall be
taken to be the full value of consideration as per section
50C.
However, where the date of agreement is different from the
date of registration, stamp duty value on the date of
agreement can be considered, provided the whole or part of
the consideration is received by way of account payee
cheque/bank draft or by way of ECS through bank account or
such other electronic mode as may be prescribed on or before
the date of agreement.
In the present case, since part of the payment is made by
account payee cheque on the date of agreement, the stamp
duty value on the date of agreement would be considered
as full value of consideration)

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 CAPITAL GAINS 4.179 a

Deemed Full value of consideration [Since stamp duty 39,00,000

value on the date of agreement exceeds 110% of the actual
consideration, stamp duty value would be deemed as Full
Value of Consideration]
Less: Expenses on transfer (Brokerage @1% of 30,500
` 30,50,000)
Net sale consideration 38,69,500
Less: Cost of acquisition (Note 1) 9,59,000
Less: Cost of improvement 3,90,000 13,49,000
Long term capital gain 25,20,500

Computation of tax liability u/s 112

Particulars Amount (`)
On LTCG of ` 25,20,500 x 12.5% 3,15,063
Add: Health and Education cess @4% 12,603
3,27,666
On LTCG with indexation benefit
Net Sale consideration 38,69,500
Less: Indexed cost of acquisition [` 9,59,000 x 376/100] 36,05,840
Less: Indexed cost of Improvement [` 3,90,000 x 376/254] 5,77,323
Long-term capital loss (3,13,663)
Since the computation results in a long term capital loss, if indexation benefit is given, the tax
u/s 112 would be Nil. However, this computation is only for determining tax liability, the said
loss can neither be set off nor carried forward.
Notes:
(1) Computation of cost of acquisition
Particulars Amount (`) Amount (`)
Cost of acquisition, 10,70,000
Being the higher of
(i) lower of Fair market value i.e., 10,70,000
` 11,85,000 and Stamp duty value i.e.,
` 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition 3,59,000
(` 3,24,000 + ` 35,000, being stamp duty
@10% of ` 3,50,000)

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 4.180 DIRECT TAX LAWS

Less: Advance money taken from

Mr. Mohan and forfeited 1,11,000
Cost of acquisition 9,59,000

(2) Where advance money has been received by the assessee, and retained by him, as
a result of failure of the negotiations, section 51 will apply. The advance retained by
the assessee will go to reduce the cost of acquisition. Accordingly, cost of acquisition
after reducing the advance money forfeited would be ` 9,59,000 [i.e. ` 10,70,000 –
` 1,11,000 (being the advance money forfeited during the P.Y.
2008-09)]. However, where the advance money is forfeited during the previous year
2014-15 or thereafter, the amount forfeited would be taxable under the head “Income
from Other Sources” and such amount will not be deducted from the cost of
acquisition of such asset while calculating capital gains. Hence, ` 1,51,000, being
the advance received from Ms. Deepshikha and retained by him, would have been
taxable under the head “Income from other sources” in the hands of Mr. Shyam in
A.Y.2016-17.

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CHAPTER 5
7
INCOME FROM OTHER
SOURCES

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 identify the income which are chargeable to tax under the head “Income
from other sources”;
 identify the admissible/ inadmissible deductions while computing
income under this head;
 examine the circumstance(s) when amount paid or payable by a closely
held company to the shareholder, being a beneficial owner or the
concern in which such shareholder has the substantial interest would be
deemed as dividend;
 examine the circumstances when any sum of money or property
transferred without consideration or for inadequate consideration would
be taxable in the hands of recipient and the exceptions thereto;
 compute the income under the head “Income from Other Sources” after
allowing the deductions available thereunder.

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 5.2 DIRECT TAX LAWS

5.1 INTRODUCTION
Any income, profits or gains includible in the total income of an assessee, which cannot be
included under any of the preceding heads of income, is chargeable under the head ‘Income from
other sources’. Thus, this head is the residuary head of income and brings within its scope all the
taxable income, profits or gains of an assessee which fall outside the scope of any other head.
Therefore, when any income, profit or gain does not fall precisely under any of the other specific
heads but is chargeable under the provisions of the Act, it would be charged under this head.

5.2 METHOD OF ACCOUNTING [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in
accordance with the cash or mercantile system of accounting regularly employed by the assessee.
Under section 145(2), the Central Government is empowered to notify in Gazette from time to time,
income computation and disclosure standards to be followed by any class of assessees or in
respect of any class of income.
Accordingly, Central Government has notified ten ICDSs to be followed by all assessees (other
than an individual or a HUF who is not required to get his accounts of the previous year audited in
accordance with the provisions of section 44AB) following the mercantile system of accounting, for
the purpose of computation of income chargeable to income-tax under the head “Profits and gains
from business or profession” or “Income from other sources”.
Text of notified ICDSs is given as an Annexure at the end of this module.

5.3 INCOMES CHARGEABLE UNDER THIS HEAD

[SECTION 56]
(1) Income chargeable only under the head ‘Income from Other Sources’:
(i) Dividend income [Section 56(2)(i)]

Dividend income is always taxable under the head “Income from other sources”. The term
‘dividend’ as used in the Act has a wider scope and meaning than under the general law.

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 INCOME FROM OTHER SOURCES 5.3

Dividend [covered by sections 2(22)(a) to (f)]:

According to section 2(22), the following receipts are deemed to be dividend:
(a) Distribution of accumulated profits, entailing the release of company’s assets - Any
distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is dividend if it entails the release of all or any part of its assets.

Note: If accumulated profits are distributed in cash, it is dividend in the hands of the share-
holders. Where accumulated profits are distributed in kind, for example by delivery of
shares etc. entailing the release of company’s assets, the market value of such shares on
the date of such distribution is deemed dividend in the hands of the shareholder.
(b) Distribution of debentures, deposit certificates to shareholders and bonus shares to
preference shareholders - Any distribution to its shareholders by a company of debenture,
debenture stock or deposit certificate in any form, whether with or without interest, and any
distribution of bonus shares to preference shareholders to the extent to which the company
possesses accumulated profits, whether capitalised or not, will be deemed as dividend.
The market value of such bonus shares is deemed as dividend in the hands of the
preference shareholder.
In the case of debentures, debenture stock etc., their value is to be taken at the market rate
and if there is no market rate they should be valued according to accepted principles of
valuation.
Note: Bonus shares given to equity shareholders are not treated as dividend.
(c) Distribution on liquidation - Any distribution made to the shareholders of a company on
its liquidation, to the extent to which the distribution is attributable to the accumulated
profits of the company immediately before its liquidation, whether capitalised or not, is
deemed to be dividend income.
Note: Any distribution made out of the profits of the company after the date of the
liquidation cannot amount to dividend. It is a repayment towards capital.

(d) Distribution on reduction of capital - Any distribution to its shareholders by a company on

the reduction of its capital, to the extent to which the company possessed accumulated
profits, whether capitalised or not, shall be deemed to be dividend.

(e) Advance or loan by a closely held company to its shareholder – Any payment by a
company in which the public are not substantially interested of any sum by way of advance

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 5.4 DIRECT TAX LAWS

or loan to any shareholder who is the beneficial owner of 10% or more of the voting power
of the company will be deemed to be dividend to the extent of the accumulated profits. If the
loan is not covered by the accumulated profits, it is not deemed to be dividend.
Advance or loan by a closely held company to a specified concern - Any payment by a
company in which the public are not substantially interested, to any concern (i.e. HUF/ Firm/
AOP/ BOI/ Company) in which a shareholder, having the beneficial ownership of atleast
10% of the equity shares is a member or a partner and in which he has a substantial
interest (i.e. atleast 20% share of the income of the concern) will be deemed to be dividend.

Also, any payments by such a closely held company on behalf of, or for the individual
benefit of any such shareholder will also be deemed to be dividend. However, in both cases
the ceiling limit of dividend is to the extent of accumulated profits.
Exceptions: The following payments or loan given would not be deemed as dividend:
(i) Loan granted in the ordinary course of business - If the loan is granted in the
ordinary course of its business and lending of money is a substantial part of the
company’s business, the loan or advance to a shareholder or to the specified
concern is not deemed to be dividend.
(ii) Advance or loan between two group entities – Any advance or loan between two
group entities, where one of the group entities is a Finance company or a Finance
Unit and the parent entity or principal entity of such group is listed on the stock
exchange in a country or territory outside India other than the country or territory
outside India as notified by the CBDT.
(iii) Dividend paid is set off against the deemed dividend - Where a loan had been
treated as dividend and subsequently, the company declares and distributes
dividend to all its shareholders including the borrowing shareholder, and the dividend
so paid is set off by the company against the previous borrowing, the adjusted
amount will not be again treated as a dividend.
Note: Subsequent repayment of loan or charge of interest at market rate does not make
any difference in the applicability of section 2(22)(e).
(f) Amount received by shareholder on buy-back of shares by domestic companies - In
case of buyback of shares (whether listed or unlisted) by a domestic company, any sum
paid by the domestic company for purchase of its own shares would be deemed as dividend
in the hands of shareholders and shall be charged to income tax at applicable tax rates. No

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 INCOME FROM OTHER SOURCES 5.5

deduction for expenses would be available against such dividend income while determining
the income from other sources.
Here is the example to understand the provisions of section 46A and section 2(22)(f):
No. of shares of A Ltd. bought in 2020 By Mr. B @` 40 per share 100 shares
Total cost of acquisition ` 4,000
(100 x ` 40)
No. of shares bought back in November 2025 by A Ltd. @` 60 per 20 shares
share
Income taxable as deemed dividend u/s 2(22)(f) [` 60 per share x 20 ` 1,200
shares]
Long-term capital loss on such buyback as per section 46A (Value of ` 800
consideration - COA) (Nil - ` 40 x 20) [Such LTCL can be set-off against
other LTCG or it can be carried forward to the next year for set-off
against other LTCG]
No. of shares sold in December 2026 by Mr. B @` 70 per share 50 Shares
Long-term capital Gain (` 70 x 50 – ` 40 x 50) ` 1,500
Chargeable long-term capital gain in P.Y. 2026-27 after set-off of long- ` 700
term capital loss [` 1,500 – ` 800] would be

Exceptions
The following also do not constitute “dividend” -

(i) Distribution in respect of non-participating shares issued for full cash consideration –
Any distribution made in accordance with (c) or (d) in respect of any share issued for full
cash consideration and the holder of such share is not entitled to participate in the surplus
asset in the event of liquidation.
(ii) Distribution of shares to the shareholders on demerger by the resulting company -
Any distribution of shares on demerger by the resulting company to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged
company).
Meaning of “accumulated profits”

Accumulated profits in point (a), (b), (d) and (e) above include all profits of the company up to the
date of distribution or payment of dividend.
Building & Machinery Depreciation fund not to be included in accumulated profits. - CIT v. Jaldu
Rama Rao (1983) 140 ITR 168 (Andhra Pradesh)

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 5.6 DIRECT TAX LAWS

Accumulated profits include in point (c) all profits of the company up to the date of liquidation
whether capitalised or not. But where liquidation is consequent to the compulsory acquisition of an
undertaking by the Government or by any corporation owned or controlled by the Government, the
accumulated profits do not include any profits of the company prior to the 3 successive previous
years immediately preceding the previous year in which such acquisition took place.
In the case of an amalgamated company, the accumulated profits, whether capitalized or not, of
the amalgamating company on the date of amalgamation shall be included in the accumulated
profits, whether capitalized or not or loss, as the case may be, of the amalgamated company.
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) – [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public are
not substantially interested, of any sum by way of advance or loan to a shareholder who is the
beneficial owner of shares holding not less than 10% of the voting power, or to any concern in
which such shareholder is a member or a partner and in which he has a substantial interest or any
payment by any such company on behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company in either case possesses accumulated profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the
nature of commercial transactions would not fall within the ambit of the provisions of section
2(22)(e) and such views have attained finality. Some illustrations /examples of trade
advances/commercial transactions held to be not covered under section 2(22)(e) are as follows:
(i) Advances were made by a company to a sister concern and adjusted against the dues for job
work done by the sister concern. It was held that amounts advanced for business
transactions do not to fall within the definition of deemed dividend under section 2(22)(e) [CIT
vs. Creative Dyeing & Printing Pvt. Ltd. [NJRS] 2009-LL-0922-2, ITA No. 250 of 2009, Delhi
High Court].
(ii) Advance was made by a company to its shareholder to install plant and machinery at the
shareholder's premises to enable him to do job work for the company so that the company
could fulfil an export order. It was held that as the assessee proved business expediency, the
advance was not covered by section 2(22)(e) [CIT vs Amrik Singh, [NJRS] 2015-LL-0429-5,
ITA No. 347 of 2013, P & H High Court]
(iii) A floating security deposit was given by a company to its sister concern against the use of
electricity generators belonging to the sister concern. The company utilised gas available to it
from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It

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 INCOME FROM OTHER SOURCES 5.7

was held that the security deposit made by the company to its sister concern was a business
transaction arising in the normal course of business between two concerns and the
transaction did not attract section 2(22)(e) [CIT, Agra vs Atul Engineering Udyog, [NJRS]
2014-LL-0926-121, ITA No. 223 of 2011, Allahabad High Court]
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that trade
advances, which are in the nature of commercial transactions, would not fall within the ambit of the
word 'advance' in section 2(22)(e) and therefore, the same would not to be treated as deemed
dividend.

Basis of charge of dividend [Section 8]

Dividend declared or distributed or paid by a company is deemed to be the income of the

shareholder in the previous year in which it is so declared or distributed or paid, as the case may be.

Deemed dividend u/s 2(22)(a)/(b)/(c)/(d) – Distribution by a company which is deemed as dividend

u/s 2(22)(a)/(b)/(c)/(d) would be the income of the previous year in which it is so distributed.

Deemed dividend u/s 2(22)(e) – Payment of advance or loan to a shareholder or a concern, as

the case may be, which is deemed as dividend u/s 2(22)(e) will be the income of the previous year
in which it is so paid.

Interim dividend – Interim dividend would be deemed to be the income of the previous year in
which such dividend is unconditionally made available by the company to the members who are
entitled to it.

Tax rate on dividend income - Any income by way of dividend received by a resident from a
company, whether domestic or foreign, is taxable in the hands of shareholder at normal rates of tax.
ILLUSTRATION 1
Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing
Director and held nearly 65% of the paid-up share capital of Aarav (P) Ltd. A substantial part of the
business of Dhaval is obtained through Aarav (P) Ltd. For this purpose, Aarav (P) Ltd. passed on
the advance received from its customers to Dhaval to execute the job work entrusted to him.
The Assessing Officer held that the advance money received by Dhaval is in the nature of loan
given by Aarav (P) Ltd. to him and accordingly is deemed dividend within the meaning of
provisions of section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer, therefore, made
the addition by treating advance money as deemed dividend.
Examine whether the action of the Assessing Officer is tenable in law.

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 5.8 DIRECT TAX LAWS

SOLUTION
As per section 2(22)(e), in case a company, not being a company in which the public are
substantially interested, makes payment of any sum by way of advance or loan to a shareholder
holding not less than 10% of voting power/share capital of the company, then, the payment so
made shall be deemed to be dividend in the hands of such shareholder to the extent to which the
company possesses accumulated profits.
In the present case, Dhaval is holding 65% of the paid-up capital of Aarav (P) Ltd. Aarav (P) Ltd.
has passed on advance received from its customers to Dhaval for execution of job work entrusted
to Dhaval.
Since Aarav (P) Ltd. is not a company in which public are substantially interested, the applicability
of the provisions of section 2(22)(e) in respect of such transaction has to be examined. In CIT v.
Rajkumar (2009) 318 ITR 462 (Del.), it was held that trade advance given to the shareholder which
is in the nature of money transacted to give effect to a commercial transaction, would not amount
to deemed dividend under section 2(22)(e). The Delhi High Court ruling in CIT v. Ambassador
Travels (P) Ltd. (2009) 318 ITR 376 also supports the above view.
In the present case, the payment is made to Dhaval by Aarav (P) Ltd. for execution of work is in
the course of commercial business transaction and therefore, it cannot be treated as deemed
dividend under section 2(22)(e). Hence, the action of the Assessing Officer is not tenable in law.
Note – This can also be answered on the basis of Circular No. 19/2017, dated 12.06.2017. The
CBDT has, in its circular clarified that it is a settled position that trade advances, which are in the
nature of commercial transactions, would not fall within the ambit of the word 'advance' in section
2(22)(e) and therefore, the same would not to be treated as deemed dividend. Since, the payment
is made to Dhaval by Aarav (P) Ltd. for execution of work is in the course of commercial business
transaction and therefore, the advance cannot be treated as deemed dividend under section
2(22)(e). Hence, the action of the Assessing Officer is not tenable in law.
ILLUSTRATION 2

MNO (P) Ltd. is a company in which the public are not substantially interested. K is a shareholder
of the company holding 15% of the equity shares. The accumulated profits of the company as on
1.10.2025 amounted to ` 10,00,000. The company lent ` 1,00,000 to K by an account payee bank
draft on 1.10.2025. The loan was not connected with the business of the company. K repaid the
loan to the company by an account payee bank draft on 30.3.2026. Examine the effect of the
borrowal and repayment of the loan by K on the computation of his total income for the
assessment year 2026-27.

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 INCOME FROM OTHER SOURCES 5.9

SOLUTION

As per section 2(22)(e), any payment by a company, in which the public are not substantially
interested, by way of advance or loan to a shareholder, being a person who is the beneficial owner
of shares holding not less than 10% of the voting power, shall be treated as dividend to the extent
to which the company possesses accumulated profits.

In the instant case, MNO (P) Ltd. is a company in which the public are not substantially interested.
The company has accumulated profits of ` 10,00,000 on 1.10.2025. The loan given by the
company to K was not in the course of its business. K holds more than 10% of the equity shares in
the company. Therefore, assuming that K has voting power equivalent to his shareholding, section
2(22)(e) comes into play. Deemed dividend of ` 1,00,000 under section 2(22)(e) would be taxable
in the hands of Mr. K at normal rates of tax.

Under section 2(22)(e), the liability arises the moment the loan is borrowed by the shareholder and
it is immaterial whether the loan is repaid before the end of the accounting year or not. Therefore,
the repayment of loan by K to the company on 30.3.2026 will not affect the taxability of the sum of
` 1,00,000 as deemed dividend.

(ii) Casual Income [Section 56(2)(ib)]

Casual income means income in the nature of winning from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort, gambling, betting etc. Such
winnings are chargeable to tax at a flat rate of 30% under the head “Income from Other Sources”.

(iii) Interest received on compensation/ enhanced compensation deemed to be income in

the year of receipt and taxable under the head “Income from Other Sources” [Section
56(2)(viii)]

(a) As per section 145(1), income chargeable under the head “Profits and gains of business or
profession” or “Income from other sources”, shall be computed in accordance with either
cash or mercantile system of accounting regularly employed by the assessee.

(b) Section 145B(1) provides that notwithstanding anything contained in section 145(1), the
interest received by an assessee on compensation or on enhanced compensation shall be
deemed to be his income of the previous year in which it is received, irrespective of the
method of accounting followed by the assessee.

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 5.10 DIRECT TAX LAWS

(c) Section 56(2)(viii) provides that income by way of interest received on compensation or on
enhanced compensation referred to in section 145B(1) shall be assessed as “Income from
other sources” in the year in which it is received.

(iv) Advance forfeited due to failure of negotiations for transfer of a capital asset to be
taxable as “Income from other sources” [Section 56(2)(ix)]

(a) Prior to A.Y.2015-16, any advance retained or received in respect of a negotiation for
transfer which failed to materialise is reduced from the cost of acquisition of the asset or the
written down value or the fair market value of the asset, at the time of its transfer to
compute the capital gains arising therefrom as per section 51. In case the asset transferred
is a long-term capital asset, indexation benefit would be on the cost so reduced.

(b) With effect from A.Y.2015-16, section 56(2)(ix) provides for the taxability of any sum of
money, received as an advance or otherwise in the course of negotiations for transfer of a
capital asset. Such sum shall be chargeable to income-tax under the head ‘Income from
other sources’, if such sum is forfeited and the negotiations do not result in transfer of such
capital asset.

(c) In order to avoid double taxation of the advance received and retained, section 51 was
amended to provide that where any sum of money received as an advance or otherwise in
the course of negotiations for transfer of a capital asset, has been included in the total
income of the assessee for any previous year, in accordance with section 56(2)(ix), such
amount shall not be deducted from the cost for which the asset was acquired or the written
down value or the fair market value, as the case may be, in computing the cost of
acquisition.

(d) It may be noted that advance received and forfeited upto 31.3.2014 has to be reduced from
cost of acquisition while computing capital gains, since such advance would not have been
subject to tax under section 56(2)(ix). Only the advance received and forfeited on or after
1.4.2014 would be subject to tax under section 56(2)(ix). Hence, such advance would not
be reduced from the cost of acquisition for computing capital gains.

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 INCOME FROM OTHER SOURCES 5.11

Tax Treatment of advance money [Sections 51 and 56(2)(ix)]

Received and Received and

forfeited before forfeited after
01.04.2014 01.04.2014

Advance forfeited to be deducted from cost of Taxable under "Income from Other
acquisiton for computing capital gains in the Sources" in the year of forfeiture of
year of actual trasnfer of asset advance

(v) Any sum of money or value of property received without consideration or for
inadequate consideration to be subject to tax in the hands of the recipient [Section 56(2)(x)]
In order to prevent the practice of receiving sum of money or the property without consideration or
for inadequate consideration, section 56(2)(x) brings to tax any sum of money or the value of any
property received by any person without consideration or the value of any property received for
inadequate consideration.
(a) Sum of Money: If any sum of money is received without consideration and the aggregate
value of which exceeds ` 50,000, the whole of the aggregate value of such sum is
chargeable to tax.
(b) Immovable property [Land or building or both]:
I. If an immovable property is received
(a) Without consideration: The stamp duty value of such property would be taxed
as the income of the recipient, if it exceeds ` 50,000.
(b) For Inadequate consideration: If consideration is less than the stamp duty
value of the property and the difference between the stamp duty value and
consideration is more than the higher of –
(i) ` 50,000 and
(ii) 10% of consideration,
the difference between the stamp duty value and the consideration shall be
chargeable to tax in the hands of the assessee as “Income from other sources”.

It may be noted that the above limit shall be considered for each property
separately.

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 5.12 DIRECT TAX LAWS

II. Value of property to be considered where the date of agreement is different

from date of registration: Taking into consideration the possible time gap between
the date of agreement and the date of registration, the stamp duty value may be
taken as on the date of agreement instead of the date of registration, if the date of
the agreement fixing the amount of consideration for the transfer of the immovable
property and the date of registration are not the same, provided whole or part of the
consideration has been paid by way of an account payee cheque or an account
payee bank draft or by use of electronic clearing system (ECS) through a bank
account or through such prescribed electronic mode on or before the date of
agreement.
The prescribed electronic modes notified are credit card, debit card, net banking,
IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay as other electronic modes of payment
[CBDT Notification No. 8/2020 dated 29.01.2020].
III. If the stamp duty value of immovable property is disputed by the assessee, the
Assessing Officer may refer the valuation of such property to a Valuation Officer. In
such a case, the provisions of section 50C and section 155(15) shall, as far as may
be, apply for determining the value of such property. As per section 50C, if such
value is less than the stamp duty value, the same would be taken for determining the
value of such property, for computation of income under this head in the hands of the
buyer.
(c) Movable Property [Property other than immovable property]:
If movable property is received
(i) Without consideration: The aggregate fair market value of such property on the
date of receipt would be taxed as the income of the recipient, if it exceeds ` 50,000.

(ii) For inadequate consideration: If the difference between the aggregate fair market
value and such consideration exceeds ` 50,000, such difference would be taxed as
the income of the recipient.

(d) Applicability of section 56(2)(x): The provisions of section 56(2)(x) would apply only to
the specified property which is the nature of a capital asset of the recipient and not stock-in-
trade, raw material or consumable stores of any business of the recipient. Therefore, only

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 INCOME FROM OTHER SOURCES 5.13

transfer of a specified capital asset, without consideration or for inadequate consideration

would attract the provisions of section 56(2)(x).

(e) The table below summarizes the scheme of taxability of gifts –

Nature of asset Taxable value

1 Money The whole amount if the same exceeds ` 50,000.
2 Movable property (i) Without consideration:
The aggregate fair market value of the property, if it exceeds
` 50,000.
(ii) Inadequate consideration:
The difference between the aggregate fair market value and
the consideration, if such difference exceeds ` 50,000.
3 Immovable (i) Without consideration:
property The stamp value of the property, if it exceeds ` 50,000.
(ii) Inadequate consideration:
The difference between the stamp duty value and the
consideration, if such difference is more than the higher of
` 50,000 and 10% of consideration.

(f) Non-applicability of section 56(2)(x): However, any sum of money or value of property
received in the following circumstances would be outside the ambit of section 56(2)(x) -
(i) from any relative; or
(ii) on the occasion of the marriage of the individual; or
(iii) under a will or by way of inheritance; or
(iv) in contemplation of death of the payer or donor, as the case may be; or
(v) from any local authority as defined in the Explanation to section 10(20); or

(vi) from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in section 10(23C); or
(vii) from or by any trust or institution registered under section 12A or section 12AA or
section 12AB; or
However, where sum of money or property has been received by specified persons
under section 13(3), this relaxation is not available and section 56(2)(x) would be
applicable.

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 5.14 DIRECT TAX LAWS

(viii) by any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution referred to in Section 10(23C)(iv)/(v)/
(vi)/(via).
(ix) by way of transaction not regarded as transfer under section 47(i)/(iv)/(v)/(vi)/(via)/
(viaa)/(vib)/(vic)/(vica)/(vicb)/(vid)/(vii)/(viiac)/(viiad)/(viiae)/(viiaf).
(x) from an individual by a trust created or established solely for the benefit of relative of the
individual.
(xi) by an individual, from any person, in respect of any expenditure actually incurred by
him on his medical treatment or treatment of any member of his family, for any
illness related to COVID-19 subject to conditions notified by the Central Government.
Accordingly, the Central Government has, vide Notification No. 91/2022 dated
5.8.2022, specified the following conditions –
The individual has to keep a record of the following documents, namely:-
(a) the COVID-19 positive report of the individual or his family member, or
medical report if clinically determined to be COVID-19 positive through
investigations in a hospital or an in-patient facility by a treating physician for a
person so admitted;
(b) all necessary documents of medical diagnosis or treatment of the individual or
family member due to COVID-19 or illness related to COVID-19 suffered
within 6 months from the date of being determined as a COVID-19 positive;
The details of the amount so received in any financial year has to be furnished in
Form No. 1 to the Income-tax Department within 9 months from the end of such
financial year.
(xii) by a member of the family of a deceased person –
(A) from the employer of the deceased person (without any limit); or
(B) from any other person or persons to the extent that such sum or aggregate of
such sums ≤ ` 10 lakhs,
where the cause of death of such person is illness related to COVID-19 and the
payment is –
(i) received within 12 months from the date of death of such person; and
(ii) subject to such other conditions notified by the Central Government.

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 INCOME FROM OTHER SOURCES 5.15

Accordingly, the Central Government has, vide Notification No. 92/2022 dated
5.8.2022, specified the following conditions –
1. (i) the death of the individual should be within 6 months from the date of
testing positive or from the date of being clinically determined as a
COVID-19 case, for which any sum of money has been received by the
member of the family;
(ii) the family member of the individual has to keep a record of the following
documents,
(a) the COVID-19 positive report of the individual, or medical report if
clinically determined to be COVID-19 positive through investigations
in a hospital or an inpatient facility by a treating physician;
(b) a medical report or death certificate issued by a medical practitioner
or a Government civil registration office, in which it is stated that
death of the person is related to corona virus disease (COVID-19).
2. The details of such amount received in any financial year has to be furnished in
Form A to the Assessing Officer within 9 months from the end of such financial
year.
(xiii) from such class of persons and subject to such conditions, as may be prescribed.
Accordingly, CBDT has inserted Rule 11UAC to notify that the provisions of section
56(2)(x) would not be applicable to the following transactions –
S. Property Received by Condition
No.
1. Any immovable a resident of an where the Central Government by
property, being unauthorized notification in the Official Gazettee,
land or building colony in the regularised the transactions of such
or both National Capital immovable property based on the
Territory of latest Power of Attorney, Agreement
Delhi to Sale, Will, possession letter and
other documents including
documents evidencing payment of
consideration for conferring or
recognising right of ownership or
transfer or mortgage in regard to
such immovable property in favour of
such resident.
Resident means a person having physical possession of property on the
basis of a registered sale deed or latest set of Power of Attorney,

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 5.16 DIRECT TAX LAWS

Agreement to Sale, Will, possession letter and other documents including

documents evidencing payment of consideration in respect of a property in
unauthorised colonies and includes their legal heirs but does not include
tenant, licensee or permissive user.
Unauthorised colony means a colony or development comprising of a
contiguous area, where no permission has been obtained for approval of
layout plan or building plans and has been identified for regularisation of
such colony in pursuance to the notification number S.O. 683(E), dated the
24th March, 2008, of the Delhi Development Authority.
2. Any movable Shareholder Where,
property, being (i) the Tribunal, on an application
unquoted shares, moved by the Central
of a company Government under section 241
and its subsidiary of the Companies Act, 2013,
and the has suspended the Board of
subsidiary of Directors of such company and
such subsidiary has appointed new directors
nominated by the Central
Government under section 242
of the said Act; and
(ii) share of company and its
subsidiary and the subsidiary of
such subsidiary has been
received pursuant to a
resolution plan approved by the
Tribunal under section 242 of
the Companies Act, 2013 after
affording a reasonable
opportunity of being heard to
the jurisdictional Principal
Commissioner or
Commissioner.
A company shall be a subsidiary of another company, if such other
company holds more than half in nominal value of the equity share capital
of the company;
3. Any movable Investor or where the said share has been allotted
property, being investor bank by the reconstructed bank (Yes Bank)
equity shares, of (SBI) under the Yes Bank Limited
the reconstructed Reconstruction Scheme, 2020 at ` 10
bank per share (Face value - ` 2 per share;
Premium - ` 8 per share).
4. Any movable a person It should be received from a public
property, being sector company or the Central

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 INCOME FROM OTHER SOURCES 5.17

equity shares, of Government or any State

a public sector Government under strategic
company or a disinvestment.
company
Strategic disinvestment - Sale of shareholding by the Central Government
or any State Government or a public sector company, in a public sector
company or in a company, which results in
- reduction of its shareholding to below 51% and
- transfer of control to the buyer.
The condition of reduction below 51% would apply only in a case where
shareholding of the Central Government or the State Government or the
public sector company was above 51% before such sale of shareholding.
The requirement of transfer of control may be carried out by the Central
Government or the State Government or the public sector company or any
two of them or all of them.
5. Any movable The fund It should be received in lieu of
property, being management shares or units or interest held by
shares or units or entity of the the investment manager entity in the
interest in the resultant fund original fund, pursuant to the
resultant fund relocation, subject to the following
conditions, namely –
(i) not less than 90% of shares or
units or interest in the fund
management entity of the
resultant fund are held by the
same entity(ies) or person(s) in
the same proportion as held by
them in the investment manager
entity of the original fund; and
(ii) not less than 90% of the
aggregate of shares or units or
interest in the investment
manager entity of the original
fund was held by such
entity(ies) or person(s).

(g) Meaning of certain terms:

Term Meaning
Property A capital asset of the assessee, namely-
(a) immovable property being land or building or both,
(b) shares and securities,

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 5.18 DIRECT TAX LAWS

(c) jewellery,
(d) archaeological collections,
(e) drawings,
(f) paintings,
(g) sculptures,
(h) any work of art or bullion.
It also includes virtual digital asset.
Relative (a) In case of an individual –
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the
individual;
(vii) spouse of any of the persons referred to above.
(b) In case of Hindu Undivided Family, any member thereof.
Family For the purpose of (xi) and (xii), family, in relation to an individual means
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any of them,
wholly or mainly dependent on the individual.

SUMMARY

Immovable Property

In the hands of transferor In the hands of transferee

If the asset is held as a If the asset is held as a Asset is held as Capital

Capital Asset Stock-in-trade asset

Section 50C apply - Capital Section 43CA apply - Section 56(2)(x) apply -
Gain Business Income Income from Other Sources

© The Institute of Chartered Accountants of India

 Tax/TDS implications on transfer of immovable property for inadequate consideration

In the hands of the seller In the hands of the buyer

Is the date of agreement different from Is the consideration for transfer of

the date of registration? L & B and SDV less than ` 50
If L & B are held If L & B are held lakhs?
as stock-in-trade as Capital Asset Yes No
Yes No
Is whole or part of the SDV on the

© The Institute of Chartered Accountants of India

No
Section 43CA will apply consideration paid by way of date of
Section 50C will apply No Tax is to be Tax @1% of the
A/c payee Cheque/ Bank registration

s
Ye
Draft/ ECS or through such would be deducted higher is
other prescribed electronic considered deductible at the
Is date of agreement mode on or before the date time of credit or
SDV on the date different from the date of of agreement? payment,
of registration
registration? whichever is
may be taken as Yes
the full value of earlier u/s 194-IA
INCOME FROM OTHER SOURCES

SDV on the date of

consideration, if No agreement may be
SDV exceeds Yes
110% of the
considered Difference between SDV and actual
actual consideration taxable u/s 56(2)(x), if such
consideration Is whole or part of the difference is more than the higher of ` 50,000
SDV on the date of
consideration received by and 10% of consideration, where L & B are held
way of A/c payee cheque/ agreement may be taken as Capital Asset
5.19

Bank Draft or ECS as the full value of

through Bank A/c or Yes consideration, if such
No through such other SDV exceeds 110% of L & B – Land and Building other
prescribed electronic actual consideration than agricultural land
mode on or before the SDV – Stamp Duty Value
date of agreement?
 5.20 DIRECT TAX LAWS

ILLUSTRATION 3
Mr. A, a dealer in shares, received the following without consideration during the P.Y.2025-26 from
his friend Mr. B, -
(1) Cash gift of ` 75,000 on his anniversary, 15th April, 2025.
(2) Bullion, the fair market value of which was ` 60,000, on his birthday, 19th June, 2025.
(3) A plot of land at Faridabad on 1st July, 2025, the stamp value of which is ` 5 lakh on that
date. Mr. B had purchased the land in April, 2009.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd.
@ ` 400 each on 19th June, 2025, the fair market value of which was ` 600 each on that date.
Mr. A sold these shares in the course of his business on 23rd June, 2025.
Further, on 1st November, 2025, Mr. A took possession of property (building) booked by him two
years back at ` 20 lakh. The stamp duty value of the property as on 1st November, 2025 was ` 32
lakh and on the date of booking was ` 23 lakh. He had paid ` 1 lakh by account payee cheque as
down payment on the date of booking.
On 1st March, 2026, he sold the plot of land at Faridabad for ` 7 lakh.
Compute the income of Mr. A chargeable under the head “Income from other sources” and “Capital
Gains” for A.Y.2026-27.
SOLUTION
Computation of “Income from other sources” of Mr. A for the A.Y.2026-27

Particulars `
(1) Cash gift is taxable under section 56(2)(x), since it exceeds ` 50,000 75,000
(2) Since bullion is included in the definition of property, therefore, when bullion 60,000
is received without consideration, the same is taxable, since the aggregate
fair market value exceeds ` 50,000
(3) Stamp value of plot of land at Faridabad, received without consideration, is 5,00,000
taxable under section 56(2)(x)
(4) Difference of ` 2 lakh in the value of shares of X Ltd. purchased from Mr. C, -
a dealer in shares, is not taxable as it represents the stock-in-trade of Mr. A.
Since Mr. A is a dealer in shares and it has been mentioned that the shares
were subsequently sold in the course of his business, such shares represent
the stock-in-trade of Mr. A.

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 INCOME FROM OTHER SOURCES 5.21

(5) Difference between the stamp duty value of ` 23 lakh on the date of 3,00,000
booking and the actual consideration of ` 20 lakh paid is taxable under
section 56(2)(x) since the difference exceeds ` 2 lakh, being the higher of
` 50,000 and 10% of consideration.
Income from Other Sources 9,35,000

Computation of “Capital Gains” of Mr. A for the A.Y.2026-27

Particulars `
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax under
section 56(2)(x) as per section 49(4)] 5,00,000
Short-term capital gains 2,00,000

Note – The resultant capital gains will be short-term capital gains since for calculating the period
of holding, the period of holding of previous owner is not to be considered.
ILLUSTRATION 4
Discuss the taxability or otherwise of the following in the hands of the recipient under section
56(2)(x) of the Income-tax Act, 1961 -

(i) Akhil HUF received ` 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is ` 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his
25th marriage anniversary. The fair market value on that date was ` 100 per share. He also
received jewellery worth ` 45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination.
The fair market value of the car is ` 5,25,000.
SOLUTION
Taxable/ Amount liable Reason
Non-taxable to tax (`)
(i) Taxable 75,000 Sum of money exceeding ` 50,000 received without
consideration from a non-relative is taxable under section
56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of
Akhil HUF, since she is not a member of Akhil HUF.

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 5.22 DIRECT TAX LAWS

(ii) Non-taxable Nil Immovable property received without consideration by a

HUF from its relative is not taxable under section
56(2)(x). Since Nitisha is a member of the HUF, she is a
relative of the HUF. However, income from such asset
would be included in the hands of Nitisha under 64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(x), in case the
aggregate fair market value of property, other than
immovable property, received without consideration
exceeds ` 50,000, the whole of the aggregate value shall
be taxable. In this case, the aggregate fair market value
of shares (` 10,000) and jewellery (` 45,000) exceeds
` 50,000. Hence, the entire amount of ` 55,000 shall be
taxable.
(iv) Non-taxable Nil Car is not included in the definition of property for the
purpose of section 56(2)(x), therefore, the same shall not
be taxable.

ILLUSTRATION 5
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Mr. Rajesh, who
is a dealer in automobile spare parts, for ` 90 lakh on 1.1.2026, when the stamp duty value was
` 150 lakh. The agreement was, however, entered into on 1.9.2025 when the stamp duty value was
` 140 lakh. Mr. Hari had received a down payment of ` 15 lakh by a crossed cheque from
Mr. Rajesh on the date of agreement. Discuss the tax implications in the hands of Mr. Hari and
Mr. Rajesh, assuming that Mr. Hari has purchased the building for ` 75 lakh on 12th July, 2024.
Would your answer be different if Hari was a share broker instead of a property dealer?
SOLUTION
Case 1: Tax implications if Mr. Hari is a property dealer

In the hands of Mr. Hari In the hands of Mr. Rajesh

In the hands of Hari, the provisions of section Since Mr. Rajesh is a dealer in automobile
43CA would be attracted, since the building spare parts, the building purchased would
represents his stock-in-trade and he has be a capital asset in his hands. The
transferred the same for a consideration less than provisions of section 56(2)(x) would be
the stamp duty value; and the stamp duty value attracted in the hands of Mr. Rajesh who
exceeds 110% of consideration. has received immovable property, being a
Under section 43CA, the option to adopt the capital asset, for inadequate consideration
stamp duty value on the date of agreement can be and the difference between the
exercised only if whole or part of the consideration consideration and stamp duty value
has been received on or before the date of exceeds ` 9,00,000, being the higher of
agreement by way of account payee cheque or ` 50,000 and 10% of consideration.

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 INCOME FROM OTHER SOURCES 5.23

draft or by use of ECS through a bank account or Therefore, ` 60 lakh, being the difference
through credit card, debit card, net banking, IMPS between the stamp duty value of the
(Immediate payment Service), UPI (Unified property on the date of registration (i.e.,
Payment Interface), RTGS (Real Time Gross ` 150 lakh) and the actual consideration
Settlement), NEFT (National Electronic Funds (i.e., ` 90 lakh) would be taxable under
Transfer), and BHIM (Bharat Interface for Money) section 56(2)(x) in the hands of
Aadhar Pay on or before the date of agreement. In Mr. Rajesh, since the payment on the date
this case, since the down payment of ` 15 lakh is of agreement is made by crossed cheque
received on the date of agreement by crossed and not account payee cheque/draft or
cheque and not account payee cheque, the option ECS or through credit card, debit card, net
cannot be exercised. banking, IMPS (Immediate payment
Therefore, ` 75 lakh, being the difference Service), UPI (Unified Payment Interface),
between the stamp duty value on the date of RTGS (Real Time Gross Settlement),
transfer i.e., ` 150 lakh, and the purchase price NEFT (National Electronic Funds
i.e., ` 75 lakh, would be chargeable as business Transfer), and BHIM (Bharat Interface for
income in the hands of Mr. Hari, since stamp duty Money) Aadhar Pay.
value exceeds 110% of the consideration.

Case 2: Tax implications if Mr. Hari is a share broker

In the hands of Mr. Hari In the hands of Mr. Rajesh
In case Mr. Hari is a share broker and not a There would be no difference in the taxability
property dealer, the building would represent in the hands of Mr. Rajesh, whether Mr. Hari
his capital asset and not stock-in-trade. In is a property dealer or a stock broker, (except
such a case, the provisions of section 50C where the property transferred in a residential
would be attracted in the hands of Mr. Hari, unit fulfilling the stipulated conditions, which is
since building is transferred for a not so in this case).
consideration less than the stamp duty value; Therefore, the provisions of section 56(2)(x)
and the stamp duty value exceeds 110% of would be attracted in the hands of Mr. Rajesh
consideration. who has received immovable property, being
Thus, ` 75 lakh, being the difference a capital asset, for inadequate consideration
between the stamp duty value on the date and the difference between the consideration
of registration (i.e., ` 150 lakh) and the and stamp duty value exceeds ` 9,00,000,
purchase price (i.e., ` 75 lakh) would be being the higher of ` 50,000 and 10% of
chargeable as short-term capital gains. consideration.
It may be noted that under section 50C, the Therefore, ` 60 lakh, being the difference
option to adopt the stamp duty value on the between the stamp duty value of the property
date of agreement can be exercised only if on the date of registration (i.e., ` 150 lakh)
whole or part of the consideration has been and the actual consideration (i.e., ` 90 lakh)
received on or before the date of agreement would be taxable under section 56(2)(x) in the
by way of account payee cheque or draft or by hands of Mr. Rajesh, since the payment on
use of ECS through a bank account or through the date of agreement is made by crossed
credit card, debit card, net banking, IMPS cheque and not account payee cheque/draft
(Immediate payment Service), UPI (Unified or ECS or through credit card, debit card, net

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 5.24 DIRECT TAX LAWS

Payment Interface), RTGS (Real Time Gross banking, IMPS (Immediate payment Service),
Settlement), NEFT (National Electronic Funds UPI (Unified Payment Interface), RTGS (Real
Transfer), and BHIM (Bharat Interface for Time Gross Settlement), NEFT (National
Money) Aadhar Pay on or before the date of Electronic Funds Transfer), and BHIM (Bharat
agreement. In this case, since the down Interface for Money) Aadhar Pay.
payment of ` 15 lakhs has been received on
the date of agreement by crossed cheque and
not account payee cheque, the option cannot
be exercised.

(vi) Compensation or any other payment received in connection with termination of his
employment [Section 56(2)(xi)]
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms and
conditions relating thereto shall be chargeable to tax under this head. However, if it is received
from employer, then it is taxable u/s 17(3)(i) under the head “Income from Salaries”.
(vii) Any specified sum received by a unit holder from a business trust during the
previous year [Section 56(2)(xii)]
Section 56(2)(xii) provides that any specified sum received by a unit holder from a business trust
during the previous year with respect to unit held by him at any time during the previous year
would be chargeable to tax in the hands of unit holder under the head “Income from other
sources”.
Specified sum is to be computed in the following manner:

Specified sum = A (-) B (-) C (which shall be zero if sum of B and C is greater than A)
A Aggregate of sum distributed by the business trust with respect to such unit, during the
previous year or during any earlier previous year or years, to such unit holder, who
holds such unit on the date of distribution of sum or to any other unit holder who held
such unit at any time prior to the date of such distribution, which is –
(a) not in the nature of interest and dividend referred to in section 10(23FC) or rental
income referred to in section 10(23FCA); and
(b) not chargeable to tax in the hands of the business trust under section 115UA(2)
B Amount at which such unit was issued by the business trust; and
C Amount charged to tax under this clause in any earlier previous year;

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 INCOME FROM OTHER SOURCES 5.25

(viii) Sum received, including the amount allocated by way of bonus, under a LIP other
than under a ULIP and keyman insurance policy, which is not exempt u/s 10(10D)
[Section 56(2)(xiii)]
Any sum received under a life insurance policy, including the sum allocated by way of bonus on
such policy would be included in the total income of a person if it is not exempt under section
10(10D). The provisions relating to exemption under section 10(10D) have already been discussed
in Chapter 4: Capital Gains.
Section 10(10D) provides that in case any difficulty arises in giving effect to the provisions of
section 10(10D), the CBDT may issue guidelines for the purpose of removing the difficulty with the
previous approval of the Central Government.
Accordingly, the CBDT has, with the approval of the Central Government, vide Circular No.
15/2023, dated 16.08.2023, issued the following guidelines in respect of LIPs (other than ULIPs)–
Situation 1: No sum of any nature including bonus (such sum hereinafter referred as
“consideration”) is received by the assessee on any LIPs which are issued on or after 1.4.2023
(such LIPs hereinafter referred as “eligible LIPs”) during any previous year preceding the current
previous year or consideration has been received on such eligible LIPs in an earlier previous year
but has not been claimed exempt. In such a situation, the exemption u/s 10(10D) would be
determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible LIP only
Circumstance Eligibility for exemption u/s
10(10D)
If the amount of premium payable on such Such consideration would be eligible
eligible LIP does not exceed ` 5,00,000 for any for exemption u/s 10(10D).
of the PYs during the term of such eligible LIP [Refer Example 1 and 2 given
and annual premium does not exceed 10% of below]
actual capital sum assured
If the amount of premium payable on such Such consideration would not be
eligible LIP > ` 5,00,000 for any of the PYs eligible for exemption u/s 10(10D).
during the term of such eligible LIP [Refer Example 3 given below]

Example 1:
LIP A
Date of issue 1.4.2014
Annual premium 6,00,000

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 5.26 DIRECT TAX LAWS

Sum assured 60,00,000

Consideration received as on 01.11.2025 on maturity 70,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2025-26.

Eligibility for exemption u/s 10(10D) - The consideration received under LIP “A” would be
exempt u/s 10(10D) in A.Y. 2026-27 since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.4.2023, limit
of ` 5,00,000 of amount of premium payable is not applicable, since it is not an eligible
ULIP.
Example 2:
LIP A
Date of issue 1.4.2023
Annual premium 5,00,000
Sum assured 50,00,000
Consideration received as on 01.11.2033 on maturity 52,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The consideration received would be exempt u/s
10(10D) in A.Y. 2034-35, since the annual premium payable on the policy does not exceed
` 5,00,000 and also does not exceed 10% of actual capital sum assured.
Example 3:
LIP A
Date of issue 1.4.2023
Annual premium 6,00,000
Sum assured 60,00,000
Consideration received as on 01.11.2033 on maturity 70,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs
in earlier P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The consideration received would not be exempt
u/s 10(10D) in A.Y. 2034-35 since the annual premium payable on the eligible LIP exceeds
` 5,00,000.

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 INCOME FROM OTHER SOURCES 5.27

II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible LIP
Circumstance Eligibility for exemption u/s 10(10D)
If the aggregate of the amount of Such consideration would be eligible for
premium payable on such eligible LIPs exemption under u/s 10(10D).
does not exceed ` 5,00,000 for any of [Refer Example 4 given below]
the PYs during the term of such eligible
LIPs and the annual premium
≤ 10% of actual capital sum assured
If the aggregate of the amount of Consideration in respect of any of those
premium payable on such eligible LIPs > eligible LIPs whose aggregate amount of
` 5,00,000 for any of the PYs during the premium payable does not exceed
term of such eligible LIP ` 5,00,000 for any of the PYs during their
term would be eligible for exemption u/s
10(10D), provided their annual premium
≤ 10% of actual capital sum assured.
[Refer Examples 5, 6 and 7 given below]

Example 4:
LIP A B
Date of issue 1.4.2023 1.4.2023
Annual premium 3,00,000 2,00,000
Sum assured 30,00,000 20,00,000
Consideration received as on 01.11.2033 on maturity 32,00,000 21,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for LIP “A” and LIP “B” does not exceed ` 5,00,000 during the term of these
policies.
Further, annual premium payable in respect of LIP “A” and LIP “B” does not exceed 10% of
actual capital sum assured. Therefore, the consideration received under LIP “A” and “B”
would be exempt u/s 10(10D) in A.Y. 2034-35
Example 5:
LIP A B
Date of issue 1.4.2023 1.4.2023
Annual premium 4,50,000 5,50,000

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 5.28 DIRECT TAX LAWS

Sum assured 45,00,000 55,00,000

Consideration received as on 01.11.2033 on maturity 52,00,000 60,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for LIP “A” and LIP “B” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIP “A” would be exempt u/s 10(10D) in
A.Y. 2034-35, since its annual premium payable does not exceed ` 5,00,000 for any
previous year during the term of the policy and also does not exceed 10% of actual capital
sum assured.
Consequently, the consideration received under LIP “B” alone would not be exempt
u/s 10(10D) in A.Y. 2034-35.
Example 6:
LIP A B C
Date of issue 1.4.2023 1.4.2023 1.4.2023
Annual premium 1,00,000 3,50,000 6,00,000
Sum assured 10,00,000 35,00,000 60,00,000
Consideration received as on 01.11.2033 on 12,00,000 40,00,000 70,00,000
maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The aggregate of annual premium payable for LIP
“A”, LIP “B” and LIP “C” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2034-35, since aggregate of annual premium payable for these two policies does not
exceed ` 5,00,000 for any previous year during the term of these two policies and annual
premium payable in respect of these policies does not exceed 10% of actual capital sum
assured.
Consequently, the consideration received under LIP “C” alone would not be exempt
u/s 10(10D) in A.Y. 2034-35.

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 INCOME FROM OTHER SOURCES 5.29

Example 7:
LIP X A B C
Date of issue 1.4.2022 1.4.2023 1.4.2023 1.4.2023
Annual premium 5,50,000 1,00,000 3,50,000 6,00,000
Sum assured 55,00,000 10,00,000 35,00,000 60,00,000
Consideration received as on 62,00,000
01.11.2032 on maturity
Consideration received as on 12,00,000 40,00,000 70,00,000
01.11.2033 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2033-34, except LIP X in P.Y. 2032-33.

Eligibility for exemption u/s 10(10D) - The consideration received under LIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.4.2023, limit
of ` 5,00,000 on amount of premium payable is not applicable, since LIP “X” is not an
eligible LIP.

The aggregate of annual premium payable for LIP “A”, LIP “B” and LIP “C” (being LIPs
issued on or after 1.4.2023) exceeds ` 5,00,000 during the term of these policies.

However, the consideration received under LIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2034-35, since aggregate of annual premium payable for these two policies does not
exceed ` 5,00,000 for any previous year during the term of these two policies and annual
premium payable in respect of these policies does not exceed 10% of actual capital sum
assured.

Consequently, the consideration received under LIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2034-35.

Situation 2: Consideration has been received by the assessee under any one or more eligible
LIPs (i.e., issued on or after 1.4.2023) during any P.Y. preceding the current P.Y. and it has been
claimed to be exempt u/s 10(10D). Such eligible LIPs are referred as “Earlier Exempt Eligible LIPs
(EEE LIPs)” in this paragraph and corresponding examples and reference to eligible LIPs shall not
include EEE LIPs. The exemption u/s 10(10D) would be determined as under:

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 5.30 DIRECT TAX LAWS

I. Where the assessee has received consideration, during the current P.Y., under one
eligible LIP only
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate amount of premium payable on Consideration under such eligible LIP
such eligible LIP and EEE LIPs does not would be eligible for exemption u/s
exceed ` 5,00,000 for any of the PYs during 10(10D).
the term of such eligible LIP and annual
premium in respect of eligible LIP does not
exceed 10% of actual capital sum assured.
If aggregate amount of premium payable on Consideration under such eligible LIP
such eligible LIP and EEE LIPs > ` 5,00,000 would not be eligible for exemption u/s
for any of the PYs during the term of such 10(10D).
eligible LIP

II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible LIP
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate of the amount of Consideration received would be eligible for
premium payable on such eligible exemption under u/s 10(10D).
LIPs and EEE LIPs does not exceed
` 5,00,000 for any of the PYs during
the term of such eligible LIPs and
annual premium in respect of eligible
LIPs also does not exceed 10% of
actual capital sum assured.
If aggregate of the amount of Consideration in respect of any of those eligible
premium payable on such eligible LIPs (whose aggregate amount of premium
LIPs and EEE LIPs > ` 5,00,000 for along with the aggregate amount of premium of
any of the PYs during the term of EEE LIPs does not exceed ` 5,00,000 for any
such eligible LIPs of the PYs during their term) would be eligible
for exemption u/s 10(10D).
[Refer Examples 8, 9 and 10 given below]

Example 8:
LIP X A B C
Date of issue 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 4,50,000 1,00,000 1,50,000 6,00,000
Sum assured 45,00,000 10,00,000 15,00,000 60,00,000

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 INCOME FROM OTHER SOURCES 5.31

Consideration received as on 50,00,000

01.11.2033 on maturity
Consideration received as on 12,00,000 18,00,000 70,00,000
01.11.2034 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2034-35, except LIP X in P.Y. 2033-34.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in P.Y. 2033-34, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “A”, LIP “B” and LIP “C”
along with the premium for LIP “X” exceeds ` 5,00,000 during the term of these policies.
The aggregate of the annual premium payable for LIP “A” and the premium for LIP “X” also
exceeds ` 5,00,000 during the term of these policies.
Consequently, the consideration received under LIP “A”, LIP “B” and LIP “C” would not be
exempt u/s 10(10D) in A.Y. 2035-36.
Example 9:
LIP X A B C
Date of issue 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 2,50,000 2,00,000 2,50,000 6,00,000
Sum assured 25,00,000 20,00,000 25,00,000 60,00,000
Consideration received as on 30,00,000
01.11.2033 on maturity
Consideration received as on 24,00,000 38,00,000 70,00,000
01.11.2034 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2034-35, except LIP X in P.Y. 2033-34.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in P.Y. 2033-34, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “A”, LIP “B” and LIP “C”
along with the premium for LIP “X” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “A” or “B” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2035-36.

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 5.32 DIRECT TAX LAWS

If the consideration received under LIP “A” is claimed to be exempt as aggregate of the
annual premium payable for LIP “X” and “A” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “B” would not be exempt.
If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “X” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “A” would not be exempt. Exemption for consideration
received under LIP “B” is preferred as it is more beneficial to the assessee.
Alternative treatment: If the consideration under LIP “X” was not claimed to be exempt u/s
10(10D) in A.Y. 2034-35 by the assessee, then, the consideration received under LIP “A”
and LIP “B” would be exempt u/s 10(10D) in A.Y. 2035-36 since the aggregate of the annual
premium payable for the LIPs “A” and “B” together did not exceed ` 5,00,000 for any of the
previous years during the term of these two policies. However, the most beneficial
treatment is to claim LIP “X” and “B” as exempt.
It may be noted that in every case, the consideration received for LIP “C” would not be
exempt u/s 10(10D).
Example 10:
LIP X Y A B C
Date of issue 1.4.2023 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 2,00,000 2,00,000 2,00,000 3,00,000 6,00,000
Sum assured 20,00,000 20,00,000 20,00,000 30,00,000 60,00,000
Consideration received 12,00,000
on surrender as on
1.7.2033
Consideration received 24,00,000
as on 01.11.2034 on
maturity
Consideration received 24,00,000 36,00,000 70,00,000
as on 01.11.2035 on
maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in
earlier P.Y. preceding the P.Y.2035-36, except LIP “X” and “Y”.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in A.Y.2034-35, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.

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 INCOME FROM OTHER SOURCES 5.33

The consideration received under LIP “Y” would be exempt u/s 10(10D) in A.Y. 2035-36,
since the aggregate of annual premium payable for LIP “X” and “Y” does not exceed
` 5,00,000 and annual premium payable for LIP “Y” does not exceed 10% of actual capital
sum assured.
The consideration received under LIPs “A”, ULIP “B” and ULIP “C” would not be exempt u/s
10(10D) in A.Y. 2036-37, since aggregate of annual premium payable for these three
policies and LIP “X” and “Y” exceeds ` 5,00,000.
Alternative treatment: If the consideration on surrender under LIP “X” was not claimed to
be exempt u/s 10(10D) in A.Y. 2034-35 by the assessee, then the consideration received
under LIP “Y” would be exempt and the consideration received under LIP “A” or LIP “B”
(any one) can be exempt u/s 10(10D) in A.Y. 2036-37. If the consideration received under
LIP “A” is claimed to be exempt, as aggregate of the annual premium payable for LIP “Y”
and “A” did not exceed ` 5,00,000 for any of the PYs., the consideration received under LIP
“B” would not be exempt.
If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “Y” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “A” would not be exempt. Exemption for consideration
received under LIP “B” is preferred as it is more beneficial to the assessee.
If the consideration on surrender of LIP “X” and on maturity of LIP “Y” were not claimed to
be exempt under section 10(10D) in A.Y.2034-35 and A.Y.2035-36, respectively, then
consideration received under both LIP “A” and LIP “B” would be exempt in A.Y.2036-37
(being LIPs issued on or after 1.4.2023, whose aggregate consideration does not exceed
` 5,00,000).
It may be noted that, in every case, consideration received under LIP “C” would not be
exempt under section 10(10D).
Example 11:

LIP A B C
ULIP X Y
Date of issue 1.4.2021 1.4.2023 1.4.2023 1.4.2023 1.4.2023
Annual premium 1,00,000 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received 6,00,000 6,00,000
on surrender as on
1.7.2033

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 5.34 DIRECT TAX LAWS

Consideration received 12,00,000 18,00,000 34,00,000

as on 01.11.2034 on
maturity
Note – The assessee did not receive any consideration under any other eligible LIPs or
ULIPs in earlier P.Y. preceding the P.Y.2034-35, except ULIP “X” and LIP “A”.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2034-35, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
The consideration under ULIP “Y” would be exempt u/s 10(10D) in A.Y.2035-36, since the
aggregate of annual premium for UIP “X” and ULIP “Y” does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
The consideration under LIP “A” would be exempt u/s 10(10D) in A.Y.2034-35, since the
annual premium does not exceed ` 5,00,000 and also does not exceed 10% of actual
capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “B” and LIP “C” along
with the premium for LIP “A” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “B” or “C” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2035-36.
If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “A” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “C” would not be exempt.
If the consideration received under LIP “C” is claimed to be exempt as aggregate of the
annual premium payable for LIP “A” and “C” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “B” would not be exempt. Exemption for consideration
received under LIP “C” should be preferred as it is more beneficial to the assessee.
Alternative treatment: If the consideration under LIP “A” was not claimed to be exempt u/s
10(10D) in A.Y. 2034-35 by the assessee, then the consideration received under LIP “B”
and LIP “C” would be exempt u/s 10(10D) in A.Y. 2035-36 since the aggregate of the
annual premium payable for the LIPs “B” and “C” together did not exceed ` 5,00,000 for any
of the previous years during the term of these two policies. This would be most beneficial to
the assessee.
Clarification on GST Component: It is also clarified by the CBDT that the premium payable/
aggregate premium payable for a life insurance policy/policies, other than a ULIP, issued on or after
1.4.2023, for any previous year, would be exclusive of the amount of GST payable on such premium.
Clarification on premium of Term life insurance policy: It is further clarified by the CBDT that
the limit of ` 5,00,000 of amount of premium payable would not be applicable in case of a term life

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 INCOME FROM OTHER SOURCES 5.35

insurance policy i.e. where sum under a life insurance policy is only paid to the nominee in case of
the death of the person insured during the term of the policy and no amount is paid to anyone if
the insured person survives the policy tenure.
Hence, any sum received under a term insurance policy shall continue to be exempt under section
10(10D), irrespective of the amount of the premium payable in respect of such policy. Further the
premium paid for such policies would not be counted for checking the limit of ` 5,00,000 of amount
of premium payable.
Summary

LIP

Policy taken before Policy taken on or after

1.4.2023 1.4.2023

Does premium exceed

10%/15%/20% of Sum If premium does not If premium or aggregate
Assured (SA)? exceed ` 5,00,000 in of premium exceed
any P.Y during the ` 5,00,000 in any P.Y
term of policy during the term of policy

Yes No

Taxable Single LIP Multiple LIP

Exempt u/s
under the 10(10D)
head
Such LIP will be (1) Exemption can be
“Income
taxable under the claimed in respect
from Other
head “Income from of those LIP, at the
Sources”
Other Sources” option of the
assessee, whose
aggregate premium
payable does not
exceed ` 5,00,000
and where
premium does not
exceed 10% of SA.
(2) Remaining LIPs will
be taxable under
the head “Income
from Other
Sources”

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 5.36 DIRECT TAX LAWS

Taxability of sum received under a LIP which is not exempt u/s 10(10D)
Where any sum is received (including the amount allocated by way of bonus) at any time during a
previous year, under a life insurance policy, other than the sum
(i) received under a ULIP
(ii) received under a Keyman insurance policy
which is not exempt under section 10(10D), the sum so received as exceeds the aggregate of the
premium paid during the term of such life insurance policy, and not claimed as deduction under
any other provision of the Act, computed in the prescribed manner, would be chargeable to tax
under the head “Income from other sources”.
Accordingly, the CBDT has, vide this notification, notified Rule 11UACA to compute the income
chargeable to tax under section 56(2)(xiii). Where any person receives at any time during any
previous year any sum under such LIP, then, the income chargeable to tax under section 56(2)(xiii)
during the previous year in which such sum is received has to be computed in the following manner -
Situation Income chargeable to tax during the previous year
in which such sum is received
(i) Where the sum is received for A-B, where
the first time under the LIP A = the sum or aggregate of sum received under the
during the previous year (first LIP during the first previous year; and
previous year) B = the aggregate of the premium paid during the term
of the LIP till the date of receipt of the sum in the first
previous year that has not been claimed as deduction
under any other provision of the Act.
(ii) where the sum is received C-D, where
under the LIP during the C = the sum or aggregate of sum received under the
previous year subsequent to LIP during the subsequent previous year; and
the first previous year D = the aggregate of the premium paid during the term
(subsequent previous year) of the LIP till the date of receipt of the sum in the
subsequent previous year not being premium which –
(a) has been claimed as deduction under any other
provision of the Act; or
(b) is included in “B” or “D” in any of the previous
year(s).

“Sum received under a LIP” means any amount, by whatever name called, received under such
policy which is not exempt under section 10(10D), other than the sum–
(a) received under a ULIP; or
(b) received under a Keyman insurance policy

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 INCOME FROM OTHER SOURCES 5.37

(2) Income chargeable under the head “Income from other sources” only if not
chargeable under the head “Profits and gains of business or profession” -
(i) Any sum received by an employer-assessee from his employees as contributions to any
provident fund, superannuation fund or any other fund for the welfare of the employees.
(ii) Income from letting out on hire, machinery, plant or furniture.
(iii) Where letting out of buildings is inseparable from the letting out of machinery, plant or
furniture, the income from such letting.
(iv) Interest on securities
However, the following Interest income arising to certain persons would be exempt
under section 10(15):
(a) Income by way of interest, premium on redemption or other payment on notified
securities, bonds, annuity certificates or other savings certificates is exempt subject
to such conditions and limits as may be specified in the notification.
Interest on Post Office Savings Bank Account would be exempt from tax to the
extent of:
(1) ` 3,500 in case of an individual account.
(2) ` 7,000 in case of a joint account.
(b) Interest payable —
(1) by public sector companies on certain specified bonds and debentures subject
to the conditions which the Central Government may specify by notification,
including the condition that the holder of such bonds or debentures registers his
name and holding with that company;
Accordingly, the Central Government has specified tax free bonds issued by
India Infrastructure Company Ltd. and tax free, secured, redeemable, non-
convertible Bonds of the Indian Railway Finance Corporation Ltd. (IRFCL),
National Highways Authority of India (NHAI), Rural Electrification Corporation
Ltd. (RECL), Housing and Urban Development Corporation Ltd. (HUDCL),
Power Finance Corporation (PFC),Jawaharlal Nehru Port Trust, Dredging
Corporation of India Limited, Ennore Port Limited and The Indian Renewable
Energy Development Agency Limited, the interest from which would be exempt
under this section.

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 5.38 DIRECT TAX LAWS

(2) by Government of India on deposit made by an employee of the Central or

State Government or a public sector company in accordance with the scheme
as may be notified of the moneys due to him on account of his retirement while
on superannuation or otherwise. It is significant that this scheme is not
applicable to non-Government employees.
The term ‘industrial undertaking’ means any undertaking which is engaged in:
(i) the manufacture or processing of goods; or
(ii) the manufacture of computer software or recording of programmes on
any disc, tape, perforated media or other information device; or
(iii) the business of generation or generation and distribution of electricity or
any other form of power; or
(iv) the business of providing telecommunication services; or
(v) mining; or
(vi) construction of ships, or
(vii) the business of ship-breaking; or
(viii) the operation of ships or aircrafts or construction or operation of rail
systems.

For the purposes of the clause, “interest” shall not include interest paid on
delayed payment of loan or default if which is more than 2% p.a. over the rate of
interest payable in terms of such loan. Interest would include hedging
transaction charges on account of currency fluctuation.
(c) Bhopal Gas Victims - Section 10(15)(v) provides exemption in respect of interest on
securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, in the
Reserve Bank’s Account No. SL/DH 048. Recently, in terms of an order of the
Supreme Court to finance the construction of a hospital at Bhopal to serve the
victims of the gas leak, the shares of the Union Carbide Indian Ltd., have been sold.
The scope of the above exemption has been extended to interest on deposits for the
benefit of the victims of the Bhopal Gas Leak disaster. Such deposits can be held in
such account with the RBI or with a public sector bank as the Central Government
may notify in the Official Gazette.

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 INCOME FROM OTHER SOURCES 5.39

(d) Interest on Gold Deposit Bond issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetization Scheme, 2015 notified by the
Central Government.
(e) Interest on bonds, issued by –
(1) a local authority; or

(2) a State Pooled Finance Entity

and specified by the Central Government by notification in the Official Gazette.
“State Pooled Finance Entity” means such entity which is set up in accordance
with the guidelines for the Pooled Finance Development Scheme notified by the
Central Government in the Ministry of Urban Development.
Accordingly, the Central Government has specified the “Tax-free Pooled Finance
Development Bonds” under Pooled Finance Development Fund Scheme of
Government of India, interest from which would be exempt under section 10(15).
(3) Keyman Insurance Policy
Any sum received under a Keyman insurance policy including the sum allocated by way of bonus
on such policy is chargeable under the head “Income from other sources” if such income is not
chargeable under the head “Profits and gains of business or profession” or under the head
“Salaries” i.e. if such sum is received by any person other than the employer who took the policy
and the employee in whose name the policy was taken.
(4) Residual Income
Any income chargeable to tax under the Act, but not falling under any other head of income shall
be chargeable to tax under the head “Income from other sources” e.g. Salary received by an
MPs/MLAs will not be chargeable to income-tax under the head ‘Salary’ but will be chargeable as
“Income from other sources” under section 56.

Exemption from withdrawals from National Savings Scheme (NSS)

Section 80CCA provides for a deduction for any amount deposited in the NSS. No deduction would be
allowed in relation to such amount deposited on or after 1.4.1992.

The NSS 1987 accounts are still operational, however due to the notification G.S.R.538E dated
29.8.2024 issued by Ministry of Finance through National Savings Scheme (Amendment) Rules,
2024, the balances at the credit of the subscribers of the National Savings Scheme on or after 1st
October, 2024, would not earn any interest.

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 5.40 DIRECT TAX LAWS

Consequent to this notification, depositors who had intended to leave their NSS balances untouched
for future use will lose interest benefit and be compelled to withdraw the balances, making these
amounts taxable.
Section 80CCA has been amended to provide exemption to the withdrawals made from National
Savings Scheme (NSS) on or after 29th August, 2024, for any amount deposited under the scheme
and the interest accrued thereon in respect of which a deduction has been allowed.

Interest from non-SLR Securities of Banks: Whether chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”? [Circular No. 18, dated
2.11.2015]
The issue addressed by this circular is whether in the case of banks, expenses relatable to
investment in non-SLR securities need to be disallowed under section 57(i), by considering interest
on non-SLR securities as “Income from other sources."
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to
income-tax under the head "Income from Other Sources", if the income is not chargeable to
income-tax under the head "Profits and Gains of Business and Profession".
The CBDT clarified that the investments made by a banking concern are part of the business
of banking. Therefore, the income arising from such investments is attributable to the business of
banking falling under the head "Profits and Gains of Business and Profession".

5.4 APPLICABLE RATE OF TAX IN RESPECT OF

CASUAL INCOME [SECTION 115BB]
(1) This section provides that income by way of winnings from lotteries, crossword puzzles,
races including horse races or card games and other games of any sort or from gambling or
betting of any form would be taxed at a flat rate of 30% plus surcharge, if applicable, plus
health and education cess @4%.
However, income by way of winnings from any online game would not be taxed under this
section.
(2) No expenditure or allowance can be allowed from such income.
(3) Deduction under Chapter VI-A is not allowable from such income.
(4) Adjustment of unexhausted basic exemption limit is also not permitted against such income.

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 INCOME FROM OTHER SOURCES 5.41

5.5 APPLICABLE RATE OF TAX IN RESPECT OF

WINNINGS FROM ONLINE GAMES [SECTION
115BBJ]
(1) This section provides that net winnings from any online game would be taxed at a flat rate
of 30% plus surcharge, if applicable, plus health and education cess@4%.

(2) No expenditure or allowance can be allowed from such income.

(3) Deduction under Chapter VI-A is not allowable from such income.

(4) Adjustment of unexhausted basic exemption limit is also not permitted against such income.

(5) Meaning of certain terms

S. No. Term Meaning
(i) Internet The combination of computer facilities and electromagnetic
transmission media, and related equipment and software,
comprising the interconnected worldwide network of computer
networks that transmits information based on a protocol for
controlling such transmission
(ii) Online game A game that is offered on the internet and is accessible by a
user through a computer resource including any
telecommunication device

5.6 DEDUCTIONS ALLOWABLE [SECTION 57]

The income chargeable under the head “Income from other sources” shall be computed after
making the following deductions:
(1) In the case of dividend (other than deemed dividend arise on account of buy-back of
shares by a domestic company) or income in respect of units of a mutual fund specified
under section 10(23D) or income in respect of units of a specified company defined
in the Explanation to section 10(35): Interest expenditure to earn such income is allowed
as deduction subject to a maximum of 20% of such income included in the total income,
without deduction under this section.
No deduction in respect of any expenditure is allowed in case of deemed dividend arise on
account of buy-back of shares by a domestic company.

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 5.42 DIRECT TAX LAWS

(2) In the case of interest on securities: Any reasonable sum paid by way of commission or
remuneration to a banker or any other person for the purpose of realising such interest on
behalf of the assessee.
(3) Income consists of recovery from employees as contribution to any provident fund
etc. in terms of section 2(24)(x): A deduction will be allowed in accordance with the
provisions of section 36(1)(va) i.e. to the extent the contribution is remitted before the due
date under the respective Acts.
(4) Where the income to be charged under this head is from letting on hire of machinery,
plant and furniture, with or without building: The following items of deductions are
allowable in the computation of such income:
(i) the amount paid on account of any current repairs to the machinery, plant or
furniture.
(ii) the amount of any premium paid in respect of insurance against risk of damage or
destruction of the machinery or plant or furniture.

(iii) the normal depreciation allowance in respect of the machinery, plant or furniture, due
thereon.
(5) In the case of income in the nature of family pension: A deduction of a sum equal to 33-
1/3 per cent of such income or ` 15,000 (in case of option regime) or ` 25,000 (in case
of default regime), whichever is less, is allowable.
This deduction is allowable both under the default tax regime u/s 115BAC and under the
optional tax regime i.e., normal provisions of the Act.
For the purposes of this deduction “family pension” means a regular monthly amount
payable by the employer to a person belonging to the family of an employee in the event of
his death.

Exemption in respect of family pension

1. The family pension received by the widow or children or nominated heirs, of a
member of the armed forces (including para-military forces) of the Union, where
the death of such member has occurred in the course of operational duties, in
specified circumstances would, however, be exempt under section 10(19).
2. The family pension received by any member of the family of an individual who had
been in the service of Central or State Government and had been awarded “Param

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 INCOME FROM OTHER SOURCES 5.43

Vir Chakra” or “Vir Chakra” or “Vir Chakra” or other notified gallantry awards would
be exempt under section 10(18)(ii).

(6) Any other expenditure not being in the nature of capital expenditure laid out or
expended wholly and exclusively for the purpose of making or earning such income.

(7) In case of income by way of interest on compensation/ enhanced compensation

received chargeable to tax under section 56(2)(viii): Deduction of 50% of such income.
No deduction would be allowable under any other clause of section 57 in respect of such
income.
ILLUSTRATION 6
Interest on enhanced compensation received by Mr. G during the previous year 2025-26 is
` 5,00,000. Out of this interest, ` 1,50,000 relates to the previous year 2020-21, ` 1,65,000
relates to previous year 2021-22 and ` 1,85,000 relates to previous year 2022-23. Discuss the tax
implication, if any, of such interest income for A.Y.2026-27.
SOLUTION
The entire interest of ` 5,00,000 would be taxable in the year of receipt, namely, P.Y.2025-26.
Particulars `
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) @50% 2,50,000
Interest chargeable under the head “Income from other sources” 2,50,000

Chart summarising the taxability of compensation/enhanced compensation (including

interest) received on compulsory acquisition:

Initial Compensation will be taxable in the year in which first

instalment is received under the head 'Capital Gains'

Enhanced Compensation will be taxable as & when received under

the head 'Capital Gains'

Interest on compensation/ enhanced compensation is taxable in

year of receipt under the head 'Income from Other Sources' after
deduction of 50% of such interest

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 5.44 DIRECT TAX LAWS

5.7 DEDUCTIONS NOT ALLOWABLE [SECTION 58]

No deduction shall be made in computing the “Income from other sources” of an assessee in
respect of the following items of expenses:

(1) In the case of any assessee:

(i) any personal expense of the assessee;

(ii) any interest chargeable to tax under the Act which is payable outside India on which
tax has not been paid or deducted at source.

(iii) any payment taxable in India as salaries, if it is payable outside India unless tax has
been paid thereon or deducted at source.

(2) Any expenditure in respect of which a payment is made to a related person or made
in cash in excess of ` 10,000: In addition to these disallowances, section 58(2)
specifically provides that the disallowance of any expenditure in respect of which a payment
is made to a related person, to the extent the same is considered excessive or
unreasonable by the Assessing Officer, having regard to the FMV. and disallowance of
payment or aggregate of payments exceeding ` 10,000 made to a person during a day
otherwise than by account payee cheque or draft or ECS through bank account or through
such other prescribed electronic mode such as credit card, debit card, net banking, IMPS,
UPI, RTGS, NEFT, and BHIM Aadhar Pay covered by section 40A will be applicable to the
computation of income under the head ‘Income from other sources’ as well.

(3) Disallowance of 30% of expenditure: 30% of expenditure shall not be allowed, in respect
of a sum which is payable to a resident and on which tax is deductible at source, if

• such tax has not been deducted or;

• such tax after deduction has not been paid on or before the due date of return
specified in section 139(1).

In case, assessee fails to deduct the whole or any part of tax on any such sum but is not
deemed as assessee in default under the first proviso to section 201(1) by reason that such
payee –

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

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 INCOME FROM OTHER SOURCES 5.45

(iii) has paid the tax due on the income declared by him in such return of income, and
the payer furnishes a certificate to this effect from an accountant in such form as
may be prescribed,

it would be deemed that the assessee has deducted and paid the tax on such sum.

The date of deduction and payment of taxes by the payer shall be deemed to be the date on
which return of income has been furnished by the payee.

(4) No deduction in respect of any expenditure incurred in connection with casual

income: No deduction in respect of any expenditure or allowance in connection with
income by way of earnings from lotteries, cross word puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form or nature
whatsoever shall be allowed in computing the said income.

The prohibition will not, however, apply in respect of the income of an assessee, being the
owner of race horses, from the activity of owning and maintaining such horses. In respect
of the activity of owning and maintaining race horses, expenses incurred shall be allowed
even in the absence of any stake money earned. Such loss shall be allowed to be carried
forward in accordance with the provisions of section 74A.

5.8 DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]

The provisions of section 41(1) are made applicable, so far as may be, to the computation of
income under this head. Accordingly, where a deduction has been made in respect of a loss,
expenditure or liability and subsequently any amount is received or benefit is derived in respect of
such expenditure incurred or loss or trading liability allowed as deduction, then it shall be deemed
as income in the year in which the amount is received or the benefit is accrued.

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 5.46 DIRECT TAX LAWS

SIGNIFICANT SELECT CASES

S. No. Case Law

1. PCIT v. Dr. Ranjan Pai (2021) 431 ITR 250 (Karn)
Issue Analysis & Decision
Can bonus shares received The issue of bonus shares by capitalization of
by shareholders be taxable reserves is merely a reallocation of the company's
under the head ‘Income funds. There is no inflow of fresh funds or increase
from other sources’ as per in the capital employed, which remains the same.
the provisions of section Thus, there is no addition or alteration to the profit-
56(2)(x), as they are making apparatus and the total funds available with the
received without company remain the same. On the other hand, when a
consideration? shareholder gets bonus shares, the value of the original
shares held by him goes down and the market value as
well as intrinsic value of the two shares put together will
be the same or nearly the same as the value of original
share before the issue of bonus shares. Thus, any profit
derived by the assessee shareholder on account of
receipt of bonus shares is adjusted by depreciation
in the value of equity shares originally held by him.
Hence, the provisions of section 56(2)(x) would not
be attracted in the hands of the recipient
shareholders on receipt of bonus shares.
Note - This decision was rendered in the context of
section 56(2)(vii); however, the underlying principle
emanating therefrom applies with equal force in the
context of the present provisions contained in section
56(2(x). Accordingly, the issue and decision has been
presented with reference to section 56(2)(x).
2. CIT v. Sree Rama Multi Tech Ltd. (2018) 403 ITR 426 (SC)
Issue Analysis & Decision
Is interest income from The assessee-company was statutorily required to keep
share application money share application money in a separate account till the
deposited in bank eligible allotment of shares was completed. Part of the share
for set-off against public application money would normally have to be returned to
issue expenses or should unsuccessful applicants, and therefore, the entire share
such interest be subject to application money would not ultimately be appropriated
tax under the head ‘Income by the company. The interest earned was inextricably
from Other Sources’? linked with the requirement of raising share capital.

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 INCOME FROM OTHER SOURCES 5.47

Any surplus money deposited in the bank for the purpose

of earning interest is liable to be taxed as “Income from
Other Sources”. Here, the share application money was
deposited with the bank not to make additional income
but to comply with the statute. The interest accrued on
such deposit is merely incidental. Moreover, the issue of
shares relates to capital structure of the company and
hence, expenses incurred in connection with the issue of
shares are to be capitalized. Accordingly, the accrued
interest is not liable to be taxed as “Income from
Other Sources”; the same is eligible to be set-off
against public issue expenses.
3. Movaliya Bhikhubhai Balabhai v. ITO (TDS) (2016) 388 ITR 343 (Guj)
Issue Analysis & Decision
Is interest on enhanced The assessee has received interest u/s 28 of the Land
compensation u/s 28 of the Acquisition Act, 1894 which represents enhanced
Land Acquisition Act, 1894 value of land and thus, partakes the character of
assessable as capital gains compensation and not interest. Hence, interest u/s 28
or as income from other is liable to be taxed under the head of ‘Capital Gains’
sources? and not under ‘Income from Other Sources’. On the other
hand, interest u/s 34 of the Land Acquisition Act, 1894 is
for the delay in making payment after the compensation
amount is determined. Such amount is liable to be taxed
under the head ‘Income from Other Sources’.
Note: The Land Acquisition Act, 1894 has now been
repealed and replaced by the Right to Fair
Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013. Section 72
and Section 80 of the new legislation have similar
provisions regarding award of interest.
4. CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.)
Issue Analysis & Decision
What are the tests for U/s 2(22), “dividend” does not include, inter alia, any
determining “substantial advance or loan made to a shareholder by a company in
part of business” of lending the ordinary course of its business, where the lending of
company for the purpose of money is a substantial part of the business of the
application of exclusion company.
provision u/s 2(22)? Percentage of turnover in relation to the whole as
also the percentage of the profit in relation to the
whole and sometimes even percentage of manpower

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used for a particular part of the business in relation

to the total manpower or work force of the company
would be required to be taken into consideration for
determining the substantial part of business. The capital
employed for a specific division of a company in
comparison to total capital employed would also be
relevant to determine whether the part of the business
constitutes a substantial part.
5. CIT v. Vir Vikram Vaid (2014) 367 ITR 365 (Bom)
Issue Analysis & Decision
Can repair and renovation The expenditure incurred by virtue of repairs and
expenses incurred by a renovation on the premises cannot be brought within the
company in respect of definition of advance or loan given to the shareholder
premises leased out by a having substantial interest in the company, though he is
shareholder having the owner of the premises. It cannot be treated as
substantial interest in the payment by the company on behalf of the shareholder or
company, be treated as for the individual benefit of such shareholder.
deemed dividend? Accordingly, the repair and renovation expenses in
respect of premises owned by the shareholder
having substantial interest in the company and
occupied by the company cannot be treated as
deemed dividend.
6. Pradip Kumar Malhotra v. CIT (2011) 338 ITR 538 (Cal.)
Issue Analysis & Decision
Can the loan or advance The phrase "by way of advance or loan" appearing in
given to a shareholder by section 2(22)(e) must be construed to mean those
the company, in return for advances or loans which a shareholder enjoys simply on
an advantage conferred on account of being a person who is the beneficial owner of
the company by the shares (not being shares entitled to a fixed rate of
shareholder, be deemed as dividend whether with or without a right to participate in
dividend under section profits) holding not less than 10% of the voting power. In
2(22)(e)? case such loan or advance is given to such shareholder
as a consequence of any further consideration which is
beneficial to the company received from such a
shareholder, such advance or loan cannot be deemed as
dividend within the meaning of the Act.
Thus, only gratuitous loan or advance given by a
company to a shareholder, who is the beneficial owner of
shares holding not less than 10% of the voting power,
would come within the purview of section 2(22)(e) but not

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 INCOME FROM OTHER SOURCES 5.49

cases where the loan or advance is given in return for an

advantage conferred upon the company by such
shareholder.
7. CIT v. Ambassador Travels (P) Ltd. (2009) 318 ITR 376 (Del.)
Issue Analysis & Decision
Would the provisions of U/s 2(22)(e), loans and advances made out of
deemed dividend u/s accumulated profits of a company in which public are not
2(22)(e) be attracted in substantially interested to a beneficial owner of shares
respect of financial holding not less than 10% of the voting power or to a
transactions entered into in concern in which such shareholder has substantial
the normal course of interest is deemed as dividend. However, this provision
business? would not apply in the case of advance made in the
course of the assessee’s business as a trading
transaction.
The assessee was involved in booking of resorts for
the customers of these companies and entered into
normal business transactions as a part of its day-to-
day business activities. Such financial transactions
cannot under any circumstances be treated as loans
or advances received by the assessee from these
concerns for the purpose of application of section
2(22)(e).
8. CIT v. Manjoo and Co. (2011) 335 ITR 527 (Kerala)
Issue Analysis & Decision
Can winnings of prize The receipt of the prize money is not in his capacity as a
money on unsold lottery lottery distributor but as a holder of the lottery ticket
tickets held by the which won the prize. The Lottery Department also does
distributor of lottery tickets not treat it as business income received by the distributor
be assessed as business but instead treats it as prize money paid on which tax is
income and be subject to deducted at source.
normal rates of tax instead Further, winnings from lotteries are assessable under
of the rates prescribed u/s the special provisions of section 115BB, irrespective
115BB? of the head under which such income falls.

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 5.50 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of
` 20 lakhs. The balance as at 31.03.2025 in General Reserve was ` 6 lakhs. The company
on 1.04.2025 gave an interest-free loan of ` 5 lakhs to its Supervisor having salary of
` 4,000 p.m., who in turn on 15.4.2025 advanced the said amount of loan so taken from the
company to Shri Parimal. The Assessing Officer had treated the amount of advance as
deemed dividend. Is the action of Assessing Officer correct?
2. Mr. Santhanam holding 25% voting power in VKS Manufacturing Private Limited permitted
his own land to be mortgaged to a bank for enabling the company to obtain a loan.
Mr. Santhanam requested the company to release the property from the mortgage. The
company failed to do so, but for retaining the benefit of bank loan it gave an advance of
` 10 lakhs to Mr. Santhanam, which was authorized by a resolution passed by the Board of
Directors. The company's accumulated profit on the date of payment of advance was ` 50
lakhs. The Assessing Officer proposes to treat the amount of ` 10 lakhs as deemed
dividend by invoking the provision of section 2(22)(e).
Is the proposition of the Assessing Officer correct in law?
3. An enterprise engaged in manufacturing of steel balls discontinued its activities and decided
to lease out its factory building, plant and machinery and furniture from 1.4.2025 on a
consolidated lease rent of ` 50,000 per month. Compute the income for Assessment Year
2026-27 of the assessee from following information: `
(i) Interest received on deposits 1,00,000
(ii) Brokerage paid on hundi loan taken 2,000
(iii) Interest paid on hundi and other loans which were given as deposits
on interest to others 75,000
(iv) Expenses incurred on repairs of building, plant and machinery 15,000
(v) Fire insurance premium of plant and machinery and furniture 12,000
(vi) Depreciation for the year 1,47,500
(vii) Legal fees paid to an advocate for drafting and registering
the lease agreement 1,500

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 INCOME FROM OTHER SOURCES 5.51

(viii) Factory licence fees paid for the year 1,000

(ix) There is unabsorbed depreciation of ` 2,75,000 of the Assessment Years 2024-25 and
2025-26.
(x) Interest paid in (iii) above includes an amount of ` 25,000 remitted to a non-resident
outside India on which tax was not deducted at source.

4. In July 2025, Mr. Pervez employed as Marketing Manager in a Pharma company, received
a Maruti car as gift from a distributor of the company. The value of the gifted car is
estimated at ` 2,60,000. Is the value of car taxable as income? If so, under what head it is
taxable?

Answers
1. The company had advanced a loan to an employee who in turn had advanced the same to
the Managing Director of the company holding 70% of its capital. By virtue of the provisions
of section 2(22)(e), the same shall be treated as the payment by a company in which public
are not substantially interested, on behalf of, or for individual benefit of any such share
holder (who holds not less than 10% of the voting power), to the extent to which the
company possesses accumulated profits.

In this case, the company has reserves of ` 6 lakhs on 31st March of the preceding year
and the amount of loan advanced on 1st April is ` 5 Lakhs. Therefore, the payment is to be
treated as deemed dividend. The amount of interest-free loan of ` 5 lakhs given by the
company to the supervisor who in turn had given the same to Mr. Parimal, shall be
construed as the amount given for the benefit of Mr. Parimal and would be treated as
deemed dividend. This has been held by the Supreme Court in the case of
L. Alagusundaram Chettiar v. CIT (2001) 252 ITR 893.
2. The issue under consideration is whether loan or advance given to a shareholder by the
company, in return of an advantage or benefit conferred on the company by the
shareholder, can be deemed as dividend under section 2(22)(e) of the Income-tax Act, 1961
in the hands of the shareholder
The facts of the case are similar to the facts in Pradip Kumar Malhotra v. CIT (2011) 338
ITR 538, wherein the above issue came up before the Calcutta High Court.
The High Court observed that the phrase "by way of advance or loan" appearing in section
2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys
simply on account of being a person who is the beneficial owner of shares (not being

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 5.52 DIRECT TAX LAWS

shares entitled to a fixed rate of dividend whether with or without a right to participate in
profits) holding not less than 10% of the voting power.

In case such loan or advance is given to such shareholder as a consequence of any further
consideration received from such a shareholder which is beneficial to the company, such
advance or loan cannot be a deemed dividend within the meaning of the Act.

Thus, gratuitous loan or advance given by a company to a shareholder, who is the

beneficial owner of shares holding not less than 10% of the voting power, would come
within the purview of section 2(22)(e) to the extent of accumulated profits of the company
but not the cases where the loan or advance is given in return for an advantage conferred
upon the company by such shareholder.
In this case, advance of ` 10 lakhs was given by VKS Manufacturing (P) Ltd. to
Mr. Santhanam holding 25% of voting power in lieu of non-release of his personal property
from mortgage thereby enabling the company to retain the benefit of loan obtained from
bank. Therefore, applying the rationale of the Calcutta High Court ruling in Pradip Kumar
Malhotra’s case, such advance cannot be brought within the purview of section 2(22)(e),
since it was not in the nature of gratuitous advance but was given to protect the interest of
the company.
The proposition of the Assessing Officer to treat the amount of ` 10 lakhs as deemed dividend
by invoking the provisions of section 2(22)(e) in this case is, therefore, not correct.
3. The income derived from leased assets shall be chargeable to tax as 'Income from other
sources' under section 56(2)(iii) but the computation thereof shall be made after allowing
deductions specified under sections 30, 31 and 32 subject to section 38. This is as per the
provisions of section 57(ii) and 57(iii).
Computation of income under the head “Income from other sources”
Particulars ` `
(A) Lease Rent for 12 months @ ` 50,000 p.m. 6,00,000
Less: Expenses and deductions allowable under section
57(ii) & 57(iii):
Repairs 15,000
Fire Insurance Premium 12,000
Legal expenses for drafting of lease agreement 1,500
Factory Licence fee 1,000
Depreciation for the year 1,47,500

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 INCOME FROM OTHER SOURCES 5.53

Unabsorbed depreciation of earlier assessment

years – eligible for deduction (Note 1) 2,75,000 4,52,000
1,48,000
(B) Interest on Deposits 1,00,000
Less: Expenses allowable under section
57(i)
Brokerage ` 2,000
Interest on hundi loans (Note 2) ` 50,000 52,000 48,000
Total Income 1,96,000

Notes:
1. Unabsorbed depreciation of ` 2,75,000 pertains to earlier assessment years. The
unabsorbed depreciation shall form part of the current year depreciation and can be
set off against any other head of income. Accordingly, the amount of ` 2,75,000 is
adjustable/ allowed to be set off against 'Income from other sources'.
2. Since deposits are made by investing amount received on hundi and other loans, the
interest on hundi and other loans would be eligible for deduction from the income arising
on such deposits.
However, interest paid to non-resident is not eligible for deduction as the tax has not
been deducted at source.

4. Mr. Pervez, an employee of a Pharma company, has received a car as a gift from a
distributor of the company. Since there is no employer-employee relationship in this case
between the distributor and Mr. Pervez, the value of gift is not a perquisite chargeable to
tax under the head “Salaries”.
Section 56(2)(x) brings within its scope the value of any property received by any person.
For this purpose, “property” means immovable property being land or building or both,
shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures,
any work of art or bullion.
Therefore, for the purpose of attracting the provisions of section 56(2)(x) for chargeability
under the head “Income from Other Sources”, an individual should be in receipt of property
as defined therein. Since, car is not included in the definition of “property”, the provisions of
section 56(2)(x) would not be attracted in the hands of Mr. Pervez.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 6
INCOME OF OTHER PERSONS
INCLUDED IN ASSESSEE’S
TOTAL INCOME
LEARNING OUTCOMES
After studying this chapter, you would be able to -
 examine the cases where clubbing provisions would be attracted;
 examine the circumstances when income of minor child, has to be
included in the hands of parent and exemption available in respect of such
included income;
 examine the circumstances when the income of HUF has to be included
in the hands of its member(s);
 apply the clubbing provisions to determine the amount of income which
need to be included in the hands of another person;
 examine the cases of cross transfers to determine the person in whose
hands the income arising from assets transferred has to be included and
the portion of income that has to be included;
 compute the income under different heads of income after applying the
clubbing provisions.

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 6.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Transfer of income
without transfer of asset
[Section 60] Transfer by way of
a trust which is not
revocable during Transferor As and when
Income arising from the life time of the derives no power to
revocable transfer of Exception beneficiary or in direct or revoke arises,
assets [Section 62] case of any other indirect benefit clubbing
[Section 61] transfer, not from such provisions
revocable during income would apply
the lifetime of the
transferee
Income of other persons included in assessee's total income

Remuneration to
Where spouse possesses
spouse from a concern
technical or professional
in which individual has Exception
qualifications, clubbing
a substantial interest
provisions will not apply
[Section 64(1)(ii)]

Spouse's Income arising to spouse from an asset*

Income transferred without adequate consideration or not
in connection with an agreement to live apart
[Section 64(1)(iv)]

Income arising to any person or AOPs from assets

transferred without adequate consideration for the
benefit of spouse [Section 64(1)(vii)]

All income of a minor is clubbed Income from manual

with the income of parent, whose work or from skill, talent
total income excluding minor's or specialised
income, is greater. Exemption of knowledge or experience
Minor's income
upto ` 1,500 per child is available Exceptions will not be clubbed
[Section 64(1A)]
u/s 10(32) if that parent has
exercised the option of shifting out Income of a minor child
of the default tax regime provided suffering from disability
under section 115BAC(1A). mentioned u/s 80U shall
Income arising to son's wife from an asset not be clubbed
transferred without adequate consideration
[Section 64(1)(vi)]
Income of
son's wife Income arising to any person or AOPs from assets transferred without
adequate consideration for the benefit of sons's wife
[Section 64(1)(viii)]

* In case of transfer of house property to spouse without adequate consideration, transferor will be deemed as owner of such property
as per section 27(i). In such a case, section 64(1)(iv) will not apply.

© The Institute of Chartered Accountants of India

 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.3

6.1 CLUBBING OF INCOME – AN INTRODUCTION

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income.
However, there are certain cases where an assessee has to pay tax in respect of income of another
person. The provisions for the same are contained in sections 60 to 65 of the Act. These provisions
have been enacted to counteract the tendency on the part of the tax-payers to dispose off their
property or transfer their income in such a way that their tax liability can be avoided or reduced.
These provisions can be categorized as follows:
• Income of other persons included in an assessee’s total income [Sections 60-63]
• Income of other persons included in an Individual’s total income [Section 64]
Note - In the case of individuals, income-tax is levied on a slab system on the total income. The tax
system is progressive i.e., as the income increases, the applicable rate of tax increases. Some
taxpayers in the higher income bracket have a tendency to divert some portion of their income to
their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance,
clubbing provisions have been incorporated in the Act, under which income arising to certain persons
(like spouse, minor child etc.) have to be included in the income of the person who has diverted his
income for the purpose of computing tax liability.

6.2 INCOME OF OTHER PERSONS INCLUDIBLE IN

ASSESSEE’S TOTAL INCOME
(1) Transfer of income without transfer of asset [Section 60]
(i) If any person transfers the income from any asset without transferring the asset itself, such
income is to be included in the total income of the transferor.
(ii) It is immaterial whether the transfer is revocable or irrevocable and whether it was made
before the commencement of this Act or after its commencement.
Example: Mr. A confers the right to receive rent in respect of his house property on his wife,
Mrs. A, without transferring the house itself to her. In this case, the rent received by Mrs. A will be
clubbed with the income of Mr. A.
(2) Income arising from revocable transfer of assets [Section 61]
All income arising to any person by virtue of a revocable transfer of assets is to be included in the
total income of the transferor.

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 6.4 DIRECT TAX LAWS

Meaning of revocable transfer [Section 63]

Transfer is deemed to be revocable if—
(i) it contains any provision for the retransfer, directly or indirectly, of the whole or any part of
the income or assets to the transferor, or
(ii) it gives, in any way to the transferor, a right to reassume power, directly or indirectly, over
the whole or any part of the income or the assets.
This clubbing provision will operate even if only part of income of the transferred asset had been
applied for the benefit of the transferor. Once the transfer is revocable, the entire income from the
transferred asset is includible in the total income of the transferor.

Exception where clubbing provisions are not attracted even in case of revocable transfer
[Section 62]
Section 61 will not apply to any income arising to any person if there is -
(i) a transfer by way of trust which is not revocable during the life time of the beneficiary; and

(ii) any other transfer, which is not revocable during the life time of the transferee.
In the above cases, the income from the transferred asset is not includible in the total income of the
transferor, provided the transferor derives no direct or indirect benefit from such income.
If the transferor receives direct or indirect benefit from such income, such income is to be included
in his total income even though the transfer may not be revocable during the life time of the
beneficiary or transferee, as the case may be.
As and when the power to revoke the transfer arises, the income arising by virtue of such transfer
will be included in the total income of the transferor.

6.3 INCOME OF OTHER PERSONS INCLUDIBLE IN AN

INDIVIDUAL’S TOTAL INCOME

(1) Clubbing of income arising to spouse

(I) Income by way of remuneration from a concern in which the individual has substantial
interest [Section 64(1)(ii)]
(i) Remuneration in cash or kind to spouse from a concern in which the individual has a
substantial interest is to be clubbed: In computing the total income of any individual, all

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.5

such income which 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 such individual has a substantial interest shall be included.

Circumstances when an
individual is deemed to
have substantial interest
in a concern

Where the concern is a

In any other case
company

If equity shares carrying 20% or If such person is entitled, or such

more of voting power are person and one or more of his
beneficially owned by such person relatives are entitled in the
or partly by such person and partly aggregate, to receive 20% or more
by one or more of his relatives at profit of such concern at any time
any time during the P.Y. during the P.Y.

The term ‘relative’ in relation to an individual means the husband, wife, brother or sister or any lineal
ascendant or descendant of that individual [Section 2(41)].

(ii) Clubbing provisions will not apply where remuneration is received on account of
technical or professional qualifications: Clubbing provisions, however, does not apply
where the spouse of the said individual possesses technical or professional qualifications and
the income to the spouse is solely attributable to the application of his/her technical or
professional knowledge or experiences. In such an event, the income arising to such spouse
is to be assessed in his/her hands.
(iii) Both husband and wife have substantial interest in a concern: 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 will be includible in the hands of that spouse, whose
total income, excluding such income is higher.
Where any such income is once included in the total income of either spouse, income arising in the
succeeding year shall not be included in the total income of the other spouse unless the Assessing
Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary to do
so.

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 6.6 DIRECT TAX LAWS

ILLUSTRATION 1
Mr. Arun holds shares carrying 55% voting power in MNO (P) Ltd. Mrs. Anamika, wife of Mr. Arun is
working as a computer software programmer in MNO (P) Ltd. at a salary of ` 35,000 p.m. She is,
however, not qualified for the job. The other income of Mr. Arun & Mrs. Anamika are ` 7,30,000 &
` 4,20,000, respectively. Compute the gross total income of Mr. Arun and Mrs. Anamika for the
A.Y.2026-27 if they are paying tax under default tax regime.
SOLUTION
Mr. Arun holds shares carrying 55% voting power in MNO (P) Ltd i.e., a substantial interest in the
company. His wife is working in the same company without any professional qualifications for the
same. Thus, by virtue of the clubbing provisions of the Act, the salary received by Mrs. Anamika
from MNO (P) Ltd. will be clubbed in the hands of Mr. Arun.
Computation of Gross total income of Mr. Arun
Particulars ` `
Salary received by Mrs. Anamika (` 35,000 × 12) 4,20,000
Less: Standard deduction under section 16(ia) 75,000 3,45,000
Other Income 7,30,000
Gross total income 10,75,000
The gross total income of Mrs. Anamika is ` 4,20,000.
ILLUSTRATION 2
Will your answer be different if Mrs. Anamika was qualified for the job?
SOLUTION

If Mrs. Anamika possesses professional qualifications for the job, then the clubbing provisions shall
not be applicable.
Gross total income of Mr. Arun = ` 7,30,000 (other income)
Gross total income of Mrs. Anamika = Salary received by Mrs. Anamika [` 35,000×12] less
` 75,000, being the standard deduction under section 16(ia) plus other income [` 4,20,000] =
` 7,65,000
ILLUSTRATION 3
Mr. Binu holds shares carrying 33% voting power in Yamma (P) Ltd. Mrs. Babita is working as an
accountant in Yamma (P) Ltd. getting income under the head salary (computed) of ` 3,60,000
without any qualification in accountancy. Mr. Binu also receives ` 32,000 as interest on securities.

© The Institute of Chartered Accountants of India

 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.7

Mrs. Babita owns a house property which she has let out. Rent received from tenants is ` 6,500
p.m. Compute the gross total income of Mr. Binu and Mrs. Babita for the A.Y. 2026-27.
SOLUTION
Since Mrs. Babita is not professionally qualified for the job, the clubbing provisions shall be
applicable.

Computation of Gross total income of Mr. Binu

Particulars `
Income from salary of Mrs. Babita (Computed) 3,60,000
Income from other sources
- Interest on securities 32,000
3,92,000

Computation of gross total income of Mrs. Babita

Particulars ` `
Income from Salary Nil
[clubbed in the hands of Mr. Binu]
Income from house property
Gross Annual Value [` 6,500 × 12] 78,000
Less: Municipal taxes paid -
Net Annual Value (NAV) 78,000
Less: 30% of NAV [deduction under section 24(b)] 23,400 54,600
Gross total income 54,600

(II) Income arising to the spouse from an asset transferred without adequate consideration
[Section 64(1)(iv)]

(i) Transfer of asset (other than house property): Where there is a transfer of an asset (other
than house property), directly or indirectly, from one spouse to the other, otherwise than for
adequate consideration or in connection with an agreement to live apart, any income arising
to the transferee-spouse from the transferred asset, either directly or indirectly, shall be
included in the total income of the transferor-spouse.
(ii) Transfer of house property: In the case of transfer of house property, the provisions are
contained in section 27. If an individual transfers a house property to his spouse, without
adequate consideration or otherwise than in connection with an agreement to live apart, the

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 6.8 DIRECT TAX LAWS

transferor shall be deemed to be the owner of the house property and its annual value will be
taxed in his hands.

(iii) Income from accretion of the transferred asset: It may be noted that any income from the
accretion of the transferred asset is not to be clubbed with the income of the transferor i.e.,
the income arising on transferred assets alone has to be clubbed. However, income earned
by investing such income (arising from transferred asset) cannot be clubbed.
(iv) Meaning of adequate consideration: It is also to be noted that natural love and affection do
not constitute adequate consideration. Therefore, where an asset is transferred without
adequate consideration, the income from such asset will be clubbed in the hands of the
transferor.
(v) Transferred asset invested in business: Where the assets transferred, directly or indirectly,
by an individual to his spouse are invested by the transferee in the business, proportionate
income arising to the transferee from such investment is to be included in the total income of
the transferor. If the investment is in the nature of contribution of capital, proportionate
interest receivable by the transferee from the firm will be clubbed with the income of the
transferor.
Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business
or by way of capital contribution in a firm as a partner, as the case may be, by the transferee
as on that day.

ILLUSTRATION 4
Mr. Rahul started a proprietary business on 01.04.2024 with a capital of ` 6,00,000. He incurred a
loss of ` 3,00,000 during the year 2024-25. To overcome the financial position, his wife
Mrs. Radha, a software engineer, gave a gift of ` 7,00,000 on 01.04.2025, which was immediately
invested in the business by Mr. Rahul. He earned a profit of ` 5,00,000 during the year 2025-26.
Compute the amount to be clubbed in the hands of Mrs. Radha for the Assessment Year 2026-27.
If Mrs. Radha gave the said amount as loan, what would be the amount to be clubbed?
SOLUTION
Section 64(1)(iv) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the
individual, if the income earned is from the assets (other than house property) transferred directly or
indirectly to the spouse of the individual, otherwise than for adequate consideration or in connection
with an agreement to live apart.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.9

In this case, Mr. Rahul received a gift of ` 7,00,000 on 1.4.2025 from his wife Mrs. Radha, which he
invested in his business immediately. The income to be clubbed in the hands of Mrs. Radha for the
A.Y. 2026-27 is computed as under:
Particulars Mr. Rahul’s capital Capital contribution Total (`)
contribution (`) out of gift from
Mrs. Radha (`)
Capital as on 1.4.2025 3,00,000 7,00,000 10,00,000
(6,00,000 – 3,00,000)
Profit for P.Y.2025-26 to be 1,50,000 3,50,000 5,00,000
apportioned on the basis of 3 7
capital employed on the first �5,00,000× � �5,00,000× �
10 10
day of the previous year i.e.
as on 1.4.2025 (3:7)

Therefore, the income to be clubbed in the hands of Mrs. Radha for the A.Y.2026-27 is
` 3,50,000.
In case, Mrs. Radha gave the said amount of ` 7,00,000 as a bona fide loan, then, clubbing
provisions would not be attracted.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mr. Rahul, since he
has received a sum of money exceeding ` 50,000 without consideration from a relative i.e., his wife.
(III) Transfer of assets for the benefit of spouse [Section 64(1)(vii)]
All income arising directly or indirectly to any person or association of persons, from the assets
transferred, directly or indirectly, to such person or association of persons by an individual without
adequate consideration is includible in the income of the individual to the extent such income is used
by the transferee for the immediate or deferred benefit of the transferor’s spouse.

(2) Clubbing of income arising to son’s wife

(I) Income arising to son’s wife from the assets transferred without adequate
consideration by the father-in-law or mother-in-law [Section 64(1)(vi)]
(i) Asset transferred without adequate consideration: Where an asset is transferred, directly
or indirectly, by an individual to his or her son’s wife without adequate consideration, the
income from such asset is to be included in the total income of the transferor.
(ii) Asset transferred invested in the business: For this purpose, where the assets transferred
directly or indirectly by an individual to his or her son’s wife are invested by the transferee in
the business, proportionate income arising from such investment is to be included in the total

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 6.10 DIRECT TAX LAWS

income of the transferor. If the investment is in the nature of contribution of capital, the
proportionate interest receivable from firm will be clubbed with the income of the transferor.

Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business
or by way of capital contribution in a firm as a partner, as the case may be, by the transferee
as on that day.

(II) Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)]
All income arising directly or indirectly, to any person or association of persons from the assets trans-
ferred, directly or indirectly, without adequate consideration, to such person or association of persons
by an individual will be included in the total income of the individual to the extent such income is used
by the transferee for the immediate or deferred benefit of the transferor’s son’s wife.

Note: Where any asset is transferred by a person to any other person without consideration or for
inadequate consideration, the provisions of 56(2)(x) would get attracted in the hands of transferee,
if conditions specified thereunder are satisfied.

ILLUSTRATION 5
Mrs. Komal transferred her immovable property to TPS Co. Ltd. subject to a condition that out of the
rental income, a sum of ` 42,000 per annum shall be utilized for the benefit of her son’s wife.
Mrs. Komal claims that the amount of ` 42,000 (utilized by her son’s wife) should not be included in
her total income as she no longer owned the property.
Examine with reasons whether the contention of Mrs. Komal is valid in law.
SOLUTION
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset,
directly or indirectly, otherwise than for adequate consideration, to any person to the extent to which
the income from such asset is for the immediate or deferred benefit of son’s wife. Such income shall
be included in computing the total income of the transferor-individual.
Therefore, income of ` 42,000 meant for the benefit of daughter-in-law is chargeable to tax in the
hands of transferor i.e., Mrs. Komal in this case.
Hence, the contention of Mrs. Komal is not valid in law.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.11

Note - In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be
otherwise than for adequate consideration. In this case, it is presumed that the transfer is otherwise
than for adequate consideration and therefore, the clubbing provisions are attracted. Moreover, the
provisions of section 56(2)(x) will also get attracted in the hands of TPS Co Ltd., if the conditions
specified thereunder are satisfied.
If it is presumed that the transfer was for adequate consideration, the provisions of section 64(1)(viii)
and section 56(2)(x) would not be attracted.

(3) Clubbing of minor’s income

(i) All income of a minor is to be included in the income of his parent.

(ii) However, the income derived by the minor from manual work or from any activity involving
his skill, talent or specialized knowledge or experience will not be included in the income of
his parent.
(iii) The income of the minor will be included in the income of that parent, whose total income is
greater.
(iv) Once clubbing of minor’s income is done with that of one parent, it will continue to be clubbed
with that parent only, in subsequent years. The Assessing Officer, may, however, club the
minor’s income with that of the other parent, if, after giving the other parent an opportunity to
be heard, he is satisfied that it is necessary to do so.
(v) Where the marriage of the parents does not subsist, the income of the minor will be includible
in the income of that parent who maintains the minor child in the relevant previous year.
(vi) However, the income of a minor child suffering from any disability of the nature specified in
section 80U shall not be included in the hands of the parent but shall be assessed in the
hands of the child.
(vii) It may be noted that the clubbing provisions are attracted even in respect of income of minor
married daughter.
Exemption in respect of clubbed income of minor [Section 10(32)]
In case the income of an individual (i.e., the parent) includes the income of his/her minor child in
terms of section 64(1A), such parent shall be entitled to exemption of ` 1,500 in respect of each
minor child. However, if income of any minor so includible is less than ` 1,500, then the entire income
shall be exempt.

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 6.12 DIRECT TAX LAWS

Exemption under section 10(32) would be available to the parent only if he/she exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A). The same would not be
available to him/her under the default tax regime where he/she computes his/her total income as per
section 115BAC and pays tax at the concessional rates provided thereunder.

(viii) In case the asset transferred to a minor child (not being a minor married daughter) without
consideration or for inadequate consideration is a house property, then, by virtue of section
27(i), the transferor-parent will be the deemed owner of the house property. Therefore, the
income from house property will be taxable in the hands of the transferor-parent, being the
deemed owner and not in the hands of the minor child. Consequently, clubbing provisions
under section 64(1A) would not be attracted in respect of such income, due to which the
benefit of exemption u/s 10(32) (discussed above) cannot be availed against such income.

However, if the house property is transferred by a parent to his or her minor married daughter,
without consideration or for inadequate consideration, then, section 27(i) is not attracted. In
such a case, the income from house property will be included u/s 64(1A) in the hands of that
parent, whose total income before including minor child’s income is higher; and benefit of
exemption u/s 10(32) can be availed by that parent in respect of the income so included if
he/she exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

Child in relation to an individual includes a step-child and an adopted child of that individual. [Section
2(15B)]

ILLUSTRATION 6

Mr. Arvind has three minor children – two twin daughters, aged 12 years, and one son, aged 16
years. Income of the twin daughters is ` 2,500 p.a. each and that of the son is ` 1,200 p.a.
Mrs. Avani (wife of Mr. Arvind) has transferred her flat to her minor son on 1.4.2025 out of natural
love and affection. The flat was let out on the same date and the rental income from the flat is
` 10,000 p.m. Compute the income, in respect of minor children, to be included in the hands of
Mr. Arvind and Mrs. Avani under section 64(1A) assuming that Mr. Arvind’s total income is higher
than Mrs. Avani’s total income, before including income of minor children and both Mr. Arvind and
Mrs. Avani exercise the option of shifting out of the default tax regime provided under section
115BAC(1A).

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.13

SOLUTION
Taxable income, in respect of minor children, in the hands of Mr. Arvind is
Particulars ` `
Twin minor daughters [` 2,500 × 2] 5,000
Less: Exempt under section 10(32) [` 1,500 × 2] 3,000 2,000

Minor son 1,200

Less: Exemption under section 10(32) would be lower of ` 1200, being 1,200 Nil
the income of minor son or ceiling limit of ` 1500
Income to be clubbed in the hands of Mr. Arvind 2,000

Note – As per section 27(i), Mrs. Avani is the deemed owner of house property transferred to her
minor son. Natural love and affection do not constitute adequate consideration for this purpose.
Accordingly, the income from house property of ` 84,000 [i.e., ` 1,20,000 (-) ` 36,000, being 30%
of ` 1,20,000) would be taxable directly in her hands as the deemed owner of the said property.
Consequently, clubbing provisions under section 64(1A) would not be attracted in respect of income
from house property, owing to which exemption u/s 10(32) cannot be availed by her.

6.4 CROSS TRANSFERS

In the case of cross transfers also (e.g., A making gift of ` 50,000 to the wife of his brother B for the
purchase of a house by her and a simultaneous gift by B to A’s minor son of shares in a foreign
company worth ` 50,000 owned by him), the income from the assets transferred would be assessed
in the hands of the deemed transferor if the transfers are so intimately connected that they form part
of a single transaction, and each transfer constitutes consideration for the other by being mutual or
otherwise. Thus, in the instant case, the transfers have been made by A and B to persons who are
not their spouse or minor child so as to circumvent the provisions of this section, showing that such
transfers constituted consideration for each other.
The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two
transactions are inter-connected and are parts of the same transaction in such a way that it can be
said that the circuitous method was adopted as a device to evade tax, the implication of clubbing
provisions would be attracted. Accordingly, the income arising to Mrs. B from the house property
should be included in the total income of B and the dividend from shares transferred to A’s minor
son would be taxable in the hands of A, assuming that Mr. A’s income is higher than that of Mrs. A.
This is because A and B are the indirect transferors to their minor child and spouse, respectively, of
income-yielding assets, so as to reduce their burden of taxation.

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 6.14 DIRECT TAX LAWS

ILLUSTRATION 7
Mr. Madan gifted a sum of ` 6.5 lakhs to his brother's wife on 14-6-2025. On 12-7-2025, his brother
gifted a sum of ` 5.2 lakhs to Mr. Madan's wife. The gifted amounts were invested as fixed deposits
in banks by Mrs. Madan and wife of Mr. Madan's brother on 01-8-2025 at 9% interest. Examine the
consequences of the above under the provisions of the Income-tax Act, 1961 in the hands of
Mr. Madan and his brother.
SOLUTION

In the given case, Mr. Madan gifted a sum of ` 6.5 lakhs to his brother’s wife on 14.06.2025 and
simultaneously, his brother gifted a sum of ` 5.2 lakhs to Mr. Madan’s wife on 12.07.2025. The gifted
amounts were invested as fixed deposits in banks by Mrs. Madan and his brother’s wife. These
transfers are in the nature of cross transfers. Accordingly, the income from the assets transferred
would be assessed in the hands of the deemed transferor because the transfers are so intimately
connected to form part of a single transaction and each transfer constitutes consideration for the
other by being mutual or otherwise.

If two transactions are inter-connected and are part of the same transaction in such a way that it can
be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing
provisions would be attracted. It was so held by the Apex Court in CIT vs. Keshavji Morarji (1967)
66 ITR 142.

Accordingly, the interest income arising to Mrs. Madan in the form of interest on fixed deposits would
be included in the total income of Mr. Madan and interest income arising in the hands of his brother’s
wife would be taxable in the hands of Mr. Madan’s brother as per section 64(1), to the extent of
amount of cross transfers i.e., ` 5.2 lakhs.

This is because both Mr. Madan and his brother are the indirect transferors of the income to their
respective spouses with an intention to reduce their burden of taxation.

However, the interest income earned by his spouse on fixed deposit of ` 5.2 lakhs alone would be
included in the hands of Mr. Madan’s brother and not the interest income on the entire fixed deposit
of ` 6.5 lakhs, since the cross transfer is only to the extent of ` 5.2 lakhs.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.15

6.5 CONVERSION OF SELF-ACQUIRED PROPERTY INTO

THE PROPERTY OF A HINDU UNDIVIDED FAMILY
[SECTION 64(2)]
Section 64(2) deals with the case of conversion of self-acquired property into property of a Hindu
undivided family.
(1) Where an individual, who is a member of the HUF, converts at any time after 31-12-1969, his
individual property into property of the HUF of which he is a member or throws such property
into the common stock of the family or otherwise transfers such individual property, directly
or indirectly, to the family otherwise than for adequate consideration, the income from such
property shall continue to be included in the total income of the individual.
(2) Where the converted property has been partitioned, either by way of total or partial partition,
the income derived from such converted property as is received by the spouse on partition
will be deemed to arise to the spouse from assets transferred indirectly by the individual to
the spouse and consequently, such income shall also be included in the total income of the
individual who effected the conversion of such property.
(3) Where income from the converted property is included in the total income of an individual
under section 64(2), it will be excluded from the total income of the family or, as the case may
be, of the spouse of the individual.

6.6 INCOME INCLUDES LOSS

It is significant to note that as per the Explanation 2 to section 64, ‘income’ would include ‘loss’.
Accordingly, where the specified income to be included in the total income of the individual is a loss,
such loss will be taken into account while computing the total income of the individual. It is significant
to note that this Explanation applies to clubbing provisions under both sections 64(1) and 64(2).

6.7 DISTINCTION BETWEEN SECTION 61 AND SECTION 64

It may be noted that the main distinction between the two sections is that section 61 applies only to
a revocable transfer made by any person while section 64 applies to revocable as well as irrevocable
transfers made only by individuals.

Note - Clubbing provisions are attracted in respect of income arising from the assets transferred,
however, income arising on accretion of income arising from transferred asset, would not be
clubbed except in case of minor child.

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 6.16 DIRECT TAX LAWS

6.8 LIABILITY OF PERSON IN RESPECT OF INCOME

INCLUDED IN THE INCOME OF ANOTHER PERSON
[SECTION 65]
Sections 61 to 64 provide for clubbing of income of one person in the hands of the other in
circumstances specified therein. However, service of notice of demand (in respect of tax on such
income) may be made upon the person to whom such asset is transferred (i.e., the transferee). In
such a case, the transferee is liable to pay that portion of tax levied on the transferor which is
attributable to the income so clubbed.
Similar provision will be applicable in case of deemed ownership of house property under section 27
i.e., transfer of house property otherwise than for adequate consideration to spouse, not being in
connection with agreement to live apart or to minor child not being a minor married daughter.
ILLUSTRATION 8
Mr. Ravi has gifted his only house property to his wife, Mrs. Ravi, and his married daughter,
Mrs. Divya. The Assessing Officer has served a notice of demand on Mr. Ravi for payment of tax for
the income derived from the said house property. Examine the validity of the Assessing Officer’s
action.
SOLUTION
As per section 27(i), an individual who transfers otherwise than for adequate consideration any house
property to his spouse, not being a transfer in connection with an agreement to live apart, or to a
minor child not being a married daughter shall be deemed to be the owner of the house property so
transferred.
Mr. Ravi, in this case, would be the deemed owner only in respect of the share of house property
transferred to his wife Mrs. Ravi without consideration and not for the share of the house property
transferred to his married daughter Mrs. Divya.
Since Mr. Ravi is the deemed owner of the share of house property transferred to his wife without
consideration, the income derived from the house property, to the extent attributable to the share of
property transferred to his wife without consideration, would be taxable in his hands under the head
“Income from house property”.

However, as per section 65, the notice of demand can be served on Mrs. Ravi for payment of that
portion of tax levied on Mr. Ravi attributable to the income derived [by virtue of section 27(i)], from
the share of house property transferred to Mrs. Ravi, and standing in her name.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.17

However, the income derived from house property, attributable to the share of property transferred
to his married daughter without consideration, would be taxable in the hands of his daughter. Such
income would not be taxable in the hands of Mr. Ravi. Mr. Ravi will not be responsible for the
payment of tax attributable to aforesaid share of income of daughter from house property.
Thus, the action of the Assessing Officer in serving notice of demand on Mr. Ravi for payment of tax
for the entire income derived from the said house property is not valid.

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 6.18 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution to the firm as on
01-04-2025 was ` 5 lakhs, out of which ` 3 lakhs was contributed out of her own sources
and ` 2 lakhs was contributed out of gift from her husband.
As further capital was needed by the firm, she further invested ` 2 lakhs on 01.05.2025 out
of the funds gifted by her husband. The firm paid interest on capital of ` 80,000 and share of
profit of ` 60,000 for the financial year 2025-26.
Advise Mr. F as to the applicability of the provisions of section 64(1)(iv) and the manner
thereof in respect of the above referred transactions.
2. Mr. A has gifted a house property valued at ` 50 lakhs to his wife, Mrs. B, who in turn has
gifted the same to Mrs. C, their daughter-in-law. The house was let out at ` 25,000 per month
throughout the year. Compute the total income of Mr. A and Mrs. C.
Will your answer be different if the said property was gifted to his son, husband of Mrs. C?
3. Mr. Korani transferred 2,000 debentures of ` 100 each of Wild Fox Ltd. to his wife
Mrs. Rekha Korani on 03.10.2024 without consideration. The company paid interest of
` 30,000 in September, 2025 which was deposited by Mrs. Korani with Kartar Finance Co. in
October, 2025. Kartar Finance Co. paid interest of ` 3,000 upto March, 2026. How would
both the interest income be charged to tax in A.Y. 2026-27?
4. Mr. Rose, out of his own funds, had taken an FDR for ` 10,00,000 bearing interest @10%
p.a. payable half-yearly in the name of his wife, Lilly. The interest earned during the financial
year 2025-26 of ` 1,00,000 was invested by Mrs. Lilly in the business of packed spices which
resulted in a net profit of ` 55,000 for the year ended 31.03.2026. How shall the interest on
FDR and income from business be taxed for the Assessment Year 2026-27?
5. Naresh is a fashion designer having lucrative business. His wife is a model. Naresh pays her
monthly salary of ` 10,000. The Assessing Officer while admitting that the salary is an
admissible deduction, in computing the total income of Naresh had applied the provisions of
section 64(1) and had clubbed the income (salary) of his wife in Naresh hands.

Discuss the correctness of the action of the Assessing Officer.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.19

Answers
1. As per section 64(1)(iv), in computing the total income of any 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 or indirectly to the
spouse by such individual otherwise than for adequate consideration or in connection with an
agreement to live apart.
In this instant case, Mr. F has gifted money to his wife, Mrs. E. Mrs. E, in turn, invested such
gifted money in the capital of a partnership firm, of which she is a partner. Mrs. E has also
contributed a sum of ` 3 lakhs out of her own resources to the capital of the firm.
As per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv),
where the assets transferred, directly or indirectly, by an individual to his spouse are invested
by the transferee in the nature of contribution of capital as a partner in a firm, proportionate
interest on capital will be clubbed with the income of the transferor. Such proportion has to
be computed by taking into account the value of the aforesaid investment as on the first day
of the previous year to the total investment by way of capital contribution as a partner in the
firm as on that day.
In view of the above provision, interest received by Mrs. E from the firm shall be included in
total income of Mr. F to the extent of ` 32,000 i.e., ` 80,000 x ` 2,00,000/ ` 5,00,000.
Share of profit amounting to ` 60,000 is exempt from income-tax under the provisions of
section 10(2A). The provisions of section 64 will not apply, if the income from the transferred
asset itself is exempt from tax.
Note: It is assumed that rate of interest on capital contributed by Mrs. E does not exceed
12% p.a.
2. As per section 27(i), an individual who transfers otherwise than for adequate consideration
any house property to his spouse, not being a transfer in connection with an agreement to
live apart, shall be deemed to be the owner of the house property so transferred.
Therefore, in this case, Mr. A would be the deemed owner of the house property transferred
to his wife Mrs. B without consideration.
As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or
indirectly, to her by an individual otherwise than for adequate consideration would be included
in the total income of such individual.

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 6.20 DIRECT TAX LAWS

Income from let-out property is ` 2,10,000 [i.e., ` 3,00,000, being the actual rent calculated
at ` 25,000 per month less ` 90,000, being deduction under section 24 @30% of
` 3,00,000]
In this case, income of ` 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s son’s
wife, would be included in the income of Mr. A, applying the provisions of section 27(i) and
section 64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.
In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64 would
not apply, since the son is not a minor child. Therefore, the income of ` 2,10,000 from letting
out of property gifted to the son would be taxable in the hands of the son.
It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of
the recipient of house property, since the receipt of property in each case was from a “relative”
of such individual. Therefore, the stamp duty value of house property would not be chargeable
to tax in the hands of the recipient of immovable property, even though the house property
was received by her or him without consideration.
Note - The first part of the question can also be answered by applying the provisions of
section 64(1)(vi) directly to include the income of ` 2,10,000 arising to Mrs. C in the hands of
Mr. A. [without first applying the provisions of section 27(i) to deem Mr. A as the owner of the
house property transferred to his wife Mrs. B without consideration], since section 64(1)(vi)
speaks of clubbing of income arising to son’s wife from indirect transfer of assets to her by
her husband’s parent, without consideration. Gift of house property by Mr. A to Mrs. C, via
Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.
3. As per section 64(1)(iv), income arising from assets transferred without adequate
consideration by an individual to his spouse is liable to be clubbed in the hands of the
individual. It may be noted that income on the asset transferred has to be clubbed but if there
is accretion to the asset, any further income derived on such accretion should not be clubbed.
Therefore, applying the provisions of section 64(1)(iv), ` 30,000, being the interest on
debentures received by Mrs. Rekha Korani in September, 2025 will be clubbed with the
income of Mr. Korani, since he had transferred the debentures of the company without
consideration to her in October, 2024.

However, the interest of ` 3,000 upto March, 2026 earned by Mrs. Rekha Korani on the
interest on the debentures deposited by her with Kartar Finance Company shall be taxable in
her individual capacity and will not be clubbed with the income of Mr. Korani.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.21

4. Section 64(1)(iv) specifies that the income derived by the spouse of an assessee from the
assets transferred directly or indirectly without adequate consideration or intention to live
apart shall be clubbed with the income of the transferor. Therefore, the interest income of
` 1 lakh on the FDR of ` 10 lakhs for the F.Y.2025-26 shall be clubbed with the income of
Mr. Rose.
When Mrs. Lilly invested the interest income in a business and earned profits therefrom, such
profits shall not be clubbed with the income of her husband but shall be taxable in her
individual capacity. This is so because the income from the accretion of the transferred assets
is not to be clubbed with the income of the transferor [CIT v. M. S. S. Rajan (2001) 252 ITR
126 (Mad)].
5. This question is based on the principles laid down by Madras High Court in the case of CIT
v. Smt. R. Bharati (1999) 240 ITR 697 where the interpretation of the terms “professional
qualifications” and “knowledge” came up for consideration as per proviso to section 64(1).
These words do not necessarily connote a qualification conferred by a recognized university
after examining the candidate who has undergone a course of study in a technical subject or
course of study preparing him for a profession of law, accountancy etc. Accordingly, the term
“qualification” must be given a wide meaning as referring to the qualities which are required
to be possessed by a person performing the work that he does, so long as that work is capable
of being regarded as technical or professional.
The word “professional” is a term capable of very broad meaning and would encompass a
variety of occupations. A large number of occupations are being practiced which form a
source of livelihood and are capable of being regarded, as professions as long as they require
certain degree of skill. A person having skill, experience and competence in a line of work
can be regarded as professionally qualified for the purpose of section 64(1)(ii).
Applying the rationale of the Madras High Court ruling, a model, having skill, competence and
experience in her line can be considered as a professional. Hence, the action of the
Assessing Officer is not correct.

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© The Institute of Chartered Accountants of India
CHAPTER 7
AGGREGATION OF INCOME,
SET OFF OR CARRY
FORWARD OF LOSSES

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 identify the permissible inter-source and inter-head adjustments for set-off of losses
and the restrictions in inter-source and inter-head set-off of losses;
 determine the unabsorbed losses which can be carried forward to the subsequent
assessment year for set-off against income of that year and the maximum period of
carry forward of such losses;
 appreciate the provisions regarding carry forward and set-off of losses in case of
closely held companies and eligible start-ups as also in case of change in
constitution of firms;
 appreciate the conditions which are required to be satisfied by the amalgamating
company and the amalgamated company for carry forward and set-off of loss of the
amalgamating company by the amalgamated company;
 appreciate the special provisions for carry forward and set-off of losses of a banking
company against the profits of a banking institution under a scheme of
amalgamation;
 compute the gross total income of an assessee after applying the provisions
relating to set-off and carry forward and set-off of losses.

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 Set off and Carry forward & Set off of losses under normal provisions of the Act

Carry forward and Set-off of unabsorbed losses

7.2

Inter-source set-off of losses under the same head of

Inter-head adjustment
income

Unabsorbed loss from house property can be

carried forward for maximum 8 AYs for set-off
Exceptions against income from house property
Exceptions

Unabsorbed business loss can be carried forward

CHAPTER OVERVIEW

for maximum 8 AYs for set-off against profits and

gains from business or profession
Loss under the head Speculation loss, loss

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Loss from Long term “ Profits and gains of from specified business
speculative business capital loss business or u/s 35AD and loss from Unabsorbed loss from speculation business can
profession” cannot the activity of owning be carried forward for maximum 4 AYs for set-off
be set off against and maintaining race against income from speculation business
DIRECT TAX LAWS

income under the horses cannot be set-off

Loss from specified business u/s head “ Salaries” against income under Unabsorbed loss from specified business under
any other head section 35AD can be carried forward for indefinite
35AD
period for set-off against profit from any specified
business
Loss from the activity of owning and Long-term capital loss can be carried forward for
maintaining race horses maximum 8 AYs for set-off against long-term capital
gains
Loss from house
Loss under the head "Capital gains“ property can be set off Short-term capital loss can be carried forward for
cannot be set-off against income under against income under maximum 8 AYs for set-off against capital gains
any other head. any other head only to
the extent of
` 2 lakhs
Unabsorbed loss from the activity of owning and
maintaining race horses can be carried forward
for maximum 4 AYs for set-off against income
from the activity of owning and maintaining race
horses
 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.3
LOSSES

Notes - Following brought forward losses/ depreciation is not allowed to be set off while computing total income under the
special concessional tax regimes under section 115BAA/115BAB/115BAC/115BAD/115BAE -
1. Brought forward business loss of specified business u/s 35AD
2. Brought forward business loss on account of deduction u/s 35(1)(ii)/(iia)/(iii) or u/s 35(2AA) [or u/s 35(2AB), in case of
computation of total income under sections 115BAA/115BAB, applicable to companies].
3. Unabsorbed depreciation attributable to additional depreciation u/s 32(1)(iia).
This is because deductions u/s 35AD, u/s 35(i)(ii)/(iia)/(iii), u/s 35(2AA), u/s 35(2AB) and additional depreciation u/s 32(1)(iia)
are not allowable under the special concessional tax regimes.
In addition, in case of persons covered under section 115BAC, loss from house property cannot be set off against income
under other head and the same cannot be carried forward. Also, brought forward loss from self-occupied house property is not
allowed to be set-off while computing total income for A.Y.2026-27 under the default tax regime thereunder.

Other Provisions

Section 72A Section 72AA Section 72AB Section 78 Section 79

Carry forward and Carry forward and Carry forward and

set off of set off of set off of
accumulated accumulated accumulated loss Carry forward and
Carry forward and
business loss and business loss and and unabsorbed set off of losses in
set off of losses in
unabsorbed unabsorbed depreciation in case of change in
case of closely
depreciation in depreciation in a business constitution of firm
held companies
certain cases of scheme of reorganisation of or on succession
amalgamation/ amalgamation in co-operative
demerger etc. certain cases banks

7.1 AGGREGATION OF INCOME

In certain cases, some amounts are deemed as income in the hands of the assessee though they
are actually not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B,
69C and 69D. These are discussed in detail in Chapter 1. The Assessing Officer may require the
assessee to furnish explanation in such cases. If the assessee does not offer any explanation or
the explanation offered by the assessee is not satisfactory, the amounts referred to in these
sections would be deemed to be the income of the assessee. Such amounts have to be
aggregated with the assessee’s income.

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 7.4 DIRECT TAX LAWS

7.2 CONCEPT OF SET OFF AND CARRY FORWARD

OF LOSSES
Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward
of losses. In simple words, “Set-off” means adjustment of losses against the profits from another
source/head of income in the same assessment year. If losses cannot be set-off in the same year
due to inadequacy of eligible profits, then such losses are carried forward to the next assessment
year for adjustment against the eligible profits of that year. The maximum period for which different
losses can be carried forward for set-off has been provided in the Act.

7.3 INTER SOURCE ADJUSTMENTS [SECTION 70]

(1) Inter-source set-off of losses
Under this section, the losses incurred by the assessee in respect of one source shall be
set-off against income from any other source under the same head of income, since the
income under each head is to be computed by grouping together the net result of the
activities of all the sources covered by that head. In simpler terms, loss from one source of
income can be adjusted against income from another source, both the sources being under
the same head.

Example: Loss from one house property can be set off against the income from another
house property.
Example: Loss from one business, say textiles, can be set off against income from any
other business, say printing, in the same year as both these sources of income fall under
one head of income. Therefore, the loss in one business may be set off against the profits
from another business in the same year.

(2) Impermissible inter-source set-off

Inter-source set-off, however, is not permissible in the following cases -
(i) Long-term capital loss [Section 70(3)]
Short-term capital loss is allowed to be set off against both short-term capital gain
and long-term capital gain. However, long-term capital loss can be set off only
against long-term capital gain and not against short-term capital gain.

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.5
LOSSES

(ii) Speculation loss [Section 73(1)]

A loss in speculation business can be set off only against the profits of any other
speculation business and not against any other business or professional income.
However, losses from other business can be adjusted against profits from
speculation business.
(iii) Loss from the activity of owning and maintaining race horses [Section 74A(3)]
Such loss can be set off only against income from the activity of owning and
maintaining race horses.
(iv) Losses from specified business [Section 73A(1)]
A loss in any specified business referred in section 35AD can be set off only against
any other specified business, whether eligible for deduction under 35AD or not.
However, losses from other business can be set off against profits from specified
business
It must be noted that loss from an exempt source cannot be set off against profits from a taxable
source of income. For example, share of loss from a partnership firm cannot be set off against
business income, since share of income of the firm is exempt under section 10(2A).

7.4 INTER HEAD ADJUSTMENTS [SECTION 71]

Loss under one head of income can be adjusted or set off against income under another head.
However, the following points should be considered:
(1) Loss under any head other than capital gains: Where the net result of the computation
under any head of income (other than ‘Capital Gains’) is a loss, the assessee can set off
such loss against his income assessable for that assessment year under any other head,
including ‘Capital Gains’.
(2) Loss under the head “Profits and gains from business or profession: Where the net
result of the computation under the head “Profits and gains of business or profession” is a
loss, such loss cannot be set off against income under the head “Salaries”. It shall be
allowed to set off from income under any other head except “Salaries”.
(3) Loss under the head “Capital Gains”: Where the net result of computation under the
head ‘Capital Gains’ is a loss, whether short term or long term, such capital loss cannot be
set off against income under any other head.
(4) Loss under the head “Income from house property”: Where the net result of the
computation under the head “Income from house property” is a loss and the assessee has

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income assessable under any other head of income, the amount of such loss exceeding ` 2
lakhs would not be allowable to be set off against income under the other head. In other
words, the maximum loss from house property which can be set off against income from
any other head is ` 2 lakhs.
Note - The loss under the head “Income from house property” would not be allowable to be
set off against income under the other head if an assessee [Individual/HUF/AOP(other than
Co-operative Society)/BOI/Artificial Juridical Person] pays tax at concessional rate u/s
115BAC. However, if the assessee exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A) and there is a loss under the head “Income
from house property” and the assessee has income assessable under any other head of
income, the maximum loss from house property which can be set off against income from
any other head is ` 2 lakhs. In other words, in such case, the amount of such loss
exceeding ` 2 lakhs would not be allowable to be set off against income under the other
head.
(5) Speculation loss and loss from the activity of owning and maintaining race horses
cannot be set off against income under any other head.

(6) Losses from Specified business u/s 35AD: In case of an assessee exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A), loss from
specified business referred to in section 35AD can be set off only against income from any
other specified business. Such loss cannot be set off against income under any other head.
However, losses from other business can be set off against profits from specified business.
If the income from a source is exempt from tax, loss from that exempt source cannot be set off
against taxable income from a different source or taxable income under a different head.

7.5 CARRY FORWARD AND SET OFF OF LOSS FROM

HOUSE PROPERTY [SECTION 71B]
(1) Set-off and Carry Forward & Set-off of losses:
(a) If the assessee, being an individual, HUF, AoP (other than Co-operative
Society), BoI or Artificial Juridical Person, exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A): In any
assessment year, if there is a loss under the head “Income from house property”,
such loss will first be set-off against income from any other head to the extent of

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` 2,00,000 during the same year. The unabsorbed loss will be carried forward to the
following assessment year to be set off against income under the head “Income from
house property”.
(b) If such assessee referred to in (a) above pays tax at concessional rate u/s
115BAC: The loss under the head “Income from house property” would not be
allowable to be set off against income under any other head. The unabsorbed loss
cannot be carried forward to the following assessment year.
(c) In case of other assessees (Companies/Firms/Co-operative Societies): In any
assessment year, if there is a loss under the head “Income from house property”,
such loss will first be set off against income from any other head to the extent of
` 2,00,000 during the same year. The unabsorbed loss will be carried forward to the
following assessment year to be set off against income under the head “Income from
house property”.
This is irrespective of whether or not the company opted for section 115BAA/115BAB
and whether or not the co-operative society opted for section 115BAD/115BAE.
(2) Maximum period for carry forward & set-off of losses: The loss under this head is
allowed to be carried forward upto 8 assessment years immediately succeeding the
assessment year in which the loss was first computed.
Note - It is to be remembered that once a particular loss is carried forward, it can be set off only
against the income from the same head in the forthcoming assessment years.

ILLUSTRATION 1
Mr. Kamal (aged 35 years) submits the following particulars pertaining to the A.Y.2026-27:
Particulars `
Income from salary (computed) 4,20,000
Loss from let-out property (-) 2,30,000
Business loss (-)1,20,000
Bank interest (FD) received 85,000

Compute the total income of Mr. Kamal for the A.Y.2026-27, assuming that
(i) He has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
(ii) He pays tax under the default tax regime.

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SOLUTION
(i) Computation of total income of Mr. Kamal for the A.Y.2026-27
under the normal provisions of the Act
Particulars Amount Amount
(`) (`)
Income from salary 4,20,000
Less: Loss from house property of ` 2,30,000 to be
restricted to ` 2 lakhs by virtue of section 71(3A) (-) 2,00,000 2,20,000
Balance loss of ` 30,000 from house property to be carried
forward to next assessment year
Income from other sources (interest on fixed deposit with 85,000
bank)
Less: Business loss of ` 1,20,000 set-off to the extent of (-) 85,000 -
` 85,000
(Business loss of ` 35,000 to be carried forward for set-off
against business income of the next assessment year)
Gross total income [See Note below] 2,20,000
Less: Deduction under Chapter VI-A Nil
Total income 2,20,000

Notes:

(i) Gross Total Income includes salary income of ` 2,20,000 after adjusting loss of
` 2,00,000 from house property. The balance loss of ` 30,000 from house property to be
carried forward to next assessment year for set-off against income from house property
of that year.

(ii) Business loss of ` 1,20,000 is set off to the extent of bank interest of ` 85,000 and
remaining business loss of ` 35,000 will be carried forward as it cannot be set off
against salary income.

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(ii) Computation of total income of Mr. Kamal for the A.Y.2026-27

under default tax regime
Particulars Amount Amount
(`) (`)
Income from salary 4,20,000
Income from other sources (interest on fixed deposit with bank) 85,000
Less: Business loss of ` 1,20,000 set-off to the extent of (-) 85,000 -
` 85,000
(Business loss of ` 35,000 to be carried forward for set-off
against business income of the next assessment year)
Gross total income/ Total Income 4,20,000

Notes:
(i) Under the default tax regime, loss from house property cannot be set off against
income under any other head and cannot be carried forward to next assessment
year.
(ii) Business loss of ` 1,20,000 is set off to the extent of bank interest of ` 85,000 and
remaining business loss of ` 35,000 will be carried forward as it cannot be set off
against salary income.

7.6 CARRY FORWARD AND SET OFF OF BUSINESS

LOSSES [SECTION 72]
Under the Act, the assessee has the right to carry forward the losses under the head of business
and profession in cases where such loss cannot be set-off due to the absence or inadequacy of
income under any other head in the same year. The loss so carried forward can be set off against
the profits of subsequent previous years.
Section 72 covers the carry forward and set off of losses arising from a business or profession.
Conditions
The assessee’s right to carry forward business losses under this section is, however, subject to
the following conditions:-
(1) The loss should have been incurred in business, profession or vocation.
(2) The loss should not be in the nature of a loss in the business of speculation.

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(3) Loss from one business can be carried forward & set off against the income from any
other business: The loss may be carried forward and set-off against the income from
business or profession though not necessarily against the profits and gains of the same
business or profession in which the loss was incurred.
However, a loss carried forward cannot, under any circumstances, be set off against the
income from any head other than “Profits and gains of business or profession”.
(4) Person who incurred the loss alone is entitled to carry forward & set-off the loss: The
loss can be carried forward and set off only against the profits of the assessee who incurred
the loss. That is, only the person who has incurred the loss is entitled to carry forward or set
off the same. Consequently, the successor of a business cannot carry forward or set off the
losses of his predecessor except in the case of succession by inheritance.
(5) Maximum period for carry forward & set-off of losses: A business loss can be carried
forward for a maximum period of 8 assessment years immediately succeeding the
assessment year in which the loss was incurred.
(6) Rehabilitation of business [Proviso to section 72(1)]
If there is a loss sustained in a business which is discontinued in the circumstances
mentioned under section 33B and such business is re-established, reconstructed or revived
by the assessee within 3 years from the end of previous year of discontinuation, the loss
attributable to such business
(i) shall be allowed to be set off against the profits and gains, if any, of that business or
any other business carried on by him and assessable for that assessment year, and
(ii) if the loss cannot be wholly so set off, the amount of balance loss to be carried to the
following assessment year and so on for 7 assessment years immediately
succeeding provided such re-established business is continued to be carried by the
assessee.
Note: Circumstances referred to in section 33B
The business is formed as re-establishment, reconstruction or revival by the assessee of
the business of such industrial undertaking which is discontinued by reason of extensive
damage to or destruction of any building, machinery, plant or furniture owned by the
assessee and used for the purpose of such business.
Such damage or destruction should be affected as a direct result of flood, typhoon,
hurricane, cyclone, earthquake or other convulsion of nature or riot or civil disturbance or
accidental fire or explosion or action by an enemy or action taken in combating an enemy.

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ILLUSTRATION 2
Mr. Vikas, a resident individual, furnishes the following particulars for the P.Y.2025-26:

Particulars `
Income from salary (computed) 8,50,000
Income from house property (24,000)
Income from non-speculative business (24,000)
Income from speculative business (6,000)
Short-term capital losses 25,000
Long-term capital gains taxable u/s 112 21,000

What is the total income chargeable to tax for the A.Y.2026-27, assuming that he pays tax under
section 115BAC?
SOLUTION
Total income of Mr. Vikas for the A.Y. 2026-27

Particulars Amount Amount

(`) (`)
Income from salaries 8,50,000
Income from house property
Loss from house property can neither be set off nor can be carried Nil
forward, since Mr. Vikas is paying tax under the default tax regime
u/s 115BAC
Profits and gains of business and profession
Business loss to be carried forward [Note (i)] (24,000)
Speculative loss to be carried forward [Note (ii)] (6,000)
Capital Gains
Long term capital gain taxable u/s 112 21,000
Short term capital loss of ` 25,000 set-off against long-term (21,000)
capital gains to the extent of ` 21,000 [Note (iii)]
Nil
Balance short term capital loss of ` 4,000 to be carried forward
[Note (iii)]
Taxable income 8,50,000

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Notes:
(i) Business loss cannot be set off against salary income. Therefore, loss of ` 24,000 from the
non-speculative business cannot be set off against the income from salaries. Hence, such
loss has to be carried forward to the next year for set off against business profits, if any.
(ii) Loss of ` 6,000 from the speculative business can be set off only against the income from
the speculative business. Hence, such loss has to be carried forward.
(iii) Short term capital loss can be set off against both short term capital gain and long term
capital gain. Therefore, short term capital loss of ` 25,000 can be set off against long term
capital gains to the extent of ` 21,000. The balance short term capital loss of ` 4,000
cannot be set-off against any other income and has to be carried forward to the next year
for set off against capital gains, if any.

7.7 CARRY FORWARD AND SET OFF OF ACCUMULATED

BUSINESS LOSSES AND UNABSORBED
DEPRECIATION IN CERTAIN CASES OF
AMALGAMATION/ DEMERGER, ETC. [SECTION 72A]
(1) Amalgamation
Applicability: This section applies where there has been an amalgamation of –
(i) a company owning an industrial undertaking or a ship or a hotel with another company; or
(ii) a banking company with a specified bank; or
(iii) one or more public sector company or companies with one or more public sector company
or companies; or
(iv) erstwhile public sector company (i.e., a company which was a public sector company in
earlier previous years and ceases to be a public sector company by way of strategic
disinvestment by the Government) with one or more company or companies, if the share
purchase agreement entered into under strategic disinvestment restricted immediate
amalgamation of the said public sector company and the amalgamation is carried out within
five year from the end of the previous year in which the restriction on amalgamation in the
share purchase agreement ends.
Strategic disinvestment means sale of shareholding by the Central Government or any
State Government or a public sector company, in a public sector company or in a company,

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which results in reduction of its shareholding to below 51% and transfer of control to the
buyer.
However, the condition of reduction of shareholding below 51% would apply only in a case
where shareholding of the Central Government or the State Government or the public
sector company was above 51% before such sale of shareholding.
Further, the requirement of transfer of control to the buyer may be carried out by the Central
Government or the State Government or the public sector company or any two of them or
all of them.
As per section 2(27) of the Companies Act, 2013, control shall include the right to appoint
majority of the directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly, including by virtue
of their shareholding or management rights or shareholders agreements or voting
agreements or in any other manner.
Allowability of carry forward and set off of accumulated loss and unabsorbed loss by
amalgamated company in case of amalgamation: It provides that the accumulated loss and
unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or
unabsorbed depreciation, as the case may be, of the amalgamated company for the previous year
in which the amalgamation took place. Other provisions of the Act relating to set off and carry
forward shall also apply accordingly.
However, in case of an amalgamation of erstwhile public sector company, with one or more
company or companies, the accumulated loss and the unabsorbed depreciation of the
amalgamating company, which is deemed to be the loss or the allowance for unabsorbed
depreciation, as the case may be, of the amalgamated company, shall not be more than the
accumulated loss and unabsorbed depreciation of the public sector company as on the date on
which the public sector company ceases to be a public sector company as a result of strategic
disinvestment.

Conditions for availing benefit under this section

(i) Conditions to be fulfilled by the amalgamating company

(a) The amalgamating company should have been engaged in the business, in which
the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more
years.
(b) The amalgamating company has held continuously as on the date of amalgamation,
at least 3/4th of the book value of the fixed assets held by it, 2 years prior to the
date of amalgamation.

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(ii) Conditions to be fulfilled by the amalgamated company

(a) The amalgamated company should hold at least 3/4th of the book value of fixed
assets of the amalgamating company acquired as a result of amalgamation for a
minimum period of 5 years from the effective date of amalgamation.
(b) The amalgamated company continues the business of the amalgamating company
for at least 5 years.
(c) The amalgamated company must also fulfill such other conditions prescribed under
Rule 9C for the revival of the business of the amalgamating company or to ensure
that the amalgamation is for genuine business purpose -
(1) The amalgamated company, owning an industrial undertaking of the
amalgamating company by way of amalgamation, shall achieve the level of
production of at least 50% of the installed capacity (capacity of production as
on the date of amalgamation) of the said undertaking before the end of 4
years from the date of amalgamation and continue to maintain the said
minimum level of production till the end of 5 years from the date of
amalgamation. Central Government has the power to modify this requirement
on an application made by the amalgamated company.
(2) The amalgamated company shall furnish to the Assessing Officer a certificate
in the prescribed form verified by a Chartered Accountant in this regard.
Consequences of non-fulfillment of specified conditions: In case the above specified
conditions are not fulfilled, that part of carry forward of loss and unabsorbed depreciation
remaining to be utilized by the amalgamated company shall lapse and such loss or depreciation as
has been set off shall be treated as the income of the amalgamated company in the year in which
there is a failure to fulfill the conditions.
(2) Re-organisation of business
Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
company in case of succession: In case of re-organisation of business, whereby
- a firm is succeeded by a company as per the provisions of section 47(xiii), or
- a sole proprietary concern is succeeded by a company as per the provisions of section
47(xiv),
then the accumulated business loss and the unabsorbed depreciation of the firm/proprietary
concern, as the case may be, shall be deemed to be the loss or depreciation allowance of the

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successor company for the previous year in which the business re-organisation took place. Other
provisions of the Act relating to set off and carry forward will apply accordingly.

Consequences of non-fulfillment of specified conditions: If it is found that any of the

conditions laid down in the corresponding sub-sections (xiii) or (xiv) of section 47 have not been
complied with, the set off of loss or allowance of depreciation made in any previous year in the
hands of the successor company shall be deemed to be the income of the company chargeable to
tax in the year in which the conditions have been violated.
(3) Conversion of a company into LLP [Section 72A(6A)]
Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by LLP in
case of conversion: In case of re-organisation of business, whereby a private company or
unlisted company is succeeded by a LLP as per the provisions of section 47(xiiib), then the
accumulated business loss and the unabsorbed depreciation of the company shall be deemed to
be the loss or depreciation allowance of the successor LLP for the previous year in which the
business re-organisation took place. Other provisions of the Act relating to set off and carry
forward will apply accordingly.
Consequences of non-fulfillment of specified conditions: If the entity fails to fulfill the
conditions specified in section 47(xiiib), the benefit of set-off of business loss/unabsorbed
depreciation availed by the LLP would be deemed to be the profits and gains of the LLP
chargeable to tax in the previous year in which the LLP fails to fulfill any of the conditions.
(4) Carry forward of accumulated loss in case of amalgamation or business
re-organisation effected on or after 1.4.2025
In case of an amalgamation or business re-organisation as per point (1), (2) and (3) above took
place on or after 01.04.2025, any accumulated loss of predecessor entity, being -
a) the amalgamating company; or
b) the firm or proprietary concern; or
c) the private company or unlisted public company,

which is deemed to be the loss of successor entity, being-

i) the amalgamated company; or
ii) the successor company; or

iii) the successor LLP,

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shall be carried forward in the hands of the successor entity for not more than eight assessment
years immediately succeeding the assessment year for which such loss was first computed for
original predecessor entity.
(5) Demerger
Allowability of carry forward and set off of accumulated loss and unabsorbed loss by
resulting company in case of demerger: Where there has been a demerger of an undertaking,
• the accumulated loss and the unabsorbed depreciation directly relatable to the undertaking
transferred by the demerged company to the resulting company shall be allowed to be
carried forward and set off in the hands of the resulting company.
• if the accumulated loss or unabsorbed depreciation is not directly relatable to the
undertaking, the same will be apportioned between the demerged company and the
resulting company in the same proportion in which the value of the assets retained by the
demerged company and have been transferred to the resulting company.
Conditions for availing benefit under this section: The Central Government is empowered to
notify such conditions as it considers necessary to ensure that the demerger is for genuine
business purpose.
(6) Meanings of certain terms

Term Particulars
Accumulated loss It means so much of the loss of
- the predecessor firm or
- the proprietary concern or
- the private company or unlisted public company or
- the amalgamating company or
- the demerged company, as the case may be,
under the head “Profit and gains of business or profession” (not being a
loss sustained in a speculation business) which such predecessor
firm or the proprietary concern or the company or amalgamating
company or demerged company, would have been entitled to carry
forward and set off under the provisions of section 72, if the
re-organisation be of business or amalgamation or demerger had not
taken place.
Industrial It means any undertaking which is engaged in -
undertaking (i) the manufacture or processing of goods;
(ii) the manufacture of computer software;

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(iii) the business of generation or distribution of electricity or any other

form of power;
(iv) providing telecommunication services, whether basic or cellular,
including radio paging, domestic satellite service, network of
trunking, broad band network and internet services.
(v) mining;
(vi) the construction of ships, aircraft or rail systems.
Original It means predecessor entity in respect of first amalgamation or first
predecessor entity business reorganization, as the case may be.
Unabsorbed Unabsorbed depreciation means so much of the allowance for
depreciation depreciation of
- the predecessor firm or
- the proprietary concern or
- the private company or unlisted public company or
- the amalgamating company or
- the demerged company, as the case may be,
which remains to be allowed, and which would have been allowed to the
predecessor firm or the proprietary concern or the company or
amalgamating company or demerged company, as the case may be,
under the provisions of this Act, if the re-organisation of business or
amalgamation or demerger had not taken place
Specified bank It means the State Bank of India or a subsidiary bank as defined in the
SBI (Subsidiary Banks) Act, 1959 or a corresponding new bank
constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 or under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980.

7.8 CARRY FORWARD AND SET OFF OF

ACCUMULATED BUSINESS LOSSES AND
UNABSORBED DEPRECIATION IN A SCHEME OF
AMALGAMATION IN CERTAIN CASES [SECTION
72AA]
(1) Applicability: This section provides for carry forward and set off of accumulated loss and
unabsorbed depreciation allowance where there has been an amalgamation of -
(i) one or more banking company with

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- any other banking institution under a scheme sanctioned and brought into
force by the Central Government under section 45(7) of the Banking
Regulation Act, 1949; or
- any other banking institution or a company subsequent to a strategic
disinvestment, wherein the amalgamation is carried out within 5 years from
the end of the previous year during which such strategic disinvestment is
carried out; or
(ii) one or more corresponding new bank or banks with any other corresponding new
bank under a scheme brought into force by the Central Government under section 9
of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or
under section 9 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980, or both, as the case may be, or
(ii) one or more Government company or companies with any other Government
company under a scheme sanctioned and brought into force by the Central
Government under section 16 of the General Insurance Business (Nationalisation)
Act, 1972.
(2) Allowability of carry forward and set-off of accumulated loss and unabsorbed
depreciation in case of amalgamation: The accumulated loss and unabsorbed
depreciation of such banking company or companies or amalgamating corresponding new
bank or banks or amalgamating Government company or companies shall be deemed to be
the loss or the allowance for depreciation of such banking institution or company or
amalgamated corresponding new bank or amalgamated Government company for the
previous year in which the scheme of amalgamation is brought into force. Accordingly, all
the provisions contained in the Income-tax Act, 1961, relating to set off and carry forward of
loss and unabsorbed depreciation would be applicable.
(3) Carry forward of accumulated loss in case of amalgamation effected on or after
1.4.2025
In case of an amalgamation took place on or after 01.04.2025, any accumulated loss of
predecessor entity, being -
a) the banking company or companies; or
b) the amalgamating corresponding new bank or banks; or
c) the amalgamating Government company or companies,

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which is deemed to be the loss of successor entity, being-

i) the banking institution or company; or
ii) the amalgamated corresponding new bank or banks; or
iii) the amalgamated Government company or companies,
shall be carried forward in the hands of the successor entity for not more than eight
assessment years immediately succeeding the assessment year for which such loss was
first computed for original predecessor entity.
(4) Meaning of certain terms:

Term Meaning
Accumulated loss So much of the loss of the amalgamating banking company or
companies or amalgamating corresponding new bank or
banks or amalgamating Government company or companies
under the head "Profits and gains of business or profession"
(not being a loss sustained in a speculation business) which
such amalgamating banking company or companies or
amalgamating corresponding new bank or banks or
amalgamating Government company or companies, would
have been entitled to carry forward and set off under the
provisions of section 72, if the amalgamation had not taken
place
Government It means a Government company as defined in section 2(45)
company of the Companies Act, 2013, which is engaged in the general
insurance business and which has come into existence by
operation of section 4 or section 5 or section 16 of the
General Insurance Business (Nationalisation) Act, 1972
Unabsorbed It means so much of the allowance for depreciation of the
depreciation amalgamating banking company or companies or
amalgamating corresponding new bank or banks or
amalgamating Government company or companies which
remains to be allowed and which would have been allowed to
such banking company or companies or amalgamating
corresponding new bank or banks or amalgamating
Government company or companies, if the amalgamation had
not taken place.
Original predecessor It means predecessor entity in respect of first amalgamation.
entity

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7.9 CARRY FORWARD AND SET OFF OF

ACCUMULATED LOSS AND UNABSORBED
DEPRECIATION IN BUSINESS REORGANISATION OF
CO-OPERATIVE BANKS [SECTION 72AB]
(1) Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
a co-operative bank in case of reorganisation: Under this section, in a case where the
amalgamation has taken place during the previous year, set off of accumulated loss and the
unabsorbed depreciation of the predecessor co-operative bank will be allowed in the hands
of the successor co-operative bank as if the amalgamation had not taken place. All the
other provisions of this Act relating to set off and carry forward of loss and allowance for
depreciation would apply accordingly.
(2) Conditions for availing benefit under this section
(i) Conditions to be fulfilled by the predecessor co-operative bank
(a) It should have been engaged in the business of banking for three or more
years; and
(b) It has held at least 3/4thof the book value of fixed assets as on the date of the
business reorganisation, continuously for 2 years prior to the date of business
reorganisation;
(ii) Conditions to be fulfilled by the successor co-operative bank
(a) It should hold at least 3/4thof the book value of fixed assets of the predecessor
co-operative bank acquired through business reorganisation, continuously for
a minimum period of 5 years immediately succeeding the date of business
reorganisation;
(b) It continues the business of the predecessor co-operative bank for a minimum
period of 5 years from the date of business reorganisation; and
(c) It fulfils such other conditions as may be prescribed to ensure the revival of
the business of the predecessor co-operative bank or to ensure that the
business reorganisation is for genuine business purpose.
(3) Quantum allowed of accumulated loss and unabsorbed depreciation: The amount of
set-off of the accumulated loss and unabsorbed depreciation allowable to the resulting co-
operative bank has to be calculated in the following manner -

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(i) In a case where the whole of the amount of such loss or unabsorbed
depreciation is directly relatable to the undertakings transferred to the
resulting co-operative bank - the entire accumulated loss or unabsorbed
depreciation of the demerged co-operative bank is allowed to be set-off.
(ii) In a case where the accumulated loss or unabsorbed depreciation is not
directly relatable to the undertakings transferred to the resulting co-operative
bank - the amount which bears the same proportion to the accumulated loss or
unabsorbed depreciation of the demerged co-operative bank as the assets of the
undertaking transferred to the resulting co-operative bank bears to the assets of the
demerged co-operative bank.

Example:
If A Co-op Bank is the demerged co-operative bank and B Co-op Bank is the
resulting co-operative bank, the amount of set-off of the accumulated loss and
unabsorbed depreciation allowable to B Co-op. bank would be –
Assets of the undertaking transferred
Unabsorbed business loss/depreciation to B Co-op bank
×
of A Co-op bank Assets of A Co-op bank

(4) Additional conditions for availing benefit under this section: The Central Government
may specify other conditions by notification in the Official Gazette as it considers
necessary, to ensure that the business reorganisation is for genuine business purposes.
(5) Period before and after business reorganization to constitute two different previous
years: The period commencing from the beginning of the previous year and ending on the
date immediately preceding the date of business reorganisation, and the period
commencing from the date of such business reorganisation and ending with the previous
year shall be deemed to be two different previous years for the purposes of set off and carry
forward of loss and allowance for depreciation.
Example:
If the date on which business re-organisation took place is 1.11.2025, then the period
between 1.4.2025 and 31.10.2025 and the period between 1.11.2025 and 31.3.2025 would
be deemed to be two different previous years for the purposes of set off and carry forward
of unabsorbed business losses and depreciation.

(6) Consequences of non-fulfillment of specified conditions: In a case where the

conditions specified in (2) above or notified under (4) above are not complied with, the set-

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off of accumulated loss or unabsorbed depreciation allowed in any previous year to the
successor co-operative bank shall be deemed to be the income of the successor co-
operative bank chargeable to tax for the year in which the conditions are not complied with.
(7) Meaning of certain terms

Term Particulars
Accumulated It means so much of loss of the amalgamating co-operative bank or the
loss demerged co-operative bank, as the case may be, under the head
“Profits and gains of business or profession” (not being a loss sustained
in a speculation business) which such amalgamating co-operative bank
or the demerged co-operative bank, would have been entitled to carry
forward and set-off under the provisions of section 72 as if the business
reorganisation had not taken place.
Unabsorbed It means so much of the allowance for depreciation of the amalgamating
depreciation co-operative bank or the demerged co-operative bank, as the case may
be, which remains to be allowed and which would have been allowed to
such bank as if the business reorganisation had not taken place.

7.10 LOSSES IN SPECULATION BUSINESS [SECTION 73]

The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the
treatment of income from speculation business has already been discussed under the head
“Profits and gains of business or profession”.
(1) Set-off and Carry forward & set-off of loss from speculation business: Since
speculation is deemed to be a business distinct and separate from any other business
carried on by the assessee, the losses incurred in speculation can be neither set off in the
same year against any other non-speculation income nor be carried forward and set off
against other income in the subsequent years.
Therefore, if the losses sustained by an assessee in a speculation business cannot be set-
off in the same year against any other speculation profit, they can be carried forward to
subsequent years and set-off only against income from any speculation business carried on
by the assessee. Loss from the activity of trading in derivatives, however, is not to be
treated as speculative loss.
(2) Maximum period for carry forward & set-off of losses: The loss in speculation business
can be carried forward only for a maximum period of 4 years from the end of the relevant
assessment year in respect of which the loss was computed. Loss from the activity of
trading in derivatives, however, is not to be treated as speculative loss.

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(3) When a business of a company deemed to be carrying on a speculation business:

The Explanation to this section provides that where any part of the business of a company
consists in the purchase and sale of the shares of other companies, such a company shall
be deemed to be carrying on speculation business to the extent to which the business
consists of the purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –

(i) A company whose gross total income consists of mainly income chargeable under
the heads “Income from house property”, “Capital gains” and “Income from other
sources”;

(ii) A company, the principal business of which is –

(a) the business of trading in shares; or
(b) the business of banking; or
(c) the granting of loans and advances.
Thus, these companies would be exempted from the operation of this Explanation.
Accordingly, if these companies carry on the business of purchase and sale of shares of
other companies, they would not be deemed to be carrying on speculation business.

7.11 CARRY FORWARD & SET OFF OF LOSSES BY

SPECIFIED BUSINESSES [SECTION 73A]
(1) Set-off and Carry forward & set-off of losses of specified business: Any loss computed
in respect of the specified business referred to in section 35AD shall be set off only against
profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will
be carried forward for set off against profits and gains of any specified business in the
following assessment year and so on.

Note - The loss of an assessee claiming deduction under section 35AD in respect of a specified
business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD. An assessee can,
therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April, 2010
and which is eligible for deduction under section 35AD, against the profits of the existing
business of operating a hospital (with atleast 100 beds for patients) or a hotel (of two-star or
above category), even if the latter is not eligible for deduction under section 35AD.

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(2) Loss can be set-off indefinitely: There is no time limit specified for carry forward and set-
off and therefore, such loss can be carried forward indefinitely for set-off against income
from specified business.
Notes:
(i) Companies who has opted for section 115BAA/115BAB and Co-operative societies who has
opted for section 115BAD/115BAE are not eligible for deduction under section 35AD.
(ii) An assessee, being an Individual/HUF/AOP/BOI, paying tax under the default tax regime
under section 115BAC(1A) would not be entitled to deduction under section 35AD.
However, such person exercising the option of shifting out of the default tax regime
provided under section 115BAC(1A) and carrying on specified business, can claim
deduction u/s 35AD in respect of capital expenditure (other than land, goodwill and financial
instruments) incurred in respect of such business, subject to fulfillment of specified
conditions. Any loss computed in respect of the specified business referred to in section
35AD can, however, be set off only against profits and gains, if any, of any other specified
business. The unabsorbed loss, if any, will be carried forward for set off against profits and
gains of any specified business in the following assessment year and so on.

7.12 LOSSES UNDER THE HEAD ‘CAPITAL GAINS’

[SECTION 74]
Carry forward & set-off of losses: Section 74 provides that where for any assessment year, the
net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the loss
shall be carried forward to the following assessment year to be set off in the following manner:
(1) Short-term capital loss: Where the loss so carried forward is a short-term capital loss, it
shall be set off against any capital gains, short term or long term, arising in that year.
(2) Long-term capital loss: Where the loss so carried forward is a long-term capital loss, it
shall be set off only against long term capital gain arising in that year.
(3) Loss under head capital gains: Net loss under the head capital gains cannot be set off against
income under any other head.
(4) Maximum period for carry forward & set-off of loss: Any unabsorbed loss shall be
carried forward to the following assessment year up to a maximum of 8 assessment years
immediately succeeding the assessment year for which the loss was first computed.

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Note - Long-term capital gain exceeding ` 1,25,000 arising on sale of equity shares or units of
equity oriented fund or unit of business trust on which STT is paid
- in respect of equity shares, both at the time of acquisition and sale and
- in respect of units of equity oriented fund or unit of business trust, at the time of sale
is taxable under section 112A @12.5%. Long-term capital loss on sale of such shares/units can,
therefore, be set-off and carried forward for set-off against long-term capital gains by virtue of
section 70(3) and section 74.

ILLUSTRATION 3
During the P.Y. 2025-26, Mr. Chetan has the following income and the brought forward losses:

Particulars `
Short term capital gains on sale of shares 1,75,000
Brought forward Long-term capital loss of A.Y.2024-25 (96,000)
Short term capital loss of A.Y.2025-26 (42,000)
Long term capital gain u/s 112 85,000

What is the capital gain taxable in the hands of Mr. Chetan for the A.Y.2026-27?
SOLUTION
Taxable capital gains of Mr. Chetan for the A.Y. 2026-27

Particulars ` `
Short term capital gains on sale of shares 1,75,000
Less: Brought forward short-term capital loss of the A.Y.2025-26 (42,000) 1,33,000

Long term capital gain 85,000

Less: Brought forward long-term capital loss of A.Y.2024-25 of
` 96,000 set-off to the extent of ` 85,000 (85,000) Nil
[See Note below]
Taxable short-term capital gains 1,33,000

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the
unadjusted long term capital loss of A.Y.2024-25 of ` 11,000 (i.e., ` 96,000 – ` 85,000) has to be
carried forward to the next year to be set-off against long-term capital gains of that year.

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7.13 LOSSES FROM THE ACTIVITY OF OWNING AND

MAINTAINING RACE HORSES [SECTION 74A(3)]
(1) Set-off and Carry forward & set-off of loss: According to provisions of section 74A(3), the
losses incurred by an assessee from the activity of owning and maintaining race horses
cannot be set-off against the income from any other source other than the activity of owning
and maintaining race horses.

(2) Maximum period for carry forward & set-off of losses: Such loss can be carried forward
for a maximum period of 4 assessment years immediately succeeding the assessment year
for which the loss was first computed, for being set-off against the income from the activity
of owning and maintaining race horses.

(3) Meaning of certain terms

Term Meaning
Amount of loss (i) In case assessee has no income by way of stake
incurred by the money – amount of revenue expenditure incurred by
assessee in the activity the assessee wholly & exclusively for the purpose of
of owning and maintaining race horses.
maintaining race (ii) In case assessee has income by way of stake
horses money - The amount by which such income by way
of stake money falls short of the amount of revenue
expenditure incurred by the assessee wholly &
exclusively for the purpose of maintaining race
horses. i.e. Loss = Stake money – revenue
expenditure for the purpose of maintaining race
horses.
Horse race A horse race upon which wagering or betting may be lawfully
made.
Income by way of stake The gross amount of prize money received on a race horse
money or race horses by the owner thereof on account of the horse
or horses or any one or more of the horses winning or being
placed second or in any lower position in horse races.

ILLUSTRATION 4
Mr. Dinesh has the following income for the P.Y.2025-26-

Particulars `
Income from the activity of owning and maintaining the race horses 75,000

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Income from textile business 95,000

Brought forward textile business loss (relating to A.Y. 2025-26) 50,000
Brought forward loss from the activity of owning and maintaining the race horses 96,000
(relating to A.Y.2023-24)

What is the total income in the hands of Mr. Dinesh for the A.Y. 2026-27?
SOLUTION
Total income of Mr. Dinesh for the A.Y. 2026-27

Particulars ` `
Income from the activity of owning and maintaining race horses 75,000
Less: Brought forward loss of ` 96,000 from the activity of owning and
maintaining race horses set-off to the extent of ` 75,000 75,000
Nil
Balance loss of ` 21,000 (` 96,000 – ` 75,000) from the activity of
owning and maintaining race horses to be carried forward to A.Y.2027-28
Income from textile business 95,000
Less: Brought forward business loss from textile business 50,000 45,000
Total income 45,000

Note: Loss from the activity of owning and maintaining race horses cannot be set-off against any
other source/head of income.

7.14 CARRY FORWARD AND SET OFF OF LOSSES IN

CASE OF CHANGE IN CONSTITUTION OF FIRM OR
SUCCESSION [SECTION 78]
(1) Change in constitution of firm: Where there is a change in the constitution of a firm, so
much of the loss proportionate to the share of a retired or deceased partner remaining
unabsorbed (i.e. so much of the loss proportionate to the share of a retired or deceased
partner as exceeds his share of profits, if any, in the firm in respect of the previous year),
shall not be allowed to be carried forward by the firm. However, unabsorbed depreciation
can be carried forward without such restriction.

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(2) Succession otherwise by inheritance: Where any person carrying on any business or
profession has been succeeded in such capacity by another person otherwise than by
inheritance, such other person shall not be allowed to carry forward and set off against his
income, any loss incurred by the predecessor.

(3) Succession by inheritance: Where there is a succession by inheritance, the legal heirs
are entitled to set-off the business loss of the predecessor. Such carry forward and set-off is
possible even if the legal heirs constitute themselves as a partnership firm. In such a case,
the firm can carry forward and set-off the business loss of the predecessor.

7.15 CARRY FORWARD AND SET OFF OF LOSSES IN

CASE OF CLOSELY HELD COMPANIES [SECTION 79]
(1) Carry forward and set-off of losses in case of closely held company not being an
eligible start-up referred to in section 80-IAC

In the case of a company in which the public are not substantially interested and not being
an eligible start-up referred to in section 80-IAC, no loss incurred in any year prior to the
previous year shall be carried forward and set-off against the income of the previous year,
unless

• on the last day of the previous year, the shares of the company carrying not less
than 51% of the voting power were beneficially held by persons

• who beneficially held shares of the company carrying not less than 51% of the voting
power on the last day of the year or years in which the loss was incurred.

(2) Carry forward and set-off of losses in case of closely held company being an eligible
start-up referred to in section 80-IAC

In case of a company in which the public are not substantially interested but being an
eligible start-up as referred to in section 80-IAC, any unabsorbed loss of the company shall
be allowed to be carried forward and set off against the income of the previous year if either
of the conditions are satisfied –

(a) on the last day of the previous year, the shares of the company carrying not less
than 51% of the voting power were beneficially held by persons who beneficially held

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shares of the company carrying not less than 51% of the voting power on the last
day of the year or years in which the loss was incurred; or

(b) all the shareholders of such company who held shares carrying voting power on the
last day of the previous year or years in which the loss was incurred continue to hold
those shares on the last day of such previous year in which the loss is to be set-off
and such loss has been incurred during the period of 10 years beginning from the
year of incorporation of such company.
(3) Non-applicability of restriction
This restriction shall, however, not apply:
(i) where a change in the voting power and shareholding takes place in a previous year
consequent upon the death of a shareholder or on account of transfer of shares by
way of gift to any relative of the shareholder making such gift;
(ii) where any change in shareholding takes place in an Indian company, being a
subsidiary of a foreign company, as a result of amalgamation or demerger of the
foreign company. However, this is subject to the condition that 51% of the
shareholders of the amalgamating/ demerged company continue to be shareholders
of the amalgamated/ resulting foreign company.
(iii) where a change in shareholding takes place in a previous year pursuant to a
resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after
affording a reasonable opportunity of being heard to the jurisdictional Principal
Commissioner or Commissioner.
(iv) to a company, and its subsidiary and the subsidiary of such subsidiary, where
(a) the Tribunal, on an application moved by the Central Government under
section 241 of the Companies Act, 2013, has suspended the Board of
Directors of such company and has appointed new directors nominated by the
Central Government, under section 242 of the said Act; and
(b) a change in shareholding of a company, and its subsidiary and the subsidiary
of such subsidiary, has taken place in a previous year pursuant to a resolution
plan approved by the Tribunal under section 242 of the Companies Act, 2013
after affording a reasonable opportunity of being heard to the jurisdictional
Principal Commissioner or Commissioner.

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(v) to a company to the extent that a change in the shareholding has taken place during
the previous year on account of
(a) relocation of a capital asset by the original fund to the resulting fund; and
(b) consequent transfer of a capital asset, being a share or unit or interest held
by a shareholder or unitholder or interest holder in the original fund, in
consideration for the share or unit or interest in the resultant fund [For the
meaning of the terms “relocation”, “original fund” and “resultant fund”, please
refer Chapter 4: Capital Gains]
(vi) to an erstwhile public sector company which has become so as a result of strategic
disinvestment by the Government (discussed in detail at 7.7) subject to the condition
that the ultimate holding company of such erstwhile public sector company
immediately after completion of the strategic disinvestment, continues to hold,
directly or through its subsidiary or subsidiaries, 51% of the voting power of the
erstwhile public sector company in aggregate.
However, if the above condition is not complied with in any previous year after the
completion of strategic disinvestment, the restriction mentioned in (1) or (2) above
shall apply for such previous year and subsequent previous year.
(4) Meaning of eligible start-up:

Company engaged in eligible business

Total turnover ≤ ` 100 crores Holds a certificate of eligible

Incorporated during the in the P.Y. relevant to the A.Y. for business from the notified Inter
period 1.4.2016-31.3.2030 which deduction is claimed under Ministerial Board of Certification
section 80-IAC

(5) Meaning of eligible business:

A business carried out by an eligible start-up engaged in –
- Innovation, development or improvement of products or processes or services or
- a scalable business model with a high potential of employment generation or wealth
creation
(6) A company shall be a subsidiary of another company, if such other company holds more
than half in nominal value of the equity share capital of the company.

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7.16 NO SET OFF OF LOSSES AGAINST UNDISCLOSED

INCOME BROUGHT TO TAX CONSEQUENT TO
SEARCH, REQUISITION AND SURVEY [SECTION 79A]
(1) No set-off of losses or unabsorbed depreciation against undisclosed income: No loss
(whether brought forward or otherwise) or unabsorbed depreciation under section 32(2) can
be set-off against undisclosed income included in the total income of any previous year of
an assessee [consequent to a search under section 132 or a requisition under section 132A
or a survey under section 133A (other than a survey conducted for TDS verification under
section 133A(2A))] while computing his total income for such previous year.
(2) Meaning of undisclosed income: Undisclosed income means -
(i) Income represented by any money, bullion, jewellery or other valuable article
or thing or any entry in the books of account: Any income of the previous year
represented, either wholly or partly, by any money, bullion, jewellery or other
valuable article or thing or any entry in the books of account or other documents or
transactions found in the course of a search under section 132 or a requisition under
section 132A or a survey under section 133A [other than under section 133A(2A)],
which has -
(A) not been recorded on or before the date of search or requisition or
survey, as the case may be, in the books of account or other documents
maintained in the normal course relating to such previous year; or
(B) not been disclosed to the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner before the date of
search or requisition or survey, as the case may be; or
(ii) Income represented by any entry in respect of an expense: Any income of the
previous year represented, either wholly or partly, by any entry in respect of an
expense recorded in the books of account or other documents maintained in the
normal course relating to the previous year which is found to be false and which
would not have been found to be so, had the search not been initiated or the survey
not been conducted or the requisition not been made.

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7.17 ORDER OF SET OFF OF LOSSES

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting
off unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows -
(1) Current year depreciation under section 32(1)
(2) Current year capital expenditure on scientific research and current year expenditure on
family planning, to the extent allowed.
(3) Brought forward loss from business/profession [Section 72(1)]
(4) Unabsorbed depreciation [Section 32(2)]
(5) Unabsorbed capital expenditure on scientific research [Section 35(4)]
(6) Unabsorbed expenditure on family planning [Section 36(1)(ix)].
ILLUSTRATION 5
Mr. Varun has furnished his details for the A.Y.2026-27 as under:
Particulars `
Income from salaries (computed) 1,70,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
Short term capital gain 90,000
Long term capital loss of A.Y.2024-25 (30,000)
Winning from lotteries (gross) 20,000

What is the taxable income of Mr. Varun for the A.Y.2026-27?

SOLUTION
Computation of taxable income of Mr. Varun for the A.Y.2026-27
Particulars ` `
Income from salaries 1,70,000
Income from speculation business 60,000
Less: Loss from non-speculation business (40,000) 20,000
Short-term capital gain 90,000
Winnings from lotteries 20,000
Taxable income 3,00,000

Note: Long term capital loss can be set off only against long term capital gain. Therefore, long
term capital loss of ` 30,000 has to be carried forward to the next assessment year.

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ILLUSTRATION 6
Compute the gross total income of Mr. Fadnis for the A.Y.2026-27 from the information given
below –

Particulars `
Income from house property (computed) 1,25,000
Income from business (before providing for depreciation) 1,35,000
Short-term capital gains on sale of shares 56,000
Long-term capital loss from sale of property (brought forward from A.Y.2023-24) (90,000)
Income from tea business 1,20,000
Dividend from Indian companies carrying on agricultural operations (Gross) 1,20,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)

SOLUTION
Gross Total Income of Mr. Fadnis for the A.Y. 2026-27
Particulars ` `
Income from house property 1,25,000
Income from business
Profits before depreciation 1,35,000
Less: Current year depreciation 26,000
1,09,000
Add: Income from tea business (40% is business income) 48,000
1,57,000
Less: Brought forward business loss 45,000 1,12,000
Income from the capital gains
Short-term capital gains 56,000
Income from Other Sources
Dividend from Indian companies is chargeable to tax in the hands of 1,20,000
shareholders
Gross Total Income 4,13,000

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 7.34 DIRECT TAX LAWS

Notes:
(1) Dividend from Indian companies of ` 1,20,000 is taxable in the hands of shareholders at
normal rate of tax.
(2) 60% of the income from tea business is treated as agricultural income and therefore,
exempt from tax.

(3) Long-term capital loss can be set off only against long-term capital gains. Therefore, long-
term capital loss of ` 90,000 brought forward from A.Y.2023-24 cannot be set-off in the
A.Y.2026-27. It has to be carried forward for set-off against long-term capital gains, if any,
during A.Y.2027-28.

7.18 SUBMISSION OF RETURN OF LOSSES [SECTION 80]

As per section 80,
- business loss to be carried forward under section 72(1)

- speculation business loss to be carried forward under section 73(2)

- loss from specified business to carried forward under section 73A(2)
- loss under the head “Capital Gains” to be carried forward under section 74(1) and
- loss incurred in the activity of owning and maintaining race horses to be carried forward
under section 74A(3).
which has not been determined in pursuance of a return filed under section 139(3) cannot be
carried forward and set off. Thus, the assessee must have filed a return of loss under section
139(3) in order to carry forward and set off of such losses. Such a return of loss should be filed
within the time allowed under section 139(1).

In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the
above specified losses sustained by him. Such a return should be filed within the time allowed
under section 139(1).

This condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).

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SIGNIFICANT SELECT CASES

Sl. Case Law

No.

1. CIT v. KBD Sugars and Distilleries Ltd. [2023] 454 ITR 800 (SC)

Issue Relevant provision of Law, analysis & decision

Can a resulting entity set off Relevant Provision of Law: Clause (vi) of Section 2(19AA)
and carry forward the losses lays down a condition that demerger in relation to companies
of the dysfunctional unit of means the transfer, pursuant to a scheme of arrangement
demerged entity? under section 230 to 232 of the Companies Act, 2013 by a
demerged company of its one or more undertakings to any
resulting company in such a manner that the transfer of the
undertaking is on a going concern basis.
Assessing Officer’s Contentions: The Assessing Officer
contented that the assessee was ineligible to the benefit of
brought forward loss under section 72A(4) for the reason
that the demerged company was dysfunctional since 1999
and, therefore, does not qualify to be a 'going concern'.
Since the undertaking not being a 'going concern', the
condition laid down in subclause (vi) of section 2(19AA) for
demerger stands violated.
Analysis and Decision: The Tribunal opined that the words
used 'on a going concern basis' in subclause (vi) of section 2
(19AA) only means that the transfer should be based on a
'going concern', and it does not mean that the undertaking
being transferred should be a 'going concern' as on the date
of transfer.
The 'scheme of demerger', which stands approved by the
High Courts and the jurisdictional Court, clearly establishes
the fact that the transfer of the undertaking is indeed on a
'going concern basis'. The assets, liabilities, employees,
debts, obligations, rights, etc., of the undertaking,
immediately prior to the demerger, stand entirely vested with
the assessee upon 'demerger'. This amounts to 'transfer of
the undertaking on a going concern basis'.
A simple reading of the same makes it very clear that the
assessee is eligible for the benefits under section 72A(4).
The Act does not state that the undertaking being demerged
ought to be a going concern at the time of demerger. It only
states that the undertaking being demerged should stand

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 7.36 DIRECT TAX LAWS

transferred in a manner similar to the manner in which a

'going concern' is transferred.
Accordingly, the High Court held that if a unit were running
and profitable, the same would not be available for
demerger. It would be incongruous to construe sub-clause
(vi) of section 2(19AA) to mean a running unit. The scheme
of demerger had been approved by the High Courts.
Therefore, the assessee was entitled to set off the brought
forward losses under section 72A(4).
The Apex Court affirmed the decision of the High Court.

2. Pramod Mittal v. CIT (2013) 356 ITR 456 (Delhi)

Issue Analysis & Decision

Can the loss suffered by an The partnership firm was dissolved and the take over of the
erstwhile partnership firm, running business of the firm by the erstwhile partner as a
which was dissolved, be sole proprietor was not a case of succession by inheritance.
carried forward for set-off by Hence, the carry forward of losses of the firm by the sole
the individual partner who proprietor for set-off against his income is not allowed.
took over the business of Note - In CIT v. Madhukant M. Mehta (2001) 247 ITR 805
the firm as a sole proprietor, (SC), the sole proprietor had expired and after his death, the
considering the succession heirs succeeded the business as a partnership concern.
as a succession by Therefore, the losses suffered by the deceased proprietor
inheritance? was allowed to be set-off by the partnership firm since the
case falls within the exception mentioned u/s 78(2), i.e., a
case of succession by inheritance.
Also, in Saroj Aggarwal v. CIT (1985) 156 ITR 497 (SC),
upon death of a partner, his legal heirs were inducted as
partners in the partnership firm. The partnership firm was not
dissolved on the death of the partner. The partnership firm
which suffered the losses continued with induction of the
legal heirs of the deceased partner. This, being a case of
succession by inheritance, the benefit of carry forward of
losses was given to the re-constituted partnership firm.
In the present case, however, the partnership firm was
dissolved and the take over of the running business of the
firm by the erstwhile partner as a sole proprietor was not a
case of succession by inheritance. Hence, the carry forward
of losses of the firm by the sole proprietor was not allowed in
this case.

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
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LOSSES

TEST YOUR KNOWLEDGE

Questions
1. X carrying on a business as sole proprietor, died on 31st March, 2026. On his death, the
same business was continued by his legal heirs, by forming a firm. As on 31st March 2026, a
determined business loss of ` 5 lakhs is to be carried forward under the Income-tax Act,
1961.
Does the firm consisting of all legal heirs of Mr. X, get a right to have this loss adjusted
against its current income?
2. ABC Limited owning an industrial undertaking was amalgamated with XYZ Limited on
01.04.2025. All the conditions of section 2(1B) were satisfied.
ABC Limited has the following losses as assessed in the Assessment Year 2025-26 which
is carried forward to A.Y. 2026-27:

Particulars ` (in lakhs)

(i) Speculative Loss 4
(ii) Unabsorbed Depreciation 18
(iii) Unabsorbed expenditure of capital nature on scientific research 2
(iv) Business Loss 120

XYZ Limited has computed a profit of ` 140 lakhs for the financial year 2025-26 before
setting off the eligible losses of ABC Limited but after providing depreciation at 15% per
annum on ` 150 lakhs, being the consideration at which plant and machinery were
transferred to XYZ Limited. The written down value as per Income-tax record of ABC
Limited as on 1st April, 2025 was ` 100 lakhs.
The above profit of XYZ Limited includes speculative profit of ` 10 lakhs.

Compute the total income of XYZ Limited for Assessment Year 2026-27 and indicate the
losses/ other allowances to be carried forward by it.
3. Examine in brief about the treatment to be given in the following case under the Income-tax
Act, 1961, for A.Y.2026-27:
A loss of ` 85,000 was sustained by Simran in the activity of owning and maintaining
camels for races.

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 7.38 DIRECT TAX LAWS

4. M/s. JKLM, a firm, consists of four partners namely, J, K, L and M. They shared profits and
losses equally during the year ended 31.3.2025. The assessed business loss of the firm for
the assessment year 2025-26 which it is entitled to carry forward amounts to ` 3,60,000. A
new deed of partnership was executed among J, K, L and M on 1.4.2025 in terms of which
they agreed to share profits and losses in the ratio of 15:15:20:50 respectively.
Compute the amount of business loss relating to the assessment year 2025-26, which the
firm is entitled to set off against its business income for the assessment year 2026-27. The
business income of the firm for the assessment year 2026-27 is ` 3,30,000. Your answer
should be supported by reasons.
5. An assessee sustained an unabsorbed depreciation in the previous year relevant to the
assessment year 2025-26, which could not be set off against income from any other head in
that assessment year. The assessee did not furnish the return of loss within the time
allowed under section 139(1) in respect of the relevant assessment year. However, the
assessee filed the return within the time allowed under section 139(4). Can the assessee
carry forward such unabsorbed depreciation for set off against income of the assessment
year 2026-27?

Answers
1. Section 78(2) provides that where a person carrying on any business or profession has
been succeeded in such capacity by another person, otherwise than by inheritance, then,
the successor is not entitled to carry forward and set-off the loss of the predecessor against
his income. This implies that generally, set-off of business losses should be claimed by the
same person who suffered the loss and the only exception to this provision is when the
business passes on to another person by inheritance.
The facts of case given in the question are similar to the case CIT v. Madhukant M. Mehta
(2001) 247 ITR 805, where the Supreme Court has held that if the business is succeeded
by inheritance, the legal heirs are entitled to the benefit of carry forward of the loss of the
predecessor. Even if the legal heirs constitute themselves as a partnership firm, the benefit
of carry forward and set off of the loss of the predecessor would be available to the firm.

In this case, the business of X was continued by his legal heirs after his death by
constituting a firm. Hence, the exception contained in section 78(2) along with the decision
of the Apex Court discussed above, would apply in this case. Therefore, the firm is entitled
to carry forward the business loss of ` 5 lakhs of X.

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.39
LOSSES

2. Computation of total income of XYZ Limited for the A.Y. 2026-27

Particulars (` in lakhs)
Business income before setting off brought forward losses of ABC Ltd. 140.00
Add: Excess depreciation claimed in the scheme of amalgamation
of ABC Limited with XYZ Limited.
Value at which assets are transferred by ABC Ltd. 150
WDV in the books of ABC Ltd. 100
Excess accounted 50
Excess depreciation claimed in computing taxable income of
XYZ Ltd. [` 50 lacs × 15%] [Explanation 2 to section 43(6)] 7.50
147.50
Set off of brought forward business loss of ABC Ltd. (See (120.00)
Notes 2 & 4)
Set off of unabsorbed depreciation under section 32(2) read (18.00)
with section 72A (See Notes 2 & 4)
Set off of unabsorbed capital expenditure under section
35(1)(iv) read with section 35(4) (See Note 5) (2.00)
Business income 7.50

Notes:
1. It is presumed that the amalgamation is within the meaning of section 72A of the
Income-tax Act, 1961.
2. In the case of amalgamation of companies, the unabsorbed losses and unabsorbed
depreciation of the amalgamating company i.e., ABC Limited shall be deemed to be
the loss or unabsorbed depreciation of the amalgamated company i.e., XYZ Limited
for the previous year in which the amalgamation was effected and such business
loss and unabsorbed depreciation shall be carried forward and set-off by
XYZ Limited for a period of 8 years immediately succeeding the A.Y. in which such
loss was first computed for ABC Ltd. and indefinitely, respectively.
3. As per section 72A(7), the accumulated loss to be carried forward specifically
excludes loss sustained in a speculative business. Therefore, speculative loss of ` 4
lacs of ABC Limited cannot be carried forward by XYZ Limited.

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 7.40 DIRECT TAX LAWS

4. Section 72(2) provides that where any allowance or part thereof unabsorbed under
section 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed
scientific research capital expenditure) is to be carried forward, effect has to be first
given to brought forward business losses under section 72.
5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed
depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in
respect of capital expenditure on scientific research related to the business carried
on by the assessee. Therefore, unabsorbed capital expenditure on scientific
research can be set off and carried forward in the same manner as unabsorbed
depreciation.
6. The restriction contained in section 73 is only regarding set-off of loss computed in
respect of speculative business. Such a loss can be set off only against profits of
another speculation business and not non-speculation business. However, there is
no restriction under the Income-tax Act, 1961 regarding set-off of normal business
losses against speculative income. Therefore, normal business losses can be set off
against profits of a speculative business.
Consequently, there is no loss or allowance to be carried forward by XYZ Limited to
the F.Y. 2026-27.
3. Section 74A(3) lays down the provisions for set-off and carry forward of loss from the
activity of owning and maintaining race horses. According to provisions of section 74A(3),
the losses incurred by an assessee from the activity of owning and maintaining race horses
cannot be set-off against the income from any other source other than the activity of owning
and maintaining race horses. Since the scope of this section is confined to the activity of
owning and maintaining race horses only, therefore, set-off and carry forward of loss from
the activity of owning and maintaining camels is not covered under section 74A(3).
It is possible to take a view that the loss from the activity of owning and maintaining camels
for races may be governed by section 72 provided such activity amounts to business.
Accordingly, the loss from the activity of owning and maintaining of camels for races can be
set-off against any income (other than income from salary) of current year and unadjusted
amount shall be carried forward for set off against any business income for a maximum
period of 8 assessment years immediately succeeding the assessment year in which the
loss was incurred.

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
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LOSSES

4. The firm is entitled to set off its brought forward business loss amounting to ` 3,60,000
relating to the assessment year 2025-26 to the extent of ` 3,30,000 against its business
income of ` 3,30,000 for the assessment year 2026-27, as per the provisions of section
72(1).
The balance unabsorbed business loss of ` 30,000 relating to the assessment year
2025-26 will be carried forward to assessment year 2027-28.
Section 78(1) which deals with carry forward and set-off of losses in the case of change in
constitution of firm is applicable only where there is retirement or death of a partner. It is
not applicable to a case where there is a change in the ratio of sharing profits and
losses amongst the existing partners. Therefore, section 78(1) is not applicable to the
case of M/s. JKLM.
5. Section 139(3) stipulates that an assessee claiming carry forward of loss under the heads
“Profits and gains of business or profession” or “Capital gains” should furnish the return of
loss within the time stipulated under section 139(1). There is no reference to “unabsorbed
depreciation” in section 139(3). The assessee, in the instant case, has filed the return
showing unabsorbed depreciation within the time prescribed under section 139(4). The
assessee is, therefore, entitled to carry forward such unabsorbed depreciation for set off
against the income of the subsequent assessment year.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 8
DEDUCTIONS FROM GROSS
TOTAL INCOME
LEARNING OUTCOMES

After studying this chapter, you would be able to:

 appreciate the general provisions contained in “A – General” of Chapter VI-A
relating to deductions to be made in computing total income;
 analyse and apply the provisions of Chapter VI-A contained in “B –
Deductions in respect of certain payments” in problem solving and addressing
related issues;
 appreciate the provisions of Chapter VI-A contained in “C – Deductions in
respect of certain incomes” and “CA – Deductions in respect of other incomes”,
and analyse and apply the provisions in problem solving and addressing
related issues;
 compute the deduction allowable in the case of a person with disability under
section 80U;
 compute the aggregate deduction available under Chapter VI-A to an
assessee, if available, and thereafter, arrive at the total income of the
assessee;
 compute the deduction available under section 10AA for units established in
SEZs considering the conditions specified thereunder.

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 8.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Deductions from Gross Total Income

Deductions under Chapter VI-A

Deductions in Other Deduction

Deductions in Deductions in
respect of certain Deductions under section
respect of certain respect of other
payments 10AA
incomes incomes

8.1 GENERAL PROVISIONS

As we have seen earlier, section 10 exempts certain incomes. Such income are excluded from the
total income and do not enter into the computation process at all. On the other hand, Chapter VI-A
contains deductions from gross total income. Section 10AA also provides for a deduction in respect
of units established in SEZ from the total income of the assessee. The important point to be noted
here is that if there is no gross total income, then no deductions will be permissible.
This Chapter contains deductions in respect of certain payments, deductions in respect of certain
incomes, deductions in respect of other income and other deductions. It also includes deduction
under section 10AA.

Section 80A
(1) Section 80A(1) provides that in computing the total income of an assessee, there shall be
allowed from his gross total income, the deductions specified in sections 80C to 80U.

(2) According to section 80A(2), the aggregate amount of the deductions under this chapter shall
not, in any case, exceed the gross total income of the assessee. Therefore, the total income
after deductions will either be positive or nil. It cannot be negative due to deductions.

An assessee cannot have a loss as a result of the deduction under Chapter VI-A and claim to
carry forward the same for the purpose of set-off against his income in the subsequent year.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.3

(3) Section 80A(3) provides that in the case of AOP/BOI, if any deduction is admissible under
section 80G/80GGA/80GGC/80-IA/80-IB/80-ID/80-IE, no deduction under the same section
shall be made in computing the total income of a member of the AOP or BOI in relation to the
share of such member in the income of the AOP or BOI.
(4) The profits and gains allowed as deduction under section 10AA or under any provision of
Chapter VI-A under the heading "C.-Deductions in respect of certain incomes" in any
assessment year, shall not be allowed as deduction under any other provision of the Act for
such assessment year [Section 80A(4)];

(5) The deduction, referred to in (4) above, shall not exceed the profits and gains of the
undertaking or unit or enterprise or eligible business, as the case may be [Section 80A(4)];
(6) No deduction under any of the provisions referred to in (4) above, shall be allowed if the
deduction has not been claimed in the return of income [Section 80A(5)];
(7) The transfer price of goods and services between such undertaking or unit or enterprise or
eligible business and any other business of the assessee shall be determined at the market
value of such goods or services as on the date of transfer. This is notwithstanding anything
to the contrary contained in section 10AA or in any provision of Chapter VI-A under the
heading “C- Deductions in respect of certain incomes” [Section 80A(6)].
(8) For this purpose, the expression "market value" has been defined to mean,-
(a) in relation to any goods or services sold or supplied, the price that such goods or
services would fetch if these were sold by the undertaking or unit or enterprise or
eligible business in the open market, subject to statutory or regulatory restrictions, if
any;
(b) in relation to any goods or services acquired, the price that such goods or services
would cost if these were acquired by the undertaking or unit or enterprise or eligible
business from the open market, subject to statutory or regulatory restrictions, if any;
(c) if it is a specified domestic transaction referred to in section 92BA, - in relation to any
goods or services sold, supplied or acquired means the arm’s length price as defined
in section 92F(ii) of such goods or services.
(9) Where a deduction under any provision of this Chapter under the heading “C – Deductions in
respect of certain incomes” is claimed and allowed in respect of the profits of such specified
business for any assessment year, no deduction under section 35AD is permissible in
relation to such specified business for the same or any other assessment year.

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 8.4 DIRECT TAX LAWS

In short, once the assessee has claimed the benefit of deduction under section 35AD for a
particular year in respect of a specified business, he cannot claim benefit under Chapter VI-A
under the heading “C.-Deductions in respect of certain incomes” for the same or any other
year and vice versa.
Section 80AB
This section provides that for the purpose of calculation of deductions specified in Chapter VI-A
under the heading “C - Deductions in respect of certain incomes”, the income computed in
accordance with the provisions of the Act (before making any deduction under Chapter VI-A) shall
alone be regarded as income received by the assessee and which is included in his gross total
income. Accordingly, the deductions specified in the aforesaid sections will be calculated with
reference to the net income as computed in accordance with the provisions of the Act (before
making deduction under Chapter VI-A) and not with reference to the gross amount of such income.
This is notwithstanding anything contained in the respective sections of Chapter VI-A.
Section 80AC: Furnishing return of income on or before due date mandatory for
claiming deduction under Chapter VI-A under the heading “C.- Deductions in respect
of certain incomes”
(1) Section 80AC stipulates compulsory filing of return of income on or before the due date
specified under section 139(1), as a pre-condition for availing benefit of deductions under any
provision of Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”.
Table showing the deductions contained in Chapter VI-A under the
heading “C. – Deductions in respect of certain income”
Section Deduction
80-IA Deductions in respect of profits and gains from undertakings or enterprises
engaged in infrastructure development/generation/ transmission/ distribution
of power etc.
80-IAB Deduction in respect of profits and gains derived by an undertaking or
enterprise engaged in development of SEZ
80-IAC Deduction in respect of profits and gains derived by an eligible start-up from
an eligible business
80-IB Deduction in respect of profits and gains from the business of processing,
preservation and packaging of fruits or vegetables or meat and meat
products or poultry or marine or dairy products or from the integrated
business of handling, storage and transportation of foodgrains
80-IBA Deduction in respect of profits and gains from housing projects/rental
housing projects

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.5

80-IE Deduction in respect of profits and gains from manufacture or production of

eligible article or thing, substantial expansion to manufacture or produce any
eligible article or thing or carrying on of eligible business in North-Eastern
States
80JJA Deduction in respect of profits and gains from business of collecting and
processing of bio-degradable waste
80JJAA Deduction in respect of employment of new employees
80LA Deduction in respect of certain income of Offshore Banking Units and
International Financial Services Centre
80M Deduction in respect of certain inter-corporate dividends
80P Deduction in respect of income of co-operative societies
80QQB Deduction in respect of royalty income, etc., of authors of certain books
other than text books
80RRB Deduction in respect of royalty on patents

(2) The effect of this provision is that in case of failure to file return of income on or before the
stipulated due date, the undertakings would lose the benefit of deduction under these
sections.
ILLUSTRATION 1
Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
(a) For grant of deduction u/s 80-IB, filing of audit report in prescribed form is must for a
corporate assessee; filing of return within the due date laid down in section 139(1) is not
required.
(b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an
assessee from claiming deduction under section 80-IE.
SOLUTION
(a) The statement is not correct. Section 80AC stipulates compulsory filing of return of income
on or before the due date specified under section 139(1), as a pre-condition for availing the
benefit of deduction, inter alia, under section 80-IB.
(b) The statement is correct. As per section 80AC, the assessee has to furnish his return of
income on or before the due date specified under section 139(1), to be eligible to claim
deduction, inter alia, under section 80-IE.

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 8.6 DIRECT TAX LAWS

Section 80B(5)

“Gross total income” means the total income computed in accordance with the provisions of the Act
without making any deduction under Chapter VI-A. “Computed in accordance with the provisions of
the Act” implies —
(1) that deductions under appropriate computation section have already been given effect to;

(2) that income of other persons, if includible under sections 60 to 64, has been included;
(3) the intra head and/or inter head losses have been adjusted; and
(4) that unabsorbed business losses, unabsorbed depreciation etc., have been set off.
Two types of deductions are allowable from Gross Total Income - Deductions under Chapter VI-A
and Deduction under section 10AA which are discussed in this chapter.
Let us first consider the deductions allowable in respect of certain payments.

8.2 DEDUCTIONS IN RESPECT OF PAYMENTS

(1) Deduction in respect of investment in specified assets [Section 80C]
Section 80C provides for a deduction from the Gross Total Income, of savings in specified modes of
investments. The deduction under section 80C is available only to an individual or HUF.
Note - The deduction under section 80C is available only to an individual or HUF exercising the
option of shifting out of the default tax regime provided under section 115BAC(1A). It is not
available under the default tax regime under section 115BAC.

The maximum permissible deduction under section 80C is ` 1,50,000. The following are the
investments/contributions eligible for deduction –
(i) Contribution in Unit-linked Insurance Plan 1971
Contributions in the name of the individual, his or her spouse or any child of the individual for
participation in the Unit-linked Insurance Plan 1971. In case of a HUF, the contribution can
be in the name of any member.

(ii) Contribution in Unit-linked Insurance Plan of LIC Mutual Fund

Contributions in the name of the individual, his or her spouse or any child of the individual for
participation in any Unit linked Insurance Plan of the LIC Mutual Fund. In case of a HUF, the
contribution can be in the name of any member.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.7

(iii) Premium paid in respect of life insurance policy

Premium paid for insurance on the life of the individual, spouse or any child (minor or major)
and in the case of HUF, any member thereof. This will include a life policy and an
endowment policy.
The following is a tabular summary of the deduction allowable under section 80C vis-à-vis
the date of issue of such policies –
Deduction u/s 80C
In respect of Premium paid to the extent of 20% of “actual capital sum assured”
policies issued
before 31.3.2012
In respect of Premium paid to the extent of 10% of “actual capital sum assured”
policies issued on
or after 1.4.2012
but before 1.4.2013
In respect of (a) Where the insurance is on the life of a person with
policies issued on disability or severe disability as referred to in section
or after 1.4.2013 80U or a person suffering from disease or ailment as
specified under section 80DDB.
Premium paid to the extent of 15% of “actual capital sum
assured”
(b) Where the insurance is on the life of any person, other
than mentioned in (a) above
Premium paid to the extent of 10% of “actual capital sum
assured”
Meaning of actual capital sum assured - Minimum amount assured under the policy on
happening of the insured event at any time during the term of the policy, not taking into
account–
(i) the value of any premium agreed to be returned; or
(ii) any benefit by way of bonus or otherwise over and above the sum actually
assured, which is to be or may be received under the policy by any person.

ILLUSTRATION 2
Compute the eligible deduction under section 80C for A.Y.2026-27 in respect of life insurance
premium paid by Mr. Hari during the P.Y.2025-26, the details of which are given hereunder, if
Mr. Hari has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) -

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 8.8 DIRECT TAX LAWS

Date of Person insured Actual Insurance

issue of capital sum premium paid
policy assured during P.Y.
(` ) 2025-26 (`)
(i) 30/3/2012 Self 9,00,000 48,000
(ii) 1/5/2019 Spouse 1,50,000 20,000
(iii) 1/6/2022 Handicapped son (section 4,00,000 80,000
80U disability)

SOLUTION
Date of Person Actual Insurance Deductio Remark
issue of insured capital premium n u/s 80C (restricted
policy sum paid during for A.Y. to % of
assured P.Y. 2026-27 actual
2025-26 capital sum
(`) (`) (`) assured)

(i) 30/3/2012 Self 9,00,000 48,000 48,000 20%

(ii) 1/5/2019 Spouse 1,50,000 20,000 15,000 10%
(iii) 1/6/2022 Handicapped
son (section
80U disability) 4,00,000 80,000 60,000 15%
Total 1,23,000

ILLUSTRATION 3
What would your answer if Mr. Hari pays tax under default tax regime under section
115BAC?
SOLUTION
If Mr. Hari pays tax under default tax regime under section 115BAC, he would not be eligible
for deduction under section 80C.
(iv) Premium paid in respect of a contract for deferred annuity
Premium paid to effect and keep in force a contract for a deferred annuity on the life of the
individual and/or his or her spouse or any child, provided such contract does not contain any
provision for the exercise by the insured of an option to receive cash payments in lieu of the
payment of the annuity.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.9

It is pertinent to note here that a contract for a deferred annuity need not necessarily be with
an insurance company. It follows therefore that such a contract can be entered into with any
person.
(v) Any sum deducted from the salary payable of a Government employee for securing a
deferred annuity

Amount deducted by or on behalf of the Government from the salary of a Government

employee in accordance with the conditions of his service for securing a deferred annuity or
making provisions for his spouse or children. The excess, if any, over one-fifth of the salary
is to be ignored.
(vi) Contribution to SPF/PPF/RPF
Contributions to any provident fund to which the Provident Funds Act, 1925 applies and
recognized provident fund qualifies for deduction under section 80C.
Contribution made to any Provident Fund set up by the Central Government and notified in his
behalf (i.e., the Public Provident Fund established under the Public Provident Fund Scheme,
1968) also qualifies for deduction under section 80C. Such contribution can be made in the
name of the individual, his spouse and any child of the individual, and any member of the
family, in case of a HUF. The maximum limit for deposit in PPF is ` 1,50,000 in a year.
ILLUSTRATION 4
An individual assessee, resident in India, has made the following deposit/payment during the
previous year 2025-26:
Particulars `
Contribution to the public provident fund 1,50,000
Insurance premium paid on the life of the spouse (policy taken on 1.4.2019) 36,000
(Assured value ` 3,00,000)

What is the deduction allowable under section 80C for A.Y.2026-27 if the assessee has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A)?
SOLUTION
Computation of deduction under section 80C for A.Y.2026-27
Particulars `
Deposit in public provident fund 1,50,000

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 8.10 DIRECT TAX LAWS

Insurance premium paid on the life of the spouse

(Maximum 10% of the assured value ` 3,00,000, as the policy is taken
after 31.3.2012) 30,000
Total 1,80,000
However, the maximum permissible deduction u/s 80C is restricted to 1,50,000

(vii) Contribution to approved superannuation Fund

Contribution by an employee to an approved superannuation fund qualifies for deduction

under section 80C.
(viii) Any sum paid or deposited in Sukanya Samridhi Account

Subscription to any such security of the Central Government or any such deposit scheme as
the Central Government as may notify in the Official Gazette. Accordingly, Sukanya
Samriddhi Scheme has been notified to provide that any sum paid or deposited during the
previous year in the said Scheme, by an individual in the name of –
(a) any girl child of the individual; or
(b) any girl child for whom such individual is the legal guardian

would be eligible for deduction under section 80C.

Exemption on payment from Sukanya Samriddhi Account [Section 10(11A)]

Section 10(11A) provides that any payment from an account opened in accordance with the
Sukanya Samriddhi Account Rules, 2014, made under the Government Savings Bank Act,
1873, shall not be included in the total income of the assessee. Accordingly, the interest
accruing on deposits in, and withdrawals from any account under the said scheme would be
exempt.

(ix) Subscription to National Savings Certificates VIII

Subscription to any Savings Certificates under the Government Savings Certificates Act,
1959 notified by the Central Government in the Official Gazette (i.e. National Savings
Certificate (VIII Issue) issued under the Government Savings Certificates Act, 1959).
(x) Contribution to approved annuity plan of LIC
Contributions to approved annuity plans of LIC (New Jeevan Dhara and New Jeevan Akshay,
New Jeevan Dhara I and New Jeevan Akshay I, II and III) or any other insurer (Tata AIG

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.11

Easy Retire Annuity Plan of Tata AIG Life Insurance Company Ltd.) as the Central
Government may, by notification in the Official Gazette, specify in this behalf.

(xi) Subscription towards notified units of mutual fund or UTI

Subscription to any units of any mutual fund referred to in section 10(23D) or from the
Administrator or the specified company under any plan formulated in accordance with such
scheme notified by the Central Government;
(xii) Contribution to notified pension fund set up by mutual fund or UTI
Contribution by an individual to a pension fund set up by any Mutual Fund referred to in
section 10(23D) or by the Administrator or the specified company as the Central Government
may specify (i.e., UTI-Retirement Benefit Pension Fund set up by the specified company
referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002 as a pension fund).

“Specified company” means a company formed and registered under the Companies Act,
1956 1 and whose entire capital is subscribed by such financial institutions or banks as may
be specified by the Central Government, by notification in the Official Gazette, for the
purpose of transfer and vesting of the undertaking
“Administrator” means a person or a body of persons appointed as Administrator by the
Central Government. The Central Government shall appoint a person or a body of persons,
as the “Administrator of the specified undertaking of the Unit Trust of India” for the purpose
of taking over the administration thereof and the Administrator shall carry on the
management of the specified undertaking of the Trust for and on behalf of the Central
Government.
“Specified undertaking” includes all business, assets, liabilities and properties of the Trust
representing and relatable to the schemes and Development Reserve Fund.

(xiii) Contribution to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008
Subscription to any deposit scheme or contribution to any pension fund set up by the
National Housing Bank i.e., National Housing Bank (Tax Saving) Term Deposit Scheme,
2008.

1 Now Companies Act, 2013

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 8.12 DIRECT TAX LAWS

(xiv) Subscription to notified deposit scheme

Subscription to any such deposit scheme of
• a public sector company which is engaged in providing long-term finance for
construction, or purchase of houses in India for residential purposes or
• any such deposit scheme of any authority constituted in India by or under any law
enacted either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of cities,
towns and villages or for both.
The deposit scheme should be notified by the Central Government, for example, public
deposit scheme of HUDCO.
(xv) Payment of tuition fees to any university, college, school or other educational
institutions within India for full-time education for maximum 2 children
Payment of tuition fees by an individual assessee at the time of admission or thereafter to
any university, college, school or other educational institutions within India for the purpose of
full-time education of any two children of the individual. This benefit is only for the amount
of tuition fees for full-time education and shall not include any payment towards development
fees or donation or payment of similar nature and payment made for education to any
institution situated outside India.
(xvi) Repayment of housing loan including stamp duty, registration fee and other expenses
Any payment made towards the cost of purchase or construction of a new residential
house property. The income from such property –
(1) should be chargeable to tax under the head “Income from house property”;
(2) would have been chargeable to tax under the head “Income from house property” had
it not been used for the assessee’s own residence.
The approved types of payments are as follows:
(1) Any instalment or part payment of the amount due under any self-financing or other
schemes of any development authority, Housing Board or other authority engaged in
the construction and sale of house property on ownership basis; or
(2) Any instalment or part payment of the amount due to any company or a cooperative
society of which the assessee is a shareholder or member towards the cost of house
allotted to him; or

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.13

(3) Repayment of amount borrowed by the assessee from:

(a) The Central Government or any State Government;
(b) Any bank including a co-operative bank;
(c) The Life Insurance Corporation;
(d) The National Housing Bank;
(e) Any public company formed and registered in India with the main object of
carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes which is eligible for
deduction under section 36(1)(viii);
(f) Any company in which the public are substantially interested or any
cooperative society engaged in the business of financing the construction of
houses;
(g) The assessee’s employer, where such employer is an authority or a board or a
corporation or any other body established or constituted under a Central or
State Act;
(h) The assessee’s employer where such employer is a public company or public
sector company or a university established by law or a college affiliated to such
university or a local authority or a co-operative society.
(4) Stamp duty, registration fee and other expenses for the purposes of transfer of such
house property to the assessee.
Inadmissible payments: However, the following amounts do not qualify for rebate:
(1) admission fee, cost of share and initial deposit which a shareholder of a company or a
member of a co-operative society has to pay for becoming a shareholder or member;
or
(2) the cost of any addition or alteration or renovation or repair of the house property after
the issue of completion certificate in respect of the house property or after the house
has been occupied by the assessee or any person on his behalf or after it has been
let out; or
(3) any expenditure in respect of which deduction is allowable under section 24.

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 8.14 DIRECT TAX LAWS

(xvii) Subscription to certain equity shares or debentures

Subscription to equity shares or debentures forming part of any eligible issue of capital
approved by the Board on an application made by a public company or as subscription to
any eligible issue of capital by any public financial institution in the prescribed form.
A lock-in period of three years is provided in respect of such equity shares or debentures. In
case of any sale or transfer of shares or debentures within three years of the date of
acquisition, the aggregate amount of deductions allowed in respect of such equity shares or
debentures in the previous year or years preceding the previous year in which such sale or
transfer has taken place shall be deemed to be the income of the assessee of such previous
year and shall be liable to tax in the assessment year relevant to such previous year.
A person shall be treated as having acquired any shares or debentures on the date on which
his name is entered in relation to those shares or debentures in the register of members or of
debenture-holders, as the case may be, of the public company.

(xviii) Subscription to certain units of mutual fund

Subscription to any units of any mutual fund referred to in section 10(23D) and approved by
the Board on an application made by such mutual fund in the prescribed form.

It is necessary that such units should be subscribed only in the eligible issue of capital of any
company.

Eligible issue of capital for (xvii) and (xviii) means an issue made by a public company
formed and registered in India or a public financial institution and the entire proceeds of the
issue are utilised wholly and exclusively for the purposes of any business referred to in
section 80-IA(4).

(xix) Investment in five year Term Deposit

Investment in term deposit -

(1) for a period of not less than five years with a scheduled bank; and

(2) which is in accordance with a scheme framed and notified by the Central Government
in the Official Gazette

qualifies as an eligible investment for availing deduction under section 80C.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.15

The maximum limit for investment in term deposit is ` 1,50,000.

Scheduled bank means -

(1) the State Bank of India

(2) a subsidiary bank of SBI, or

(3) a corresponding new bank constituted under section 3 of the -

(a) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or

(b) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or

(4) any other bank, being a bank included in the Second Schedule to the Reserve Bank
of India Act, 1934.

(xx) Subscription to notified bonds issued by NABARD

Subscription to such bonds issued by NABARD (as the Central Government may notify in the
Official Gazette) qualifies for deduction under section 80C.

(xxi) Deposit in Senior Citizens Savings Scheme Rules, 2004

Deposit in an account under the Senior Citizens Savings Scheme Rules, 2004 qualifies for
deduction under section 80C.

(xxii) Investment in five year Post Office time deposit

Investment in five year time deposit in an account under Post Office Time Deposit Rules,
1981 qualifies for deduction under section 80C.

(xxiii) Contribution to additional account under NPS

Contribution by a Central Government employee to additional account under NPS (specified

account) referred to in section 80CCD for a fixed period of not less than 3 years and which is
in accordance with the scheme 2 notified by the Central Government for this purpose qualifies
for deduction under section 80C. It may be noted that only the contribution to the additional
account under NPS will qualify for deduction under section 80C.

There are two types of NPS account i.e., Tier I and Tier II, to which an individual can
contribute. Section 80CCD provides deduction in respect of contribution to individual pension

2 National Pension Scheme Tier II- Tax Saver Scheme, 2020 notified for this purpose.

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 8.16 DIRECT TAX LAWS

account [Tier I account] under the NPS [referred to in section 20(2)(a) of the Pension Fund
Regulatory and Development Authority Act, 2013 (PFRDA)] whereas deduction under section
80C is allowable in respect of contribution by Central Government employee to additional
account [Tier II account] of NPS [referred to in section 20(3) of the PFRDA], which does not
qualify for deduction under section 80CCD. Thus, Tier II account is the additional account
under NPS, contribution to which would qualify for deduction under section 80C only
in the hands of a Central Government employee.

Termination of Insurance Policy or Unit Linked Insurance Plan or transfer of House Property
or withdrawal of deposit:
Where, in any previous year, an assessee:
(1) terminates his contract of insurance referred to in (iii) above, by notice to that effect or where
the contract ceases to be in force by reason of not paying the premium, by not reviving the
contract of insurance, -
(a) in case of any single premium policy, within two years after the date of
commencement of insurance; or
(b) in any other case, before premiums have been paid for two years; or
(2) terminates his participation in any Unit Linked Insurance Plan referred to in (i) or (ii) above,
by notice to that effect or where he ceases to participate by reason of failure to pay any
contribution, by not reviving his participation, before contributions in respect of such
participation have been paid for five years, or
(3) transfers the house property referred to in (xvi) above, before the expiry of five years from
the end of the financial year in which possession of such property is obtained by him, or
receives back, whether by way of refund or otherwise, any sum specified in (xvi) above,
then, no deduction will be allowed to the assessee in respect of sums paid during such previous
year and the total amount of deductions of income allowed in respect of the previous year or years
preceding such previous year, shall be deemed to be income of the assessee of such previous year
and shall be liable to tax in the assessment year relevant to such previous year.
Further, where any amount is withdrawn by the assessee from his account under the Senior
Citizens Savings Scheme or under the Post Office Time Deposit Rules before the expiry of a period
of 5 years from the date of its deposit, the amount so withdrawn shall be deemed to be the income
of the assessee of the previous year in which the amount is withdrawn. Accordingly, the amount so
withdrawn would be chargeable to tax in the assessment year relevant to such previous year. The

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.17

amount chargeable to tax would also include that part of the amount withdrawn which represents
interest accrued on the deposit.

However, if any part of the amount relating to interest so received or withdrawn has been subject to
tax in any of the earlier years, such amount shall not be taxed again.
If any amount has been received by the nominee or legal heir of the assessee, on the death of such
assessee, the amount would not be chargeable to tax. But if the amount relating to interest on
deposit was not included in the total income of the assessee in any of any earlier years, then such
interest would be chargeable to tax.
ILLUSTRATION 5
Mr. Binu, aged about 40 years, has earned a lottery income of ` 1,30,000 (gross) during the
P.Y. 2025-26. He also has interest on Fixed Deposit of ` 35,000. He invested an amount of
` 20,000 in Public Provident Fund account and ` 34,000 in five years term deposit. What is the
total income of Mr. Binu for the A.Y.2026-27 if he has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A)?
SOLUTION
Computation of total income of Mr. Binu for A.Y.2026-27
Particulars ` `
Income from Other Sources
- Interest on Fixed Deposit 35,000
- Lottery income 1,30,000
Gross Total Income 1,65,000
Less: Deductions under Chapter VIA [See Note below]
Under section 80C
- Deposit in Public Provident Fund 20,000
- Investment in five years term deposit 34,000
54,000
Restricted to 35,000
Total Income 1,30,000

Note: Though the value of eligible investments is ` 54,000, however, deduction under Chapter VI-A
cannot exceed the gross total income exclusive of long term capital gains u/s 112/112A, short-term
capital gains covered under section 111A, winnings of lotteries etc. of the assessee.

Therefore, the maximum permissible deduction u/s 80C = ` 1,65,000 – ` 1,30,000 = ` 35,000.

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 8.18 DIRECT TAX LAWS

(2) Deduction in respect of contribution to certain pension funds [Section 80CCC]

(i) Eligible assessee - Where an assessee, being an individual, has in the previous year paid
or deposited any amount out of his income chargeable to tax to effect or keep in force a
contract for any annuity plan of LIC of India or any other insurer for receiving pension from
the fund set up by LIC or such other insurer, he shall be allowed a deduction in the
computation of his total income.
For this purpose, the interest or bonus accrued or credited to the assessee’s account shall
not be reckoned as contribution.

Note: Where any amount paid or deposited by the assessee has been taken into account for
the purposes of this section, a deduction under section 80C shall not be allowed with
reference to such amount.
(ii) Maximum Deduction: The maximum permissible deduction is ` 1,50,000 [Further, the
overall limit of ` 1,50,000 prescribed in section 80CCE will continue to be applicable i.e. the
maximum permissible deduction under sections 80C, 80CCC and 80CCD(1) put together is
` 1,50,000].
(iii) Deemed Income: Where any amount standing to the credit of the assessee in the fund in
respect of which a deduction has been allowed, together with interest or bonus accrued or
credited to the assessee’s account is received by the assessee or his nominee on account of
the surrender of the annuity plan in any previous year or as pension received from the
annuity plan, such amount will be deemed to be the income of the assessee or the nominee
in that previous year in which such withdrawal is made or pension is received. It will be
chargeable to tax as income of that previous year.

Note - The deduction under section 80CCC is available only to an individual exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A). It is not available
under the default tax regime under section 115BAC.

(3) Deduction in respect of contribution to pension scheme notified by the Central

Government [Section 80CCD]

(i) Pension Scheme of Central Government: As per the “Restructured Defined Contribution
Pension System” applicable to new entrants to Government service, it is mandatory for
persons entering the service of the Central Government on or after 1st January, 2004, to
contribute 10% of their salary every month towards their pension account. A matching

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.19

contribution is required to be made by the Government to the said account. The benefit of
this scheme is also available to individuals employed by any other employer as well as to
self-employed individuals.

(ii) Deduction: Section 80CCD provides deduction in respect of contribution made to the
pension scheme notified by the Central Government.

Accordingly, in exercise of the powers conferred by section 80CCD(1), the Central

Government has notified the ‘Atal Pension Yojana (APY)’ as a pension scheme,
contribution to which would qualify for deduction under section 80CCD in the hands of the
individual.

(iii) Quantum of deduction

(a) Section 80CCD(1) provides a deduction for the amount paid or deposited by an
employee in his pension account subject to a maximum of 10% of his salary. The
deduction in the case of a self-employed individual would be restricted to 20% of his
gross total income in the previous year.

Note - Deduction u/s 80CCD(1) would be available to an individual only if he exercises

the option of shifting out of the default tax regime u/s 115BAC(1A) (i.e., if he pays tax
under the optional tax regime i.e., the normal provisions of the Act).

Deduction under section 80CCD(1)

An individual
employed by CG on
or after 01.01.2004
10% of
Eligible An Individual salary
employed by any
Assessee other employer

20% of
Any other individual
GTI
(b) Section 80CCD(1B) provides for an additional deduction of up to ` 50,000 in respect
of the whole of the amount paid or deposited by an individual assessee under NPS in
the previous year, whether or not any deduction is allowed under section 80CCD(1).

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 8.20 DIRECT TAX LAWS

Note - Deduction u/s 80CCD(1B) would be available to an individual only if he

exercises the option of shifting out of the default tax regime provided u/s 115BAC(1A)
(i.e., it is available only if he pays tax under the optional tax regime – the normal
provisions of the Act)

(c) Whereas the deduction under section 80CCD(1) is subject to the overall limit of
` 1.50 lakh under section 80CCE (i.e., the maximum permissible deduction under
sections 80C, 80CCC and 80CCD(1) put together is ` 1,50,000), the deduction of
upto ` 50,000 under section 80CCD(1B) is in addition to the overall limit of ` 1.50
lakh provided under section 80CCE.
(d) Under section 80CCD(2), contribution made by the Central Government or State
Government or any other employer in the previous year to the said account of an
employee, is allowed as a deduction in computation of the total income of the
assessee.
(e) The entire employer’s contribution would be included in the salary of the employee.
However, deduction under section 80CCD(2) would be restricted to,
- In case of contribution made by the Central Government or State Government -
14% of salary and
- In case of contribution made by any other employer - 10% of salary (14% of
salary in case assessee is paying tax as per default tax regime under section
115BAC).

Notes:
1. Deduction u/s 80CCD(2) would be available to an individual irrespective of the regime
under which he pays tax.

2. The limit of ` 1,50,000 under section 80CCE does not apply to employer’s contribution to
pension scheme of Central Government which is allowable as deduction under section
80CCD(2).

3. No deduction will be allowed u/s 80C in respect of amounts paid or deposited by the
assessee, for which deduction has been allowed u/s 80CCD(1) or 80CCD(1B).
4. For computation of limit under section 80CCD(1) and (2), salary includes dearness
allowance, if the terms of employment so provide, but excludes all other allowances and
perquisites.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.21

(iv) Deduction for contribution made to NPS Vatsalya Scheme: NPS Vatsalya is a NPS
Scheme designed for minor Indian citizen upto the age of 18 years. The account will be
opened and operated by the guardian on behalf of the minor. When the minor attains the age
of 18 years, the account will continue to be operational and will be shifted into a NPS Tier-I
Account.

Deduction under section 80CCD(1B) is allowed for any amount paid or deposited in the
account of minor under the pension scheme by the assessee, being the parent or guardian of
such minor. However, the aggregate amount of deduction under section 80CCD(1B) shall not
exceed ` 50,000.

(v) Deemed income: The amount standing to the credit of the assessee or a minor, in his or a
minor’s pension account (for which deduction has already been claimed by him under this
section) and accretions to such account, shall be taxed as income in the year in which such
amounts are received by the assessee or his nominee on -

(a) closure of the account or

(b) his opting out of the said scheme or

(c) receipt of pension from the annuity plan purchased or taken on such closure or opting out.

However, the amount received by the nominee on the death of the assessee under the
circumstances referred to in (a) and (b) above, shall not be deemed to be the income of the
nominee.

It is further provided that the amount received by a person, being the parent or guardian or
nominee of a minor, shall not be deemed to be the income of such person if such amount is
received on account of closure of pension scheme due to the death of minor.

Further, the assessee shall be deemed not to have received any amount in the previous year
if such amount is used for purchasing an annuity plan in the same previous year.

Notes:

1. Exemption on payment from NPS Trust to an assessee on closure of his account or on

his opting out of the pension scheme [Section 10(12A)]

(i) As per section 80CCD, any payment from National Pension System Trust to an assessee on
account of closure or his opting out of the pension scheme is chargeable to tax.

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(ii) Section 10(12A) provides that any payment from National Pension System Trust to an
assessee on account of closure or his opting out of the pension scheme referred to in
section 80CCD, to the extent it does not exceed 60% of the total amount payable to him
at the time of closure or his opting out of the scheme, shall be exempt from tax.

2. Exemption on payment from NPS Trust to an employee on partial withdrawal [Section

10(12B)]

To provide relief to an employee subscriber of NPS, section 10(12B) provides that any
payment from National Pension System Trust to an employee under the pension scheme
referred to in section 80CCD, on partial withdrawn made out of his account in accordance with
the terms and conditions specified under the Pension Fund Regulatory and Development
Authority Act, 2013 and the regulations made there under, shall be exempt from tax to the
extent it does not exceed 25% of amount of contributions made by him.

3. Exemption on payment from NPS Trust to an assessee, being the parent or guardian of
minor on partial withdrawal [Section 10(12BA)]

Section 10(12BA) provides that any payment from National Pension System Trust to an
assessee, being the parent or guardian of minor under the pension scheme referred to in
section 80CCD, on partial withdrawn made out of minor's account in accordance with the
terms and conditions specified under the Pension Fund Regulatory and Development Authority
Act, 2013 and the regulations made there under, shall be exempt from tax to the extent it does
not exceed 25% of amount of contributions made by him.

(vi) Unified Pension Scheme: The Unified Pension Scheme (UPS) has been introduced as an
option under the National Pension System (NPS) by the Central Government for the Central
Government employees covered under NPS so that they may receive an assured payout
after their retirement.
It is a ‘fund-based’ payout system which relies on the regular and timely accumulation and
investment of applicable contributions (from both the employee and the employer (the
Central Government) for grant of monthly payout to the retiree.
To align the tax treatment of the UPS with the NPS, Taxation Law (Amendment) Act, 2025
has inserted sub-section (3A) and (6) in section 80CCD and clause (12AA) and (12AB) in
section 10.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.23

Section 80CCD(3A) provides that the amount standing to the credit of the assessee, being a
subscriber to the UPS, in his account (for which deduction has already been claimed by him
under this section) and accretions to such account, received by the assessee or his
nominee, in whole or part in any previous year on account of his superannuation or voluntary
retirement or retirement under Rule 56(j) of the Fundamental Rules (not treated as penalty)
shall be deemed to be the income of the assessee or his nominees and taxed in the year in
which such amounts are received.
However, the assessee shall be deemed not to have received any amount in the previous
year if such amount is transferred to the pool corpus from individual corpus on account of his
superannuation, voluntary retirement or retirement. [Section 80CCD(6)].

Exemption on payment from NPS Trust to an assessee, being a subscriber to the UPS, at the
time of his superannuation or voluntary retirement or retirement [Section 10(12AA)]

Any payments from the NPS Trust to an assessee, being a subscriber to the UPS, at the time of
superannuation, voluntary retirement or retirement, to the extent it does not exceed 60% of the
individual's corpus, shall be exempt from income tax.

Exemption on lumpsum amount received by an assessee, being a subscriber to the UPS

[Section 10(12AB)]
Any sum received as a lump sum amount as per clause (vi) of paragraph 2 of the notification
number FX-1/3/2024-PR, dated the 24th January, 2025, of the Department of Financial Services, by
an assessee being a subscriber to the Unified Pension Scheme shall be exempt from tax.
As per clause (vi) of paragraph 2 of the notification number FX-1/3/2024-PR, dated the
24th January, 2025, of the Department of Financial Services, a lump sum payment will be allowed
on superannuation at the rate of 10% of monthly emoluments (Basic Pay + Dearness Allowance) for
every completed six months of qualifying service.

(4) Limit on deductions under sections 80C, 80CCC & 80CCD(1) [Section 80CCE]

This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1)
to ` 1,50,000. It may be noted that the deduction of upto ` 50,000 under section 80CCD(1B) and
employer’s contribution to pension scheme, allowable as deduction under section 80CCD(2) in the
hands of the employee, would be outside the overall limit of ` 1,50,000 stipulated under section
80CCE.

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The following table summarizes the ceiling limit under these sections –
Section Particulars Ceiling limit (`)
80C Investment in LIP, Deposit in PPF/SPF/RPF etc. 1,50,000
80CCC Contribution to certain pension funds 1,50,000
80CCD(1) Contribution to NPS of Government 10% of salary or 20% of
GTI, as the case may be.
80CCE Aggregate deduction under sections 80C, 80CCC & 1,50,000
80CCD(1)
80CCD(1B) Contribution to NPS notified by the Central 50,000
Government (outside the limit of ` 1,50,000 under
section 80CCE)
80CCD(2) Contribution by the Central Government or State 14% of salary
Government to NPS A/c of its employees (outside
the limit of ` 1,50,000 under section 80CCE)
Contribution by any other employer to NPS A/c of its
employees (outside the limit of ` 1,50,000 under
section 80CCE)
- Where assessee is paying tax as per optional 10% of salary
tax regime
- where assessee is paying tax as per default 14% of salary
regime u/s 115BAC(1A)
ILLUSTRATION 6
The basic salary of Mr. Arjun is ` 1,00,000 p.m. He is entitled to dearness allowance, which is 40%
of basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both
Mr. Arjun and his employer contribute 15% of basic salary to the pension scheme referred to in
section 80CCD. Examine the tax treatment in respect of such contribution in the hands of Mr. Arjun
if he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).

What would be your answer if Mr. Arjun pays tax under the default tax regime under section 115BAC?
SOLUTION
(i) Tax treatment in the hands of Mr. Arjun in respect of employer’s and own contribution
to pension scheme referred to in section 80CCD, where Mr. Arjun has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A)
[i.e., where Mr. Arjun pays tax under the normal provisions of the Act]

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.25

(a) Employer’s contribution to such pension scheme would be treated as salary since it is
specifically included in the definition of “salary” under section 17(1)(viii). Therefore,
` 1,80,000, being 15% of basic salary of ` 12,00,000, will be included in Mr. Arjun’s salary.
(b) Mr. Arjun’s contribution to pension scheme is allowable as deduction under section
80CCD(1). However, the deduction is restricted to 10% of salary. Salary, for this
purpose, means basic pay plus dearness allowance, if it forms part of pay for
retirement benefits.
Therefore, deduction under section 80CCD for Mr. Arjun would be –
Particulars `
Basic salary = ` 1,00,000 × 12 = 12,00,000
Dearness allowance = 40% of ` 12,00,000 = ` 4,80,000
50% of Dearness Allowance forms part of pay = 50% of ` 4,80,000 2,40,000
Salary for the purpose of deduction under section 80CCD 14,40,000

Deduction under section 80CCD(1) is restricted to 10% of

` 14,40,000 (as against actual contribution of ` 1,80,000, being 1,44,000
15% of basic salary of ` 12,00,000)
As per section 80CCD(1B), a further deduction of upto ` 50,000 is
allowable. Therefore, deduction under section 80CCD(1B) is
` 36,000 (` 1,80,000 - ` 1,44,000). 36,000

` 1,44,000 is allowable as deduction under section 80CCD(1). This would be taken

into consideration and be subject to the overall limit of ` 1,50,000 under section
80CCE. ` 36,000 allowable as deduction under section 80CCD(1B) is outside the
overall limit of ` 1,50,000 under section 80CCE.
In the alternative, ` 50,000 can be claimed as deduction under section 80CCD(1B).
The balance ` 1,30,000 (` 1,80,000 - ` 50,000) can be claimed as deduction under
section 80CCD(1).
(c) Employer’s contribution to pension scheme would be allowable as deduction under
section 80CCD(2), subject to a maximum of 10% of salary. Therefore, deduction
under section 80CCD(2), would also be restricted to ` 1,44,000, even though the
entire employer’s contribution of ` 1,80,000 is included in salary under section
17(1)(viii). However, this deduction of employer’s contribution of ` 1,44,000 to
pension scheme would be outside the overall limit of ` 1,50,000 under section 80CCE
i.e., this deduction would be over and above the other deductions which are subject to
the limit of ` 1,50,000.

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 8.26 DIRECT TAX LAWS

(ii) Where Mr. Arjun pays tax under the default tax regime under section 115BAC
Mr. Arjun would not be eligible for deduction under section 80CCD(1)/(1B) in respect of his
contribution to pension scheme under the default tax regime under section 115BAC.
However, he would be allowed deduction of upto ` 2,01,600 being 14% of salary
[` 14,40,000, computed in (i) above] under section 80CCD(2) in respect of employer’s
contribution to pension scheme. Accordingly, entire employer’s contribution of ` 1,80,000
would be allowed as deduction under section 80CCD(2).
ILLUSTRATION 7
The gross total income of Mr. Neeraj for the A.Y.2026-27 is ` 9,00,000. He has made the following
investments/ payments during the F.Y.2025-26 –
Particulars `
(1) Contribution to PPF 1,30,000
(2) Payment of tuition fees to Sunrise School, Mumbai, for education of his 95,000
son studying in Class X
(3) Repayment of housing loan taken from Canara Bank 30,000
(4) Contribution to approved pension fund of LIC 1,05,000

Compute the eligible deduction under Chapter VI-A for the A.Y.2026-27 if Mr. Neeraj exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Computation of deduction under Chapter VI-A for the A.Y.2026-27
Particulars `
Deduction under section 80C
- Contribution to PPF 1,30,000
- Payment of tuition fees to Sunrise School, Mumbai, for education of his 95,000
son studying in Class X
- Repayment of housing loan 30,000
2,55,000
Restricted to ` 1,50,000, being the maximum permissible deduction u/s 80C 1,50,000
Deduction under section 80CCC
- Contribution to approved pension fund of LIC 1,05,000
2,55,000

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.27

As per section 80CCE, the aggregate deduction under section 80C, 80CCC and
80CCD(1) has to be restricted to ` 1,50,000
Deduction allowable under Chapter VIA for the A.Y.2026-27 1,50,000

(5) Deduction in respect of contribution to Agnipath Scheme [Section 80CCH]

(i) Meaning of Agnipath scheme: Agnipath scheme is a Central Government scheme
launched in 2022 for enrolment of Indian youth in the Indian Armed Forces.
(ii) Meaning of Agniveer Corpus Fund: The Agniveer Corpus Fund means a fund in which
consolidated contributions of all the Agniveers and matching contributions of the Central
Government along with interest on both these contributions are held.
(iii) Features of the Agnipath Scheme: Each Agniveer is to contribute 30% of his monthly
customized Agniveer Package to the individual’s Agniveer Corpus Fund. Further, the
Government will also contribute a matching amount to the ‘Agniveer Corpus Fund’. The
Government will also pay to the subscriber interest as approved from time to time on the
contributions standing in his account.
(iv) Quantum of deduction:
(a) Section 80CCH(1) provides a deduction for the amount paid or deposited by an
assessee, being an individual enrolled in the Agnipath Scheme and subscribing to the
Agniveer Corpus Fund on or after 1.11.2022, in his account in the Agniveer Corpus
Fund.

Note - Deduction u/s 80CCH(1) would be available to an individual only if he has

exercised the option of shifting out of the default tax regime provided u/s
115BAC(1A).

(b) Under section 80CCH(2), the whole amount of contribution made by the Central
Government to the said account of an assessee in the Agniveer Corpus Fund, is
allowed as a deduction in computation of the total income of the assessee.

(e) The entire Central Government’s contribution to the Agniveer Corpus Fund would be
included in the salary of the assessee. However, deduction under section 80CCH(2)
would be available for the same.

Note - Deduction u/s 80CCH(2) would be available to an individual irrespective of the

regime under which he pays tax.

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 8.28 DIRECT TAX LAWS

Exemption on payment from Agnipath Corpus Fund to a person enrolled under

the Agnipath Scheme or to his nominee [Section 10(12C)]
Any payment from the Agnipath Corpus Fund to a person enrolled under the
Agnipath Scheme or to his nominee would be exempt from tax.

(6) Deduction in respect of medical insurance premium [Section 80D]

(i) In case of an Individual

(a) Deduction in respect of insurance premium paid for family: A deduction to the
extent of ` 25,000 is allowed in respect of the following payments–

(1) premium paid to effect or keep in force an insurance on the health of self,
spouse and dependant children or

(2) any contribution made to the Central Government Health Scheme or

(3) such other health scheme as may be notified by the Central Government.
Contributory Health Service Scheme of the Department of Atomic Energy has
been notified by the Central Government.

(b) Deduction in respect of insurance premium for parents: A further deduction up to

` 25,000 is allowable to effect or to keep in force an insurance on the health of parents of
the assessee.

Quantum of deduction in case of senior citizen: An increased deduction of

` 50,000 (instead of ` 25,000) shall be allowed in case any of the persons mentioned
above is a senior citizen i.e., an individual resident in India of the age of 60 years or
more at any time during the relevant previous year.

(c) Deduction in respect of payment towards preventive health check-up: Section

80D provides that deduction to the extent of ` 5,000 shall be allowed in respect
payment made on account of preventive health check-up of self, spouse, dependant
children or parents made during the previous year. However, the said deduction of
` 5,000 is within the overall limit of ` 25,000 or ` 50,000, specified in (a) and (b)
above.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.29

(d) Mode of payment: For claiming such deduction under section 80D, the payment can
be made:

(1) by any mode, including cash, in respect of any sum paid on account of
preventive health check-up;

(2) by any mode other than cash, in all other cases.

(e) Deduction for medical expenditure incurred on senior citizens: As a welfare

measure towards senior citizens i.e., person of the age of 60 years or more and
resident in India, who are unable to get health insurance coverage, deduction of upto
` 50,000 would be allowed in respect of any payment made on account of medical
expenditure in respect of a such person(s), if no payment has been made to keep in
force an insurance on the health of such person(s).

‘Senior citizen’ means an individual resident in India who is of the age of 60 years or
more at any time during the relevant previous year.

(ii) In case of a HUF

Deduction under section 80D is allowable in respect of premium paid to insure the health of
any member of the family. The maximum deduction available to a HUF would be ` 25,000
and in case any member is a senior citizen, ` 50,000.

Further, the amount paid on account of medical expenditure incurred on the health of any
member(s) of a family who is a senior citizen would qualify for deduction subject to a
maximum of ` 50,000 provided no amount has been paid to effect or keep in force any
insurance on the health of such person(s).

(iii) Other conditions

The other conditions to be fulfilled are that such premium should be paid by any mode, other
than cash, in the previous year out of his income chargeable to tax. Further, the medical
insurance should be in accordance with a scheme made in this behalf by -

(a) the General Insurance Corporation of India and approved by the Central Government
in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development
Authority.

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 8.30 DIRECT TAX LAWS

The following table summarizes the provisions of section 80D –

S. Nature of payment/ Expenditure on behalf of Deduction

No. expenditure
I (i) Any premium paid, In case of Self, spouse and
otherwise than by way individual dependent children ` 25,000
of cash, to keep in
In case of Family member
force an insurance on
HUF
the health
(ii) Contribution to
Central Government In case any of the above persons is of ` 50,000
Health Scheme the age of 60 years or more (+)
(CGHS) resident in India
(iii) Preventive health
check up expenditure

II (i) Any premium paid, ` 25,000

otherwise than by way In case either or both the parents is of
of cash, to keep in the age of 60 years or more + Resident
force an insurance on in India
the health
` 50,000
(ii) Preventive health
check up Parents

Maximum ` 5,000 allowed as deduction for aggregate of preventive health check up

expenditure, by any mode including cash, mentioned in I and II (Subject to overall limit of
` 25,000 or ` 50,000, as the case may be)

III Amount paid on account of For self/ spouse/ parents + who is of

medical expenditure the age of 60 years or more + Resident
` 50,000
in India + no payment has been made
to keep in force an insurance on the
health of such person

Note: In case the individual or any of his family members is a senior citizen, the aggregate of
deduction, in respect of payment of premium, contribution to CGHS and medical expenditure
incurred, as specified in (I) & (III) above, cannot exceed ` 50,000.

In case one of the parents is a senior citizen who is covered under mediclaim policy and
another is also a senior citizen but not covered under mediclaim policy, the aggregate of
deduction, in respect of payment of medical insurance premium and medical expenditure
incurred, as specified in (II) & (III) above, cannot exceed ` 50,000.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.31

(iv) Deduction where premium for health insurance is paid in lump sum [Section 80D(4A)]

(a) Appropriate fraction of lump sum premium allowable as deduction: In a case

where mediclaim premium is paid in lumpsum for more than one year by:

(1) an individual, to effect or keep in force an insurance on his health or health of

his spouse, dependent children or parents; or

(2) a HUF, to effect or keep in force an insurance on the health of any member of
the family,

then, the deduction allowable under this section for each of the relevant previous year
would be equal to the appropriate fraction of such lump sum payment.

(b) Meaning of certain terms

Term Meaning
Appropriate fraction 1 ÷ Total number of relevant previous years
Relevant previous year The previous year in which such lump sum amount is
paid; and the subsequent previous year(s) during
which the insurance would be in force.

Note - Deduction under section 80D would be available to an individual/ HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 8

Mr. Ravi, aged 45 years, paid medical insurance premium of ` 22,000 during the P.Y.2025-26 to
insure his health as well as the health of his spouse. He also paid medical insurance premium of
` 47,000 during the year to insure the health of his father, aged 65 years, who is not dependant on
him. He contributed ` 4,600 to Central Government Health Scheme during the year. He has
incurred ` 3,000 in cash on preventive health check-up of himself and his spouse and ` 4,500 by
cheque on preventive health check-up of his father. Compute the deduction allowable under section
80D for the A.Y. 2026-27 if Mr. Ravi has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).

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 8.32 DIRECT TAX LAWS

SOLUTION
Deduction allowable under section 80D for the A.Y.2026-27

Particulars Actual Maximum

Payment deduction
allowable
` `
A. Premium paid and medical expenditure incurred for
self and spouse
(i) Medical insurance premium paid for self and spouse 22,000 22,000
(ii) Contribution to CGHS 4,600 3,000
(iii) Exp. on preventive health check-up of self & spouse 3,000 Nil
29,600 25,000
B. Premium paid and medical expenditure incurred for
father, who is a senior citizen
(i) Mediclaim premium paid for father, who is over 60 47,000 47,000
years of age
(ii) Expenditure on preventive health check-up of father 4,500 3,000
51,500 50,000
Total deduction under section 80D (` 25,000 + ` 50,000) 75,000

Notes:
(1) The total deduction under A.(i), (ii) and (iii) above should not exceed ` 25,000. Therefore,
the contribution to CGHS would be restricted to ` 3,000 [` 25,000 (-) ` 22,000] and
expenditure on preventive health check-up for self and spouse would be Nil [` 25,000 (-)
` 22,000 (-) ` 3,000].
(2) The total deduction under B. (i) and (ii) above should not exceed ` 50,000. Therefore, the
expenditure on preventive health check-up for father would be restricted to ` 3,000, being
[` 50,000 (-) ` 47,000].
(3) In this case, the total deduction allowed on account of expenditure on preventive health
check-up of self, spouse and father is ` 3,000, which is less than the maximum permissible
limit of ` 5,000.
ILLUSTRATION 9
Mr. Yatin, aged 48 years, paid medical insurance premium of ` 23,000 during the P.Y.2025-26 to
insure his health as well as the health of his spouse and dependant children. He also paid

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.33

medical insurance premium of ` 35,000 during the year to insure the health of his mother, aged
71 years, who is not dependant on him. He incurred medical expenditure of ` 24,000 on his
father, aged 78 years, who is not covered under mediclaim policy. His father is also not
dependent upon him. He contributed ` 6,500 to Central Government Health Scheme during the
year. Compute the deduction allowable under section 80D for the A.Y.2026-27 if Mr. Yatin has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Deduction allowable under section 80D for the A.Y.2026-27
Particulars `
(i) Medical insurance premium paid for self, spouse and dependent
children ` 23,000
(ii) Contribution to CGHS ` 6,500
` 29,500
restricted to 25,000
(iii) Mediclaim premium paid for mother, who is over 60 years of age ` 35,000
(iv) Medical expenditure incurred for father, who is over 60 years of
age and not covered by any insurance ` 24,000
` 59,000
restricted to 50,000
75,000

(7) Deduction in respect of maintenance including medical treatment of a dependant

disabled [Section 80DD]

(i) Eligible assessee: Section 80DD provides deduction to an assessee, who is a resident in
India, being an individual or Hindu undivided family.

(ii) Payment qualifying for deduction:

(a) Any amount –

- incurred for the medical treatment (including nursing), training and

rehabilitation of a dependant, being a person with disability, or

- paid or deposited under a scheme framed in this behalf by the Life Insurance
Corporation or any other insurer or the Administrator or the Specified Company

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 8.34 DIRECT TAX LAWS

as referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking

and Repeal) Act, 2002, for the maintenance of a dependant, being a person
with disability

qualifies for deduction.

(b) The benefit of deduction under this section is also available to assessees incurring
expenditure on maintenance including medical treatment of persons suffering from
autism, cerebral palsy and multiple disabilities.

(iii) Quantum of deduction: The quantum of deduction is ` 75,000 and in case of severe
disability (i.e. person with 80% or more disability) the deduction shall be ` 1,25,000.

(iv) Conditions:
(a) The scheme should provide for payment of annuity or a lump sum amount for the
benefit of a dependant, being a person with disability,
I in the event of the death of the individual or member of the HUF, in whose name
subscription was made; or
II on attaining the age of 60 years or more by such individual or the member of the
HUF, and the payment or deposit to such scheme has been discontinued
and the assessee must nominate either the dependant, being a person with disability
or any other person or a trust to receive the payment on his behalf, for the benefit of
the dependant, being a person with disability.

(b) For claiming the deduction, the assessee shall have to furnish a copy of the
certificate issued by the medical authority under the Persons with Disability (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995 along with the
return of income under section 139.
(c) Where the condition of disability requires reassessment, a fresh certificate from the
medical authority shall have to be obtained after the expiry of the period mentioned
in the original certificate in order to continue to claim the deduction.
(v) Deemed income: If the dependent, being a person with disability, predeceases the
individual or the member of HUF, in whose name subscription was made, then, the amount
paid or deposited under the said scheme would be chargeable to tax in the hands of the
assessee (individual or member of HUF) in the previous year in which such amount is
received by him.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.35

However, such deeming provisions would not apply, to the amount received by the
dependant, being a person with disability, before his death, by way of annuity or lump sum
under the scheme mentioned in II of (a) above i.e., when the individual or member of HUF
attains the age of 60 years or more, and the payment or deposit to such scheme has been
discontinued.
(vi) Meaning of “Dependant”:
Assessee Dependant
(1) Individual the spouse, children, parents, brother or sister of the individual who is
wholly or mainly dependant on such individual and not claimed
deduction under section 80U in the computation of his income
(2) HUF a member of the HUF, wholly or mainly dependant on such HUF and
not claimed deduction under section 80U in the computation of his
income

Note - Deduction under section 80DD would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 10
Mr. Mohan is a resident individual. He deposits a sum of ` 60,000 with Life Insurance Corporation
every year for the maintenance of his disabled grandfather who is wholly dependant upon him. The
disability is one which comes under the Persons with Disabilities (Equal Opportunities, Protection of
Rights and Full Participation) Act, 1995. A copy of the certificate from the medical authority is
submitted. Compute the amount of deduction available under section 80DD for the A.Y. 2026-27 if
Mr. Mohan has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
SOLUTION
Since the amount deposited by Mr. Mohan was for his grandfather, he will not be allowed any
deduction under section 80DD. The deduction is available if the individual assessee incurs any
expense for a dependant disabled relative. Grandfather does not come within the meaning of
“dependant” as defined under section 80DD.
ILLUSTRATION 11
What will be the deduction if Mr. Mohan had made this deposit for his dependant father?

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 8.36 DIRECT TAX LAWS

SOLUTION

Since the expense was incurred for a dependant disabled relative, Mr. Mohan will be entitled to
claim a deduction of ` 75,000 under section 80DD, irrespective of the amount deposited. In case
his father has severe disability, the deduction would be ` 1,25,000.

(8) Deduction in respect of medical treatment etc. [Section 80DDB]

(i) Eligible assessee: This section provides deduction to an assessee, who is resident in India,
being an individual and Hindu undivided family. The deduction is available to an individual for
medical expenditure incurred on himself or a dependant. It is also available to a Hindu
undivided family (HUF) for such expenditure incurred on any of its members.
(ii) Meaning of “Dependant”:

Assessee Dependant
(1) Individual the spouse, children, parents, brother or sister of the individual or any
of them, wholly or mainly dependant on such individual for his support
and maintenance.
(2) HUF a member of the HUF, wholly or mainly dependant on such HUF for his
support and maintenance.

(iii) Payment qualifying for deduction: Any amount actually paid for the medical treatment of
such disease or ailment as may be specified in the rules made in this behalf by the Board for
himself or a dependant, in case the assessee is an individual or for any member of a HUF, in
case the assessee is a HUF will qualify for deduction.
(iv) Quantum of deduction: The amount of deduction under this section shall be equal to the
amount actually paid or ` 40,000, whichever is less, in respect of that previous year in which
such amount was actually paid.
In case the amount is paid in respect of a senior citizen, i.e., a resident individual of the age
of 60 years or more at any time during the relevant previous year, then the deduction would
be the amount actually paid or ` 1,00,000, whichever is less.

The deduction under this section shall be reduced by the amount received, if any, under
insurance from an insurer, or reimbursed by an employer, for the medical treatment of the
assessee or the dependant.
(v) Maximum deduction: The maximum limit of deduction under section 80DDB for the various
categories of dependant are summarized hereunder:

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.37

Dependant Maximum limit (`)

(1) A senior citizen, being a resident individual 1,00,000
(2) Other than a senior citizen 40,000

(vi) Condition: No such deduction shall be allowed unless the assessee obtains the prescription
for such medical treatment from a neurologist, an oncologist, a urologist, a hematologist, an
immunologist or such other specialist, as may be prescribed.
Note - Deduction under section 80DDB would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).

(9) Deduction in respect of interest loan taken for higher education [Section 80E]
(i) Eligible assessee: Section 80E provides deduction to an individual-assessee in respect of
any interest on loan paid by him in the previous year out of his income chargeable to tax.
(ii) Conditions: The loan must have been taken for the purpose of pursuing his higher
education or for the purpose of higher education of his or her relative. The loan must have
been taken from any financial institution or approved charitable institution.
(iii) Meaning of certain terms:

Term Meaning
(a) Relative Spouse and children of the individual or the student for whom
the individual is the legal guardian
(b) Higher education It means any course of study (including vocational studies)
pursued after passing the Senior Secondary Examination or
its equivalent from any school, board or university recognised
by the Central Government or State Government or local
authority or by any other authority authorized by the Central
Government or State Government or local authority to do so.
Therefore, interest on loan taken for pursuing any course
after Class XII or its equivalent, will qualify for deduction
under section 80E.
(c) Period of The deduction is allowed in computing the total income in
deduction respect of the initial assessment year (i.e., the assessment
year relevant to the previous year, in which the assessee
starts paying the interest on the loan) and seven assessment
years immediately succeeding the initial assessment year or
until the interest is paid in full by the assessee, whichever is
earlier.

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 8.38 DIRECT TAX LAWS

(d) Approved It means an institution established for charitable purposes

charitable and approved by the prescribed authority under section
institution 10(23C) or an institution referred to in section 80G(2)(a).
(e) Financial It means –
institution (a) a banking company to which the Banking Regulation
Act, 1949 applies (including a bank or banking
institution referred to in section 51 of the Act); or
(b) any other financial institution which the Central
Government may, by notification in the Official
Gazette, specify in this behalf

Note - Deduction under section 80E would be available to an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 12
Mr. Gopal has taken three education loans on April 1, 2025, the details of which are given below:
Loan 1 Loan 2 Loan 3
For whose education loan was taken Gopal Son of Gopal Daughter of Gopal
Purpose of loan MBA B. Tech. [Link].
Amount of loan (`) 6,00,000 3,00,000 4,50,000
Annual repayment of loan (`) 1,20,000 48,000 88,000
Annual repayment of interest (`) 24,000 12,000 16,000

Compute the amount deductible under section 80E for the A.Y.2026-27 if Mr. Gopal has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION

Deduction under section 80E is available to an individual assessee exercising the option of shifting
out of the default tax regime provided under section 115BAC(1A), in respect of any interest paid by
him in the previous year in respect of loan taken for pursuing his higher education or higher
education of his spouse or children. Higher education means any course of study pursued after
senior secondary examination.

Therefore, interest repayment in respect of all the above loans would be eligible for deduction.

Deduction under section 80E = ` 24,000 + ` 12,000 + ` 16,000 = ` 52,000.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.39

(10) Deduction for interest on loan borrowed for acquisition of house property by an
individual [Section 80EE]

(i) Eligible assessee: An individual who has taken a loan for acquisition of residential house
property from any financial institution. Interest payable on such loan would qualify for
deduction under this section.

(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Value of house
≤ ` 50 lakhs
The assessee should
not own any Loan should be
residential house on Conditions sanctioned during the
the date of sanction of P.Y.2016-17
loan
Loan sanctioned
≤ ` 35 lakhs

(iii) Period of benefit: The benefit of deduction under this section would be available till the
repayment of loan continues.
(iv) Quantum of deduction: The maximum deduction allowable is ` 50,000. The deduction of
upto ` 50,000 under section 80EE is over and above the deduction of upto ` 2,00,000
available under section 24 for interest paid in respect of loan borrowed for acquisition of a
self-occupied property.
(v) No deduction under any other provision: The interest allowed as deduction under section
80EE will not be allowed as deduction under any other provision of the Act for the same or
any other assessment year.
(vi) Meaning of certain terms:

Term Meaning
(a) Financial institution  A banking company to which the Banking Regulation
Act, 1949 applies; or
 Any bank or banking institution referred to in section 51
of the Banking Regulation Act, 1949; or
 A housing finance company.

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 8.40 DIRECT TAX LAWS

(b) Housing finance A public company formed or registered in India with the main
company object of carrying on the business of providing long-term
finance for construction or purchase of houses in India for
residential purposes.

Note - Deduction under section 80EE would be available to an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 13
Mr. Ankur purchased a residential house property for self-occupation at a cost of ` 48 lakh on
1.4.2017, in respect of which he took a housing loan of ` 35 lakh from Bank of India@11% p.a.
on the same date. The loan was sanctioned on 10 th March, 2017. Compute the eligible deduction
in respect of interest on housing loan for A.Y.2026-27 if Mr. Ankur has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A), assuming that the
entire loan was outstanding as on 31.3.2026 and he does not own any other house property.
SOLUTION

Particulars `
Interest deduction for A.Y.2026-27
(i) Deduction allowable while computing income under the head
“Income from house property”
Deduction under section 24(b) ` 3,85,000 [` 35,00,000 × 11%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction under section 80EE ` 1,85,000 (` 3,85,000 – ` 2,00,000)
Restricted to 50,000

(11) Deduction in respect of interest payable on loan taken for acquisition of

residential house property [Section 80EEA]
(i) Eligible assessee: An individual who has taken a loan for acquisition of residential house
property from any financial institution. Interest payable on such loan would qualify for
deduction under this section.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.41

(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Stamp Duty Value of

house ≤ ` 45 lakhs

Loan should be sanctioned by a

The individual should not own Financial Institution during the
any residential house on the Conditions
period from 1st April, 2019 and
date of sanction of loan 31st March, 2022

The individual should not

be eligible to claim
deduction u/s 80EE

(iii) Period of benefit: The benefit of deduction under this section would be available for interest
payable for each assessment year.
(iv) Quantum of deduction: The maximum deduction allowable is ` 1,50,000. The deduction of
upto ` 1,50,000 under section 80EEA is over and above the deduction available under
section 24(b) in respect of interest payable on loan borrowed for acquisition of a residential
house property.
(v) No deduction under any other provision: The interest allowed as deduction under section
80EEA will not be allowed as deduction under any other provision of the Act for the same or
any other assessment year.
(vi) Meaning of certain terms:
Term Meaning
(a) Financial • A banking company to which the Banking Regulation Act, 1949
institution applies; or
• Any bank or banking institution referred to in section 51 of the
Banking Regulation Act, 1949; or
• A housing finance company.
(b) Housing A public company formed or registered in India with the main object of
finance carrying on the business of providing long-term finance for
company construction or purchase of houses in India for residential purposes.
Note - Deduction under section 80EEA would be available to an individual only if he exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).

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 8.42 DIRECT TAX LAWS

In case the individual assessee pays tax under default tax regime under section 115BAC

Deduction in respect of interest payable on loan borrowed

for acquisition of a residential house property

In case of self-occupied In case of let out or deemed

house property to be let out property

No interest deduction u/s No limit u/s 24(b). Entire interest payable

24(b) is allowable as deduction. However, loss
from house property cannot be set off
against income under any other head.
No deduction u/s 80EEA
No deduction u/s 80EEA
In case the individual assessee has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A)
Deduction in respect of interest payable on loan borrowed for
acquisition of a residential house property

In case of self-occupied house In case of let out or deemed to be

property let out property

restricted to ` 2,00,000 u/s 24(b) No limit u/s 24(b). Entire interest payable is allowable
as deduction. However, section 71(3A) restricts set off
of loss from house property against income under any
other head to ` 2,00,000.
Deduction for interest upto
` 1,50,000 can be claimed u/s 80EEA
over and above deduction u/s 24(b)
If there is a loss from house property and it is more
than ` 2,00,000, interest u/s 24(b) can be claimed to
the extent of loss of ` 2,00,000 and balance interest
upto ` 1,50,000 can be claimed u/s 80EEA.

(12) Deduction in respect of interest payable on loan taken for purchase of electric
vehicle [Section 80EEB]
(i) Eligible Assessee: An individual who has taken a loan for purchase of an electric vehicle
from any financial institution. Interest payable on such loan would qualify for deduction under
this section.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.43

(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Loan should be taken

for purchase of an
electric vehicle
Loan should be
The assessee should Conditions sanctioned during the
be an individual. period between 1.4.2019
and 31.3.2023
Loan should be
sanctioned by a FI (bank
or specified NBFCs)

(iii) Period of benefit: The benefit of deduction under this section would be available for interest
payable on such loan for each assessment year.
(iv) Quantum of deduction: Interest payable, subject to a maximum of ` 1,50,000.
(v) No deduction under any other provision: The interest allowed as deduction u/s 80EEB
will not be allowed as deduction under any other provision of the Act for the same or any
other assessment year.
(vi) Meaning of certain terms:

Term Meaning
(a) Financial institution • A banking company to which the Banking Regulation
Act, 1949 applies; or
• Any bank or banking institution referred to in section 51
of the Banking Regulation Act, 1949; or
• Any deposit taking NBFC
• A systemically important non-deposit taking NBFC i.e.,
a NBFC which is not accepting or holding public
deposits and having total assets of not less than
` 500 crore as per the last audited balance sheet and is
registered with the RBI.
(b) Electric Vehicle A vehicle which is powered exclusively by an electric motor
whose traction energy is supplied exclusively by traction
battery installed in the vehicle. The vehicle should have
electric regenerative braking system, which during braking
provides for the conversion of vehicle kinetic energy into
electrical energy.

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 8.44 DIRECT TAX LAWS

Note - Deduction under section 80EEB would be available to an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 14
The following are the particulars relating to Mr. Arun, Mr. Barun, Mr. Chetan and Mr. Dinesh,
salaried individuals, for A.Y.2026-27 –

Particulars Mr. Arun Mr. Barun Mr. Chetan Mr. Dinesh

Amount of loan ` 43 lakhs ` 45 lakhs ` 20 lakhs ` 12 lakhs
taken
Loan taken from HFC Deposit taking Deposit taking Public sector
NBFC NBFC bank
Date of sanction of 1.4.2021 1.4.2020 1.4.2020 30.3.2019
loan
Date of 1.5.2021 1.5.2020 1.5.2020 1.5.2019
disbursement of
loan
Purpose of loan Acquisition of Acquisition of Purchase of Purchase of
residential residential electric vehicle for electric vehicle
house property house property personal use for personal use
for self- for self-
occupation occupation
Stamp duty value ` 45 lakhs ` 48 lakhs - -
of house property
Cost of electric - - ` 22 lakhs ` 18 lakhs
vehicle
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.

Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act,
1961 for A.Y.2026-27 in the hands of Mr. Arun, Mr. Barun, Mr. Cehtan and Mr. Dinesh if they have
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Assume that there has been no principal repayment in respect of any of the above loans upto
31.3.2026.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.45

SOLUTION
Particulars `
Mr. Arun
Interest deduction for A.Y.2026-27
(i) Deduction allowable while computing income under the head “Income
from house property”
Deduction u/s 24(b) ` 3,87,000 [` 43,00,000 × 9%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA ` 1,87,000 (` 3,87,000 – ` 2,00,000)
Restricted to 1,50,000
Mr. Barun
Interest deduction for A.Y.2026-27
(i) Deduction allowable while computing income under the head “Income
from house property”
Deduction u/s 24(b) ` 4,05,000 [` 45,00,000 × 9%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A
Deduction u/s 80EEA is not permissible since: Nil
(i) loan is taken from NBFC
(ii) stamp duty value exceeds ` 45 lakh.
Deduction under section 80EEA would not be permissible due to either
violation listed above.
Mr. Chetan
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB for interest payable on loan taken for purchase of electric 1,50,000
vehicle [` 20 lakhs x 10% = ` 2,00,000, restricted to ` 1,50,000, being the
maximum permissible deduction]
Mr. Dinesh
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB is not permissible since loan was sanctioned before 1.4.2019. Nil

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(13) Deduction in respect of donations to certain funds, charitable institutions etc.

[Section 80G]
(i) Eligible assessee: Where an assessee pays any sum as donation to eligible funds or
institutions, he is entitled to a deduction, subject to certain limitations, from the gross total
income.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an
artificial juridical person, deduction u/s 80G would not be available under the default tax
regime under section 115BAC(1A). Deduction under section 80G would be available only if
such person has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) and pays tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction would not be available if they
opted for the special provisions u/s 115BAA/115BAB and section 115BAD/115BAE,
respectively. In other words, deduction would be available only if companies and co-
operative societies pay tax under the normal provisions of the Act.

(ii) Quantum of deduction: There are four categories of deductions. The following table gives
the details of the institutions and funds to which donations can be made for the purpose of
claiming deduction under section 80G, –

I Donation qualifying for 100% deduction, without any qualifying limit

(1) The National Defence Fund set up by the Central Government
(2) Prime Minister’s National Relief Fund.
(3) Prime Minister’s Armenia Earthquake Relief Fund
(4) The Africa (Public Contributions-India) Fund
(5) The National Children’s Fund
(6) The National Foundation for Communal Harmony
(7) Approved University or educational institution of national eminence
(8) Chief Minister’s Earthquake Relief Fund, Maharashtra
(9) Any fund set up by the State Government of Gujarat exclusively for providing
relief to the victims of the Gujarat earthquake
(10) Any Zila Saksharta Samiti for primary education in villages and towns and for
literacy and post-literacy activities

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.47

(11) National Blood Transfusion Council or any State Blood Transfusion Council
whose sole objective is the control, supervision, regulation or encouragement of
operation and requirements of blood banks
(12) Any State Government Fund set up to provide medical relief to the poor
(13) The Army Central Welfare Fund or Indian Naval Benevolent Fund or Air Force
Central Welfare Fund established by the armed forces of the Union for the
welfare of past and present members of such forces or their dependants.
(14) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
(15) The National Illness Assistance Fund
(16) The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund in respect
of any State or Union Territory
(17) The National Sports Development Fund set up by the Central Government
(18) The National Cultural Fund set up by the Central Government
(19) The Fund for Technology Development and Application set up by the Central
Government
(20) National Trust for welfare of persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disabilities
(21) The Swachh Bharat Kosh, set up by the Central Government, other than the sum
spent by the assessee in pursuance of CSR u/s 135(5) of the Companies Act,
2013
(22) The Clean Ganga Fund, set up by the Central Government, where such
assessee is a resident, other than the sum spent in pursuance of CSR u/s 135(5)
of the Companies Act, 2013
(23) The National Fund for Control of Drug Abuse constituted under section 7A of the
Narcotic Drugs and Psychotroic Substances Act, 1985
(24) Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund
(PM Cares Fund)
II Donation qualifying for 50% deduction, without any qualifying limit
(1) Prime Minister’s Drought Relief Fund
III Donation qualifying for 100% deduction, subject to qualifying limit
(1) The Government or to any approved local authority, institution or association as
may be approved for promotion of family planning
(2) Sum paid by a company as donation to the Indian Olympic Association or any
other association/institution established in India, as may be notified by the
Government established –

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 8.48 DIRECT TAX LAWS

- for the development of infrastructure for sports or games, or

- the sponsorship of sports and games in India
IV Donation qualifying for 50% deduction, subject to qualifying limit
(1) Any Institution or Fund established in India for charitable purposes fulfilling
prescribed conditions under section 80G(5).
(2) The Government or any local authority for utilisation for any charitable purpose
other than the purpose of promoting family planning.
(3) An authority constituted in India by or under any other law enacted either for the
purpose
- of dealing with and satisfying the need for housing accommodation or
- of planning, development or improvement of cities, towns and villages, or both.
(4) Any Corporation established by the Central Government or any State
Government for promoting the interests of the members of a minority community
as referred in section 10(26BB).
(5) for renovation or repair of any such temple, mosque, gurdwara, church or other
place as notified by the Central Government to be of historic, archaeological or
artistic importance or to be a place of public worship of renown throughout any
State or States.

(iii) Qualifying limit: The eligible donations referred to in III and IV should be aggregated and
the sum total should be limited to 10% of the adjusted gross total income. This would be the
maximum permissible deduction.
The donations qualifying for 100% deduction would be first adjusted from the maximum
permissible deduction and thereafter 50% deduction of the balance would be allowed.
Steps for computation of qualifying limit

Step 1: Compute adjusted total income i.e., the GTI as reduced by the following:
(i) Deductions under Chapter VI-A, except under section 80G
(ii) Short-term capital gain taxable under section 111A
(iii) Long-term capital gains taxable under sections 112 & 112A
(iv) Any income on which income-tax is not payable
(v) Income referred to in section 115A(1)(a), 115AB, 115AC, 115AD and
115D
Step 2: Calculate 10% of adjusted total income
Step 3: Calculate the actual donation, which is subject to qualifying limit (Total of
Category III and IV donations, shown in the table above)

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.49

Step 4: Lower of Step 2 or Step 3 is the maximum permissible deduction.

Step 5: The said deduction is adjusted first against donations qualifying for 100%
deduction (i.e., Category III donations). Thereafter, 50% of balance qualifies
for deduction under section 80G.

(iv) Conditions: Donation to any institution or fund referred in point no. (1) of (IV) above i.e.,
donation to whom would qualify for 50% deduction, subject to qualifying limit, shall be
eligible for deduction if it is established in India for charitable purposes and fulfill the
following conditions:
(1) The institution or fund is:
(a) constituted as a public charitable trust, or
(b) registered under the Societies Registration Act, 1860 or under any
corresponding law or under section 25 of the Companies Act, 1956 3, or
(c) a University established by law or
(d) any other educational institution recognized by the Government or by a
university established by law or affiliated to any university established by law
(e) an institution financed wholly or in part by the Government or a local authority
[Section 80G(5)(v)].
(2) Where such institution or fund derives any income, such income should not be liable
to inclusion in its total income under the provisions of section 10(23AA), 10(23C) or
11 or 12 [Section 80G(5)(i)].

However, in respect of profits and gains of business, the condition of such income
should not be liable to inclusion in its total income under the provisions of section 11
shall not be applicable if –

- the institution or fund maintains separate books of account in respect of such

business;
- the donation made to it are not used by it, directly or indirectly, for the purpose
of such business; and
- the institution or fund issues certificate to the donor in respect of the above
compliance.

3 Section 8 of the Companies Act, 2013

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Further, it may be noted that the assessee will not lose the benefit of deduction if:
(a) subsequent to the donation, any part of the income of the Institution has
become chargeable to tax due to non-compliance with any of the provisions of
section 11 or section 12 or section 12A.
(b) as a result of the operation of section 13(1)(c), exemption under section 11 or
section 12 is denied to the institution in relation to any income arising to it from
any investment made in a concern in which the person specified under section
13(3) has substantial interest and aggregate of fund so invested does not
exceed 5% of the capital of that concern. [Explanation 2 to section 80G]
(3) No part of the income or assets of the Institution or Fund is transferable or applied at
any time for any purposes other than charitable purpose [Section 80G(5)(ii)].
Such charitable purpose however does not include any purpose the whole or
substantially the whole of which is of a religious nature [Explanation 3 to Section
80G].

However, where an institution or fund incurs expenditure of a religious nature for an

amount not exceeding 5% of its total income in that previous year, such institution or
fund shall be deemed to be a fund or institution to which the provisions of this section
apply [Section 80G(5B)].
(4) For the purposes of this section, an association or institution having as its object the
control, supervision, regulation or encouragement in India of such games or sports as
the Central Government may, by notification in the Official Gazette, specify in this
behalf, shall be deemed to be an institution established in India for a charitable
purpose. [Explanation 4 to Section 80G]
(5) The Institution or Fund is not expressed to be for the benefit of any particular religious
community or caste [Section 80G(5)(iii)].
An institution or fund established for the benefit of women and children or of
Scheduled Castes, Backward classes or Scheduled Tribes is not however to be
treated as an institution or fund for the benefit of a religious community or caste.
[Explanation 1 to Section 80G]

(6) The Institution or Fund maintains regular accounts of its receipt and expenditure
[Section 80G(5)(iv)].

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.51

(7) Such institution or fund must be approved by the Principal Commissioner or

Commissioner [Section 80G(5)(vi)]

First, second, third and fourth provisos to section 80G(5) provide that the institution or
fund has to make an application in the prescribed form and manner to the Principal
Commissioner (PC) or Commissioner (C), for grant of approval within the prescribed
time period and the PC or C will pass an order for grant of approval.
(8) Filing of statement of donation received by the institution or fund: The institution
or fund is required to prepare such statement for such period as may be prescribed
and deliver or cause to be delivered to the prescribed income-tax authority or the
person authorised by such authority such statement in such form and verified in such
manner and setting forth such particulars and within such time as may be prescribed
[Section 80G(5)(viii)].
The institution or fund can also deliver to the said prescribed authority a correction
statement for rectification of any mistake or to add, delete or update the information
furnished in the statement delivered under this sub-section in such form and verified
in such manner as may be prescribed.
(9) Furnishing of certificate to the donor: The institution or fund is also required to
furnish to the donor, a certificate specifying the amount of donation in such manner,
containing such particulars and within such time from the date of receipt of donation,
as may be prescribed [Section 80G(5)(ix)]
Consequently, Explanation 2A to section 80G provides that claim of the assessee for
a deduction in respect of any donation made to an institution or fund, in the return of
income for any assessment year filed by him, is allowed on the basis of information
relating to said donation furnished by the institution or fund, subject to verification in
accordance with the risk management strategy formulated by the Board from time to
time.

(v) Other points:

(a) Where an assessee has claimed and has been allowed any deduction under this
section in respect of any amount of donation, the same amount will not qualify for
deduction under any other provision of the Act for the same or any other assessment
year [Section 80G(5A)].
(b) Donations in kind shall not qualify for deduction.

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 8.52 DIRECT TAX LAWS

(c) No deduction shall be allowed in respect of donation of any sum exceeding

` 2,000 unless such sum is paid by any mode other than cash [Section 80G(5D)].

(d) The deduction under section 80G can be claimed whether it has any nexus with the
business of the assessee or not.
(e) As per Circular No.2/2005 dated 12.1.2005, in cases where employees make
donations to the Prime Minister’s National Relief Fund, the Chief Minister’s Relief
Fund or the Lieutenant Governor’s Relief Fund through their respective employers,
it is not possible for such funds to issue separate certificate to every such employee
in respect of donations made to such funds as contributions made to these funds
are in the form of a consolidated cheque. An employee who makes donations
towards these funds is eligible to claim deduction under section 80G. It is, hereby,
clarified that the claim in respect of such donations as indicated above will be
admissible under section 80G on the basis of the certificate issued by the Drawing
and Disbursing Officer (DDO)/ Employer in this behalf.
ILLUSTRATION 15
Mr. Arjun aged 45 years, has gross total income of ` 8,85,000 comprising of income from
salary and house property. He has made the following payments and investments:
(i) Premium paid to insure the life of her major daughter (policy taken on 1.4.2019)
(Assured value ` 1,80,000) – ` 20,000
(ii) Medical Insurance premium for self – ` 14,000; Spouse – ` 15,000

(iii) Donation to a public charitable institution registered under 80G ` 50,000 by way of
cheque

(iv) LIC Pension Fund – ` 60,000

(v) Donation to National Children’s Fund - ` 25,000 by way of cheque

(vi) Donation to PM CARES Fund – ` 10,000 by way of cheque.

(vii) Donation to approved institution for promotion of family planning - ` 40,000 by way of
cheque

(viii) Deposit in PPF - ` 1,20,000

Compute the total income of Mr. Arjun for A.Y. 2026-27 if he exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.53

SOLUTION
Computation of Total Income of Mr. Arjun for A.Y. 2026-27
Particulars ` `
Gross Total Income 8,85,000
Less: Deduction under section 80C
Deposit in PPF 1,20,000
Life insurance premium paid for insurance of major
daughter (Maximum 10% of the assured value ` 1,80,000,
as the policy is taken after 31.3.2012) 18,000
1,38,000
Deduction u/s 80CCC in respect of LIC pension fund 60,000
1,98,000
As per section 80CCE, deduction u/s 80C & 80CCC is restricted 1,50,000
to
Deduction under section 80D
Medical Insurance premium in respect of self and spouse 29,000
Restricted to 25,000
Deduction under section 80G (See Working Note below) 90,500
Total income 6,19,500

Working Note: Computation of deduction under section 80G

Particulars of donation Amount % of deduction Deduction u/s
donated 80G (`)
(`)
(i) National Children’s Fund 25,000 100% 25,000
(ii) PM Cares Fund 10,000 100% 10,000
(iii) Approved institution for 40,000 100%, subject to 40,000
promotion of family planning qualifying limit
(iv) Public Charitable Trust 50,000 50% subject to 15,500
qualifying limit
(See Note below)
90,500

Note - Adjusted total income = Gross Total Income (–) Amount of deductions under section
80C to 80U except section 80G i.e., ` 7,10,000, in this case., ` 71,000, being 10% of
adjusted total income is the qualifying limit, in this case.

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 8.54 DIRECT TAX LAWS

Firstly, donation of ` 40,000 to approved institution for family planning qualifying for 100%
deduction subject to qualifying limit, has to be adjusted against this amount. Thereafter,
donation to public charitable trust qualifying for 50% deduction, subject to qualifying limit is
adjusted. Hence, the contribution of ` 50,000 to public charitable trust is restricted to
` 31,000 (being, ` 71,000 - ` 40,000), 50% of which would be the deduction under section
80G. Therefore, the deduction under section 80G in respect of donation to public charitable
trust would be ` 15,500, which is 50% of ` 31,000.

(14) Deduction in respect of rent paid [Section 80GG]

(i) Eligible assessee: Assessee, who is not in receipt of HRA qualifying for exemption under
section 10(13A) from employer and who pays rent for accommodation occupied by him for
residential purposes.

(ii) Conditions: The following conditions have to be satisfied for claiming deduction under
section 80GG -

(a) The assessee should not be receiving any house rent allowance exempt under
section 10(13A).
(b) The expenditure incurred by him on rent of any furnished or unfurnished
accommodation should exceed 10% of his total income arrived at after all deductions
under Chapter VI A except section 80GG.
(c) The accommodation should be occupied by the assessee for the purposes of his own
residence.
(d) The assessee should fulfill such other conditions or limitations as may be prescribed,
having regard to the area or place in which such accommodation is situated and other
relevant considerations.
(e) The assessee or his spouse or his minor child or an HUF of which he is a member
should not own any accommodation at the place where he ordinarily resides or perform
duties of his office or employment or carries on his business or profession; or
(f) If the assessee owns any accommodation at any place other than that referred to
above, such accommodation should not be in the occupation of the assessee and its
annual value is not required to be determined under section 23(2)(a) or section
23(4)(a).
(g) The assessee should file a declaration in the prescribed form, confirming the details
of rent paid and fulfillment of other conditions, with the return of income.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.55

(iii) Quantum of deduction: The deduction admissible will be the least of the following:

(a) Actual rent paid minus 10% of the total income of the assessee before allowing the
deduction, or
(b) 25% of such total income (arrived at after making all deductions under Chapter VI-A
but before making any deduction under this section), or
(c) Amount calculated at ` 5,000 p.m.

Note - Deduction under section 80GG would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 16
Mr. Rakesh, a businessman, whose total income (before allowing deduction under section 80GG)
for A.Y.2026-27 is ` 4,60,000, paid house rent at ` 12,000 p.m. in respect of residential
accommodation occupied by him at Mumbai. Compute the deduction allowable to him under section
80GG for A.Y.2026-27 if he has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).
SOLUTION
The deduction under section 80GG will be computed as follows:

(i) Actual rent paid less 10% of total income

` 1,44,000 (-) ` 46,000 (10% x ` 4,60,000) = ` 98,000
(ii) 25% of total income i.e., ` 4,60,000

= ` 1,15,000
(iii) Amount calculated at ` 5,000 p.m. = ` 60,000
Deduction allowable u/s 80GG [least of (i), (ii) and (iii)] = ` 60,000

(15) Deduction in respect of donations for scientific research or rural development

[Section 80GGA]
(i) Eligible assessee: Section 80GGA grants deduction in respect of the donations made for
scientific research or rural development by any assessee not having income chargeable
under the head “Profits and gains of business or profession”.

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(ii) Donations qualifying for deduction:

(a) Any sum paid by the assessee in the previous year to a research association which
has, as its object, the undertaking of scientific research or to a University, college or
other institution to be used for scientific research; and
Such research association, University, college or institution must be approved under
section 35(1)(ii).
(b) Any sum paid to a research Association which has as its object the undertaking of
research in social science or statistical research, University, College or other
institution to be used for research in social science or statistical research.
Such Research Association, University, College or institution must be approved under
section 35(1)(iii).

(c) Any sum paid by the assessee in the previous year

- to an association or institution which has as its object the undertaking of any
programme of rural development to be used for carrying out any programme of
rural development approved by the prescribed authority for purposes of section
35CCA or
- to an institution or association which has as its object the training of persons
for implementing programmes of rural development.
It is, however, essential that assessee furnishes the certificate from such institution or
association as referred to in section 35CCA(2) & (2A).
(d) Any sum paid to a public sector company or a local authority or to an association or
institution approved by the National Committee for carrying out any eligible project or
scheme.
(e) Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum
- to a research association or university college or other institution for scientific
research or research in a social science or statistical research,
- an association or institution for carrying out the programme of rural
development

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- public sector company or a local authority or to an association or institution

approved by the National Committee for carrying out any eligible project or
scheme
shall not be denied merely on the ground that subsequent to payment of such sum by
the assessee, the approval granted to any of the aforesaid entities or to such
programme is withdrawn.
(f) Any sum paid to a rural development fund set up and notified under section 35CCA.
(g) Any sum paid by the assessee in the previous year to National Urban Poverty
Eradication Fund (NUPEF).
(iii) Restrictions on deduction:
(a) No deduction under this section would be allowed in the case of an assessee whose
gross total income includes income which is chargeable under the head “Profits and
gains of business or profession”.
(b) Where a deduction under this section is claimed and allowed for any assessment
year, deduction shall not be allowed in respect of such payment under any provision
of this Act for the same or any other assessment year.
(c) No deduction shall be allowed in respect of donation of any sum exceeding
` 2,000 unless such sum is paid by any mode other than cash.
(d) Deduction under this section claimed by the assessee in the return of income for any
assessment year would be allowable on the basis of the information relating to
donation furnished by the payee to the prescribed income-tax authority or person
specified by such authority, subject to verification in accordance with the risk
management strategy formulated by the CBDT from time to time.

Note - An individual, HUF, AoP (other than a co-operative society) or BoI or an artificial juridical
person will be eligible for deduction u/s 80GGA only if such person has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).

(16) Deduction in respect of contributions given by companies to political parties

[Section 80GGB]

(i) Deduction & Conditions: This section provides for deduction of any sum contributed in the
previous year by an Indian company not opting for section 115BAA/ 115BAB to any political

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party or an electoral trust. However, no deduction shall be allowed in respect of any sum
contributed by way of cash.

(ii) Meaning of “contribute”: For the purposes of this section, the word “contribute” has the
same meaning assigned to it under section 293A of the Companies Act, 1956 4, which
provides that -

(a) a donation or subscription or payment given by a company to a person for carrying on

any activity which is likely to effect public support for a political party shall also be
deemed to be contribution for a political purpose;
(b) the expenditure incurred, directly or indirectly, by a company on advertisement in any
publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet
or the like) by or on behalf of a political party or for its advantage shall also be
deemed to be a contribution to such political party or a contribution for a political
purpose to the person publishing it.
(iii) Meaning of “Political party”: It means a political party registered under section 29A of the
Representation of the People Act, 1951.
ILLUSTRATION 17

During the P.Y.2025-26, Sky Ltd., an Indian company contributed a sum of ` 3.5 lakh to an
electoral trust; and incurred expenditure of ` 52,000 on advertisement in a brochure of a political
party.
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that the
contribution was made by cheque? If so, what is the quantum of deduction? Sky Ltd. does not opt
for section 115BAA.
SOLUTION

An Indian company is eligible for deduction under section 80GGB in respect of any sum contributed
by it in the previous year to any political party or an electoral trust. Further, the word “contribute” in
section 80GGB has the meaning assigned to it in section 293A of the Companies Act, 1956, and
accordingly, it includes the amount of expenditure incurred on advertisement in a brochure of a
political party.

4 Now section 182 of the Companies Act, 2013

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Therefore, Sky Ltd. is eligible for a deduction of ` 4,02,000 under section 80GGB in respect of sum
of ` 3.5 lakh contributed to an electoral trust and ` 52,000 incurred by it on advertisement in a
brochure of a political party.
It may be noted that there is a specific disallowance under section 37(2B) in respect of expenditure
incurred on advertisement in a brochure of a political party. Therefore, the expenditure of
` 52,000 would be disallowed while computing business income/ gross total income. However, the
said expenditure incurred by an Indian company is allowable as a deduction from gross total income
under section 80GGB.

(17) Deduction in respect of contributions given by any person to political

parties [Section 80GGC]

(i) Deduction & Conditions: This section provides for deduction of any sum contributed in the
previous year by any person to a political party or an electoral trust. However, no deduction
shall be allowed in respect of any sum contributed by way of cash.
(ii) Persons not eligible for deduction: This deduction will, however, not be available to a local
authority and an artificial juridical person, wholly or partly funded by the Government.
(iii) Meaning of “Political party”: It means a political party registered under section 29A of the
Representation of the People Act, 1951.

Note - An individual, HUF, AoP (other than a co-operative society) or BoI would be eligible for
deduction u/s 80GGC only if such person has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A). A co-operative society will not be eligible for deduction
if it opts for special provisions of section 115BAD/115BAE.

8.3 DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

(1) Deductions in respect of profits and gains from undertakings or enterprises
engaged in infrastructure development, etc. [Section 80-IA]
Applicability
Section 80-IA(1) provides a 10 year tax holiday to an assessee, whose gross total income includes
any profits and gains derived by an undertaking or enterprise from an eligible business i.e.,
business referred to in sub-section (4), namely :
(i) Infrastructure facility - Any enterprise carrying on the business of:
(a) developing; or

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(b) operating and maintaining; or

(c) developing, operating and maintaining
(d) any infrastructure facility.
Conditions: However, such enterprise must fulfill the following conditions:
(1) It must be owned by a company registered in India or by a consortium of such
companies or by an authority or a board or a corporation or any other body
established or constituted under any Central or State Act.

(2) It has entered into an agreement with the Central or a State Government or a local
authority or statutory body for (i) developing or (ii) operating and maintaining, or (iii)
developing, operating and maintaining a new infrastructure facility.
(3) It starts operating and maintaining such infrastructure facility on or after 1-4-1995.
(4) However, where an enterprise which developed such infrastructure facility transfers it
to another enterprise on or after 1-4-1999, and such transferee enterprise operates
and maintains it according to the agreement drawn up with the Government, etc., this
section will apply to the transferee enterprise for the unexpired period of deduction
(which was available to the first enterprise).

Meaning of “infrastructure facility”:

a port, airport, inland

a road, including toll waterway or inland
road, a bridge or a port or navigational
rail system channel in the sea
Infrastructure facility means
a highway a water supply project,
project including water treatment system,
housing or other irrigation project,
activities being sanitation and sewerage
an integral part system or solid waste
of the highway management
project system

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Note:
1. Structures at the ports for storage, loading and unloading etc. will be included in the
definition of port for the purpose of section 80-IA, if the concerned port authority has
issued a certificate that the said structures form part of the port.
2. Effluent treatment and conveyance system is a part of water treatment system and
would accordingly, qualify as an infrastructure facility for the purpose of section 80-IA.
3. The CBDT has, vide Circular No. 4/2010 dated 18.5.2010, clarified that widening of an
existing road by constructing additional lanes as a part of a highway project by an
undertaking would be regarded as a new infrastructure facility for the purpose of
section 80-IA(4)(i). However, simply relaying of an existing road would not be
classifiable as a new infrastructure facility for this purpose.

Note – Any enterprise which starts the development or operation and maintenance of the
infrastructure facility on or after 1.4.2017 will not be eligible for deduction under section
80-IA. Instead, they would be eligible for investment-linked tax deduction under section
35AD.
(ii) Power undertakings: Any undertaking which

is set up in any part of India for the generation or generation and

distribution of power. However, such undertaking must begin to
generate power at any time during the period between 1.4.1993 and
31.3.2017

starts transmission or distribution by laying a network of new

transmission or distribution lines at any time during the period from
1.4.1999 and 31.3.2017. However, the deduction shall be allowed
only in respect of profits derived from the laying of such network of
new lines for transmission or distribution

undertakes substantial renovation and modernisation of the existing

network of transmission or distribution lines at any time during the
period beginning on 1.4.2004 and ending on 31.3.2017

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Meaning of “Substantial renovation and modernisation”:

‘Substantial renovation and modernisation’ means an increase in the plant and machinery in
the network of transmission or distribution lines by at least fifty per cent of the book value of
such plant and machinery as on 1st April, 2004.
Rate of Deduction
The amount of deduction available will be 100% of the profits and gains derived from such business
for ten consecutive assessment years commencing at any time during the periods specified in
period of tax holiday/concession below.
Period of tax holiday/concession
Eligible business Period of tax holiday
1. For all eligible business except Assessee has the option to claim deduction for
business mentioned in point 2 below. 10 consecutive assessment years out of 15
years beginning from the year in which the
undertaking or the enterprise develops or begins
to operate the infrastructure facility or generates
power or commences transmission or
distribution of power or undertakes substantial
renovation and modernization of the existing
transmission or distribution lines.
2. In case of an infrastructure facility Assessee has the option to claim deduction for
being a public facility like – 10 consecutive assessment years out of 20
(i) a road, including a toll road, years beginning from the year in which the
bridge or rail system; or undertaking or the enterprise develops or begins
to operate the eligible business
(ii) a highway project including
housing or other activities which
are an integral part of the
highway project; or
(iii) a water supply project, water
treatment system, irrigation
project, sanitation and sewerage
system or solid waste
management system

Other provisions
(1) Eligible business to be considered as the only source of income: For the purpose of
computing deduction under this section, the profits and gains of the eligible business shall

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be computed as if such eligible business were the only source of income of the assessee
during the relevant previous years [Sub-section (5)].

(2) Conditions to exempt profit from housing or other activities, being integral part of
highway project: Where housing or other activities are an integral part of a highway project
and the profits and gains have been calculated in accordance with the section, the profits
shall not be liable to tax if the following conditions have been fulfilled:
(a) The profit has been transferred to a special reserve account; and
(b) the same is actually utilised for the highway project excluding housing and other
activities before the expiry of 3 years following the year of transfer to the reserve
account;
(c) The amount remaining unutilised shall be chargeable to tax as income of the year in
which the transfer to the reserve account took place [Sub-section (6)].
(3) Audit of accounts: The deduction shall be allowed to the undertaking only if the accounts of
the undertaking for the relevant previous year have been audited by a chartered accountant
and the assessee furnishes the audit report in the prescribed form, duly signed and verified
by such accountant, before the specified date referred to in section 44AB i.e., the date one
month prior to due date for filing return of income under section 139(1) [Sub-section (7)].
(4) Transfer of goods/services between eligible business and other business of the
assessee: Where any goods or services held for the purposes of the eligible business are
transferred to any other business carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the market value of the goods or
services then the profits and gains of the eligible business shall be computed as if the
transfer was made at market value.
However, if, in the opinion of the Assessing Officer, such computation presents exceptional
difficulties, the Assessing Officer may compute the profits on such reasonable basis as he
may deem fit [Sub-section (8)].
For this purpose, the market value, in relation to any goods or services transferred between
the eligible business and any other business carried on by the assessee, shall mean –
(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined under section 92F, where the transfer of such goods
or services is a specified domestic transaction referred to in section 92BA.

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(5) Deduction not to exceed profits of eligible business: The deductions claimed and
allowed under this section shall not exceed the profits and gains of the eligible business.
Further, where deduction is claimed and allowed under this section for any assessment year
no deduction in respect of such profits will be allowed under any other section under this
chapter under the heading “Deductions in respect of certain incomes” [Sub-section (9)].
(6) Assessing Officer empowered to make adjustment in case any transaction produces
excessive profits to eligible business: The Assessing Officer is empowered to make an
adjustment while computing the profit and gains of the eligible business on the basis of the
reasonable profit that can be derived from the transaction, in case due to close connection or
for any other reason the transaction between the assessee carrying on the eligible business
under section 80-IA and any other person is so arranged that the transaction produces
excessive profits to the eligible business [Sub-section (10)].
If the aforesaid arrangement between the assessee carrying on the eligible business and any
other person is a specified domestic transaction referred to in section 92BA, then, the
amount of profit of such transaction shall be determined having regard to arm’s length price
as defined under section 92F and not as per the reasonable profit from such transaction.
(7) Central Government empowered to deny deduction to any class of eligible undertaking
or enterprise: The section empowers the Central Government to declare any class of
industrial undertaking or enterprise as not being entitled to deduction under this section. The
denial of exemption shall be with effect from such date as may be specified in the notification
issued in the Official Gazette [Sub-section (11)].
(8) Deduction in case of amalgamation or demerger: In the case of any amalgamation or
demerger, by virtue of which the Indian company carrying on the eligible business is
transferred to another Indian company, deduction under this section will be available as
follows:
(a) No deduction will be available to the amalgamating company or the demerged
company, as the case may be, in the year of amalgamation/ demerger.
(b) The provisions of this section will apply to the amalgamated/ resulting company as
they would have applied to the amalgamating/ demerged company if the
amalgamation/ demerger had not taken place [Sub-section (12)].
However, such transfer of benefit of deduction to the amalgamated/ resulting company would
not be available in respect of any enterprise or undertaking which is transferred in a scheme
of amalgamation or demerger effected on or after 1.4.2007 [Sub-section (12A)].

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(9) No deduction to any business carrying on specified activities in the nature of a work
contract: The tax holiday under section 80-IA would not be available in relation to a
business referred to in sub-section (4) which is in the nature of a works contract awarded by
any person (including the Central or State Government) and executed by the undertaking or
enterprise referred to in section 80-IA(1).

(2) Deduction in respect of profits and gains by an undertaking or enterprise

engaged in development of SEZ [Section 80-IAB]
(i) Quantum of deduction:
Sub-section (1) provides for a deduction of 100% of profits and gains derived by an
undertaking or an enterprise from any business of developing a SEZ for 10 consecutive
assessment years.
(ii) Eligible assessee:
The deduction is available to an assessee, being a Developer, whose gross total income
includes any profits and gains derived by an undertaking or an enterprise from any business
of developing a SEZ, notified on or after 1st April, 2005 under the SEZ Act, 2005.

Note - No deduction would be available to an assessee, being a developer, where the

development of SEZ begins on or after 1st April, 2017.

(iii) Meaning of Developer:

(a) a person who, or
(b) a State Government which
has been granted a letter of approval by the Central Government under section 3(10) of the
SEZ Act, 2005.
A developer includes –
(a) an authority and
(b) a Co-developer.
Co-developer means -
(a) a person who, or
(b) a State Government which
has been granted a letter of approval by the Central Government under section 3(12) of the
SEZ Act, 2005.

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(iv) Option to choose 10 consecutive A.Y.s out of 15 years to claim deduction:

The assessee has the option of claiming the said deduction for any ten consecutive
assessment years out of fifteen years beginning from the year in which a SEZ has been
notified by the Central Government.

(v) Deduction to transferee in case of transfer of operation and maintenance of such SEZ:

In a case where an undertaking, being a Developer, who develops a SEZ on or after

1.4.2005 and transfers the operation and maintenance of such SEZ to another Developer,
the deduction under sub-section (1) shall be allowed to such transferee Developer for the
remaining period in the ten consecutive assessment years as if the operation and
maintenance were not so transferred to the transferee Developer.

(vi) The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to
the Special Economic Zone for the purpose of allowing deductions under 80-IAB(1).

(3) Tax incentives for new start-ups [Section 80-IAC]

(i) Objective:

Section 80-IAC provides an incentive to start-ups in order to aid their growth in the early
phase of their business.

(ii) Quantum of deduction:

Accordingly, a deduction of 100% of the profits and gains derived by an eligible start-up from
an eligible business is allowed for any three consecutive assessment years out of ten
years beginning from the year in which the eligible start up is incorporated.
(iii) Meaning of eligible start-up:

Company or LLP engaged

in eligible business

Total turnover ≤ ` 100 Holds a certificate of eligible

Incorporated during the crores in the P.Y. relevant business from the notified
period 1.4.2016-31.3.2030 to the A.Y. for which IMBC
deduction is claimed

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(iv) Meaning of eligible business:

A business carried out by an eligible start-up engaged in –
- Innovation, development or improvement of products or processes or services or
- a scalable business model with a high potential of employment generation or wealth
creation
(v) Conditions to be fulfilled:
This incentive is available to an eligible start-up which fulfils the following conditions:
(1) It is not formed by splitting up, or the reconstruction, of a business already in
existence.
Exception: However, this condition shall not apply in the case of an undertaking
which is formed as a result of reconstruction, re-establishment or revival of the
business of any undertaking which has been discontinued in any previous year due to
extensive damage or destruction of any building, machinery, plant or furniture owned
by the assessee and used for the purposes of such business. Further, the reason for
damage or destruction is due to any natural calamity or other unforeseen
circumstances such as the following:
(i) Flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or
(ii) riot or civil disturbance, or

(iii) accidental fire or explosion, or

(iv) enemy action or action taken in combat,
and such business is re-established or revived within 3 years from the end of such
previous year.
(2) It is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.

Exceptions: However, any machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as machinery or plant
previously used for any purpose, if all the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the
installation by the assessee, used in India;
(b) such machinery or plant is imported into India;

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(c) no deduction on account of depreciation in respect of such machinery or plant

has been allowed or is allowable under the provisions of the Income-tax Act,
1961 in computing the total income of any person for any period prior to the
date of the installation of the machinery or plant by the assessee.
Further, where in the case of a start-up, any machinery or plant or any part thereof
previously used for any purpose is transferred to a new business and the total value
of the machinery or plant or part so transferred does not exceed 20% of the total
value of the machinery or plant used in the business, then, the condition specified that
it should not be formed by transfer to a new business of plant and machinery used for
any purpose shall be deemed to have been complied with.
(vi) The provisions of sub-section (5) and sub-section (7) to (11) of section 80-IA shall apply to
the start-ups for the purpose of allowing deductions under 80-IAC(1).

(4) Deductions in respect of profits and gains from certain undertaking [Section
80-IB]
Applicability
This section will be applicable to assessees, whose gross total income includes any profits and
gains from the business of processing, preservation and packaging of fruits or vegetables or meat
and meat products or poultry or marine or dairy products or from the integrated business of
handling, storage and transportation of foodgrains [Sub-section (11A)].
Conditions to be fulfilled, amount of deduction and period of deduction
In order to claim deduction, the undertaking should fulfill the following conditions:
(i) It should be deriving profits from the business of processing, preservation and packaging of
fruits or vegetables or meat or meat products or poultry or marine or dairy products or from
the integrated business of handling, storage and transportation of foodgrains.
(ii) It should begin to operate such business on or after 1.4.2001.
(iii) It should begin operates such business on or after 1.4.2009 in case of an undertaking
deriving profit from the business of processing, preservation and packaging of meat or meat
products or poultry or marine or dairy products.
Quantum and period of deduction: The amount of deduction shall be 100% of the profits and
gains derived from such business for 5 assessment years beginning with the initial assessment year
i.e. the assessment year relevant to the previous year in which the undertaking begins such

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business. Thereafter, the deduction allowable is 25%. In the case of a company, the rate of 25%
shall be substituted by 30%. The total period of deduction should not exceed 10 consecutive
assessment years.
The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to the
eligible business under section 80-IB.
(5) Deductions in respect of profits and gains from housing projects/rental
housing project [Section 80-IBA]

(i) Objective:

Section 80-IBA provides impetus to affordable housing sector to achieve the larger objective
of 'Housing for All'.

(ii) Quantum of deduction:

Where the gross total income of an assessee includes any profits and gains derived from

- the business of developing and building housing projects an amount equal to 100% of
the profits and gains derived from such business is allowable as deduction under
section 80-IBA, subject to fulfilment of certain conditions [Section 80-IBA(1)].

- the business of developing and building rental housing project an amount equal to
100% of the profits and gains derived from such business is allowable as deduction
[Section 80-IBA(1A)].

(iii) Conditions to be fulfilled for claim of deduction in respect of housing project referred
under section 80-IBA(1):

(a) the project is approved by the competent authority after 1st June, 2016 but on or
before 31st March, 2022;

(b) the project is completed within a period of five years from the date of approval by the
competent authority:

However, in a case where the approval in respect of a housing project is obtained

more than once, the project shall be deemed to have been approved on the date on
which the building plant of such housing project was first approved by the competent
authority and the project shall be deemed to have been completed when a certificate
of completion of project as a whole is obtained in writing from the competent authority.

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(c) the carpet area of the shops and other commercial establishments included in the
housing project does not exceed 3% of the aggregate carpet area;

Additional conditions to be fulfilled if the project is approved by the competent

authority before 1st September, 2019

(a) where a residential unit in the housing project is allotted to an individual, no other
residential unit in the housing project shall be allotted to the individual or the spouse
or the minor children of such individual;
(b) Conditions relating to size of plot of land, residential units etc.

Location Size on plot Carpet area of Percentage of floor area

of the of land on the residential ratio to be utilised by the
housing which the unit project
project project is comprised in
located the housing
project
(1) (2) (3) (4) (5)
(i) Within the Not less than Not more than Not less than 90% of the
cities of 1,000 sq. m. 30 sq. m. floor area ratio permissible
Chennai, in respect of the plot of land
Delhi, under the rules to be made
Kolkata or by the Central Government
Mumbai or the State Government or
the local authority, as the
case may be.
(ii) In any Not less than Not more than not less than 80% of such
other place 2,000 sq. m. 60 sq. m. floor area ratio

(c) The project is the only housing project on the plot of land [referred to in column (3)].

(d) the assessee maintains separate books of account in respect of the housing project.

Additional conditions to be fulfilled if the project is approved by the competent

authority on or after 1st September, 2019

(a) where a residential unit in the housing project is allotted to an individual, no other
residential unit in the housing project shall be allotted to the individual or the spouse
or the minor children of such individual;

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(b) Conditions relating to size of plot of land, residential units etc.

Location of the Size on Carpet area of Percentage of
housing project plot of land the residential floor area ratio to
on which unit be utilised by the
the project comprised in project
is located the housing
project
(1) (2) (3) (4) (5)
(i) Within the metropolitan Not less Not more than Not less than 90%
cities of Bengaluru, than 1,000 60 sq. m. of the floor area
Chennai, Delhi sq. m. ratio permissible in
National Capital respect of the plot
Region (limited to of land under the
Delhi, Noida, Greater rules to be made
Noida, Ghaziabad, by the Central
Gurugram, Faridabad), Government or the
Hyderabad, Kolkata State Government
and Mumbai (whole of or the local
Mumbai Metropolitan authority, as the
Region) case may be.
(ii) In any other place Not less Not more than Not less than 80%
than 2,000 90 sq. m. of such floor area
sq. m. ratio

(c) The project is the only housing project on the plot of land [referred to in column (3)
above].
(d) the assessee maintains separate books of account in respect of the housing project.

(e) the stamp duty value of a residential unit in the housing project does not exceed ` 45
lakhs.
(iv) No deduction for person executing the housing project as a works contract:
An assessee who merely executes the housing project as a works-contract awarded by any
person (including the Central Government or the State Government) would not be eligible for
deduction under this section.
(v) Consequence of non-completion of housing project within 5 years:
In a case where the housing project is not completed within the period of five years from the
date of approval by the competent authority and in respect of which a deduction has been
claimed and allowed under this section, the total amount of deduction so claimed and

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allowed in one or more previous years, shall be deemed to be the income of the assessee
chargeable under the head “Profits and gains of business or profession” of the previous year
in which the period for completion so expires.
(vi) No deduction under any other provision of the Act in respect of such profits:
Where any amount of profits and gains derived from the business of developing and building
housing projects is claimed and allowed under this section for any assessment year,
deduction to the extent of such profit and gains shall not be allowed under any other
provision of this Act.
(vii) Meaning of certain terms:
Term Meaning
(a) Carpet area Net usable floor area of an apartment
Excluding –
• The area covered by the external walls,
• areas under service shafts
• exclusive balcony or verandah area and
• exclusive open terrace area
However, carpet area includes the area covered by the
internal partition walls of the apartment.
Exclusive balcony or verandah and exclusive open terrace
area means the area of the balcony or verandah and the
area of open terrace respectively, which is appurtenant to
the net usable floor area of an apartment, meant for the
exclusive use of the allottee.
(b) Competent The authority empowered by the Central Government to
authority approve the building plan by or under any law for the time
being in force.
(c) Floor area ratio The quotient obtained by dividing the total covered area of
plinth area on all the floors by the area of the plot of land
(d) Housing project A project consisting predominantly of residential units with
such other facilities and amenities as the competent
authority may approve subject to the provisions of this
section
(e) Rental housing A project which is notified by the Central Government under
project this clause on or before the 31.03.2022 and fulfils such
conditions as may be specified in the said notification.
(f) Residential unit An independent housing unit with separate facilities for
living, cooking and sanitary requirements, distinctly

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.73

separated from other residential units within the building,

which is directly accessible from an outer door or through an
interior door in a shared hallway and not by walking through
the living space of another household.
(g) Stamp duty value Value adopted or assessed or assessable by any authority
of the Central Government or a State Government for the
purpose of payment of stamp duty in respect of an
immovable property.

(6) Tax holiday in respect of profits and gains from eligible business of certain
undertakings in North-Eastern States [Section 80-IE]
(i) Applicability:
This section provides for an incentive to an undertaking which has during the period between
1st April, 2007 and 1st April, 2017, begun or begins, in any of the North-Eastern States (i.e.,
the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim
and Tripura) -
(1) to manufacture or produce any eligible article or thing;
(2) to undertake substantial expansion to manufacture or produce any eligible article or
thing;
(3) to carry on any eligible business.
(ii) Meaning of certain terms:
Terms Meaning
(a) Eligible the article or thing other than
article or - goods falling under Chapter 24 of the First Schedule to the
thing Central Excise Tariff Act, 1985 which pertains to tobacco and
manufactured tobacco substitutes;
- pan masala as covered under Chapter 21 of the First Schedule
to the Central Excise Tariff Act, 1985;
- plastic carry bags of less than 20 microns; and
- goods falling under Chapter 27 of the First Schedule to the
Central Excise Tariff Act, 1985 produced by petroleum oil or
gas refineries
(b) Substantial Increase in the investment in the plant and machinery by at least
expansion 25% of the book value of plant and machinery (before taking
depreciation in any year), as on the first day of the previous year in
which the substantial expansion is undertaken

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(c) Eligible Business of -

business
- hotel (not below two star category);
- adventure and leisure sports including ropeways;
- providing medical and health services in the nature of nursing
home with a minimum capacity of 25 beds;
- running an old-age home;
- operating vocational training institute for hotel management,
catering and food craft, entrepreneurship development, nursing
and para-medical, civil aviation related training, fashion
designing and industrial training;
- running information technology related training centre;
- manufacturing of information technology hardware; and
- Bio-technology.

(iii) Quantum of deduction and period:

Where the gross total income of an assessee includes any profits and gains derived by such
an undertaking, a deduction of 100% of the profits and gains derived from such business for
10 consecutive assessment years commencing with the initial assessment year shall be
allowed in computing the total income of the assessee. Initial assessment year means the
assessment year relevant to the previous year in which the undertaking begins to
manufacture or produce articles or things or completes substantial expansion.

(iv) No deduction under any other section of Chapter VIA or section 10AA of the Act in
respect of such profits:

No benefit to these undertakings will be available under any of the sections in Chapter VIA or
in section 10AA in relation to the profits and gains of such undertakings.

(v) Maximum permissible deduction:

While computing the total period of 10 years the period for which the benefit under section
80-IC has already been availed, if any, shall also be included.

(vi) The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to
the eligible undertaking under this section.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.75

SUMMARY OF DEDUCTIONS IN RESPECT OF CERTAIN

INCOMES: SECTIONS 80-IA to 80-IE

Section Eligible Business Year of Period of Quantum of

commencement of Deduction Deduction
eligible business
80-IA (1) (i) Developing or On or after Infrastructure 100% of the
(ii) Operating and 1.4.1995 but not Facility of road, profits and gains
maintaining or later than 1.4.2017 or a bridge or a derived from
rail system or a such business
(iii) Developing,
highway for 10
operating and
project or a consecutive
maintaining any
water supply assessment
infrastructure
project: 10 years.
facility
consecutive
(2) Power Generation or assessment
undertakings Generation and years out of 20
distribution: Set years beginning
up between from the year in
1.4.1993 & which the
31.3.2017. enterprise
Transmission or develops or
distribution: Start begins to
transmission during operate the
the period from eligible
1.4.1999 & business.
31.3.2017. Other eligible
Renovation and businesses: 10
modernisation of consecutive
existing network: assessment
Undertakes years out of 15
substantial years beginning
renovation and from the year in
modernisation which the
during the period on enterprise
or after 1.4.2004 & develops or
ending on begins to
31.3.2017. operate the
eligible
business.

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80-IAB Development of Special Develops SEZ, 10 consecutive 100% of the

Economic Zones(SEZs) notified on or after AYs out of 15 profits and gains
1st April 2005 but years beginning derived from
before 1st April from the year in such business.
2017. SEZ has been
notified.
80-IAC A business carried out by The company or 3 consecutive 100% of the
an eligible start-up LLP is incorporated AYs out of 10 profits and gains
engaged in Innovation, during the period years beginning derived from
Development or 1.4.2016 - from the year in such business.
Improvement of products 31.3.2030 which company
or processes or services or or LLP,
a scalable business model incorporated.
with a high potential of
employment generation or
wealth creation
80-IB Processing, preservation Processing, 10 consecutive 100% of the
and packaging of fruits or preservation and AYs beginning profits and gains
vegetables or meat and packaging of meat with the initial derived from such
meat products or poultry or meat products AY business for 5
or marine or dairy or poultry or AYs beginning
products or from the marine or dairy with the initial AY
integrated business of products: On or 25% (30% in case
handling, storage and after 1.4.2009 of company) for
transportation of Other eligible remaining 5 years
foodgrains businesses: On or
after 1.4.2001
80-IBA Developing and building Housing Project 100% of the
housing projects or referred under ---- profits and gains
rental housing project section 80-IBA(1) is derived from
approved after such housing
1st June 2016 but project.
on or before 31st
March 2022
80-IE Undertaking begun or between 1st April, 10 consecutive 100% of the
begins, in any of the 2007 and ending AYs profits and gains
North-Eastern States (i.e., before 1st April, Commencing derived from
the States of Arunachal 2017 with the initial AY such business

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.77

Pradesh, Assam, Manipur,

Meghalaya, Mizoram,
Nagaland, Sikkim and
Tripura) -
(1) to manufacture or
produce any eligible
article or thing;
(2) to undertake
substantial expansion
to manufacture or
produce any eligible
article or thing;
(3) to carry on any eligible
business.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction under section 80-IA to 80-IE would be available only if such person has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). It
would not be available if such person pays concessional rates of tax under the default tax regime
u/s 115BAC.
In case of companies and co-operative societies, deduction under section 80-IA to 80-IE would not
be available if they opted for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction would be available only if companies and
co-operative societies pay tax under the normal provisions of the Act.

Admissibility of deduction under Chapter VI-A on the profits enhanced due to disallowance
of expenditure related to business activity [Circular No.37/2016, Dated 02.11.2016]
Chapter VI-A of the Income-tax Act, 1961, provides for deductions in respect of certain incomes. In
computing the profits and gains of a business activity, the Assessing Officer may make certain
disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the
Act. At times, disallowance out of specific expenditure claimed may also be made. The effect of
such disallowances is an increase in the profits.
The issue is whether such higher profits would also result in claim for a higher profit-linked
deduction under Chapter VI-A.

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The courts have generally held that if the expenditure disallowed is related to the business activity
against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on
the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was
not allowable on account of non-deduction of TDS under law, such disallowance would
ultimately increase assessee's profits from business of developing housing project. The
ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) would qualify
for deduction under section 80-IB.
(ii) If deduction under section 40A(3) is not allowed, the same would have to be added to the
profits of the undertaking on which the assessee would be entitled for deduction under
section 80-IB.

In view of the aforesaid judgements, the CBDT has accepted the settled position that the
disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. and other specific
disallowances, related to the business activity against which the Chapter VI-A deduction has been
claimed, result in enhancement of the profits of the eligible business, and that deduction under
Chapter VI-A is admissible on the profits so enhanced by the disallowance.

(7) Deduction in respect of profits and gains from business of collecting and
processing of bio-degradable waste [Section 80JJA]
(i) Eligible business: The deduction is allowable where the gross total income of an assessee
includes any profits and gains derived from the business of collecting and processing or
treating of bio-degradable waste -
(1) for generating power, or
(2) producing bio-fertilizers, bio-pesticides or other biological agents, or

(3) for producing bio-gas, or

(4) making pellets or briquettes for fuel or organic manure.
(ii) Quantum of deduction and period: The deduction allowable under this section is an
amount equal to the whole of such profits and gains for a period of five consecutive
assessment years beginning with the assessment year relevant to the previous year in which
the business commences.

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Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction under section 80JJA would be available only if such person has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). It
would not be available if such person pays concessional rates of tax under the default tax regime
u/s 115BAC.
In case of companies and co-operative societies, deduction under section 80JJA would not be
available if they opted for the special provisions u/s 115BAA/115BAB and section 115BAD/115BAE,
respectively. In other words, deduction would be available only if companies and co-operative
societies pay tax under the normal provisions of the Act.

(8) Deduction in respect of employment of new employees [Section 80JJAA]

(i) Quantum and period of deduction:
Where the gross total income of an assessee to whom section 44AB applies, includes any
profits and gains derived from business, a deduction of an amount equal to 30% of additional
employee cost incurred in the course of such business in the previous year, would be
allowed for three assessment years including the assessment year relevant to the previous
year in which such employment is provided.
(ii) Conditions to be fulfilled:
The deduction would be allowed only subject to fulfilment of the following conditions:

The report of the accountant,

The business is not
giving the prescribed particulars,
The business should not be acquired by the assessee
has to be furnished before the
formed by splitting up, or the by way of transfer from any
specified date referred to in
reconstruction, of an existing other person or as a result
section 44AB i.e., the date one
business of any business
month prior to due date for filing
reorganisation
ROI u/s 139(1)

(iii) Meaning of certain terms:

Term Meaning
(a) Additional employee cost Total emoluments paid or payable to additional
employees employed during the previous year.
In the case of an The additional employee cost
existing business shall be Nil, if—
(a) there is no increase in the
number of employees from

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the total number of

employees employed as
on the last day of the
preceding year;
(b) emoluments are paid
otherwise than by an
account payee cheque or
account payee bank draft
or by use of electronic
clearing system through a
bank account or through
any other prescribed
electronic mode [credit
card, debit card, net
banking, IMPS (Immediate
Payment Services), UPI
(Unified Payment
Interface), RTGS (Real
Time Gross Settlement),
NEFT (National Electronic
Fund Transfer), BHIM
(Bharat Interface for
Money) Aadhar Pay].
In the first year of The emoluments paid 5 or
a new business payable to employees
employed during that previous
year shall be deemed to be the
additional employee cost.
(b) Additional employee An employee who has been employed during the
previous year and whose employment has the
effect of increasing the total number of employees
employed by the employer as on the last day of the
preceding year.
Exclusions from the definition:
(a) an employee whose total emoluments are
more than ` 25,000 per month; or
(b) an employee for whom the entire contribution
is paid by the Government under the
Employees’ Pension Scheme notified in
accordance with the provisions of the

5As per Form No.10DA read with Rule 19AB, the amount shall not include emoluments paid otherwise than
by way of account payee cheque/bank draft/ECS through a bank account and prescribed electronic modes.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.81

Employees’ Provident Funds and

Miscellaneous Provisions Act, 1952; or
(c) an employee employed for a period of less
than 240 days during the previous year. In
case of an assessee engaged in the business
of manufacturing of apparel or footwear or
leather products, an employee employed for a
period of less than 150 days during the
previous year; or
(e) an employee who does not participate in the
recognised provident fund.
Note – If an employee is employed during the
previous year for less than 240 days or 150 days,
as the case may be, but is employed for a period of
240 days or 150 days, as the case may be, in the
immediately succeeding year, he shall be deemed
to have been employed in the succeeding year.
Accordingly, the employer would be entitled to
deduction of 30% of additional employee cost of
such employees for three years from the
succeeding year.
(c) Emoluments any sum paid or payable to an employee in lieu of
his employment by whatever name called.
Exclusions from the definition:
(a) any contribution paid or payable by the
employer to any pension fund or provident fund
or any other fund for the benefit of the
employee under any law for the time being in
force; and
(b) any lump-sum payment paid or payable to an
employee at the time of termination of his
service or superannuation or voluntary
retirement, such as gratuity, severance pay,
leave encashment, voluntary retrenchment
benefits, commutation of pension and the like.

Note - Deduction u/s 80JJAA would be available to an assessee irrespective of the regime under
which such assessee pays tax.

ILLUSTRATION 18
Mr. Vikas has commenced the business of manufacture of computers on 1.4.2025. He employed
420 new employees during the P.Y.2025-26, the details of whom are as follows –

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No. of employees Date of Regular/Casual Total monthly emoluments

employment per employee (`)
(i) 75 1.4.2025 Regular 24,000
(ii) 125 1.5.2025 Regular 26,000
(iii) 120 1.7.2025 Casual 24,500
(iv) 100 1.9.2025 Regular 24,000

The regular employees participate in recognized provident fund while the casual employees do not.
Compute the deduction, if any, available to Mr. Vikas for A.Y.2026-27, if the profits and gains
derived from manufacture of computers that year is ` 90 lakhs and his total turnover is ` 11.48
crores.
What would be your answer if Mr. Vikas has commenced the business of manufacture of leather
products on 1.4.2025?
SOLUTION
Mr. Vikas is eligible for deduction under section 80JJAA since he is subject to tax audit under section
44AB for A.Y.2026-27, and he has employed “additional employees” during the P.Y.2025-26.
I. If Mr. Vikas is engaged in the business of manufacture of computers
Additional employee cost = ` 24,000 × 12 × 75 [See Working Note below] = ` 2,16,00,000
Deduction under section 80JJAA = 30% of ` 2,16,00,000 = ` 64,80,000.

Working Note:
Number of additional employees

Particulars No. of workmen

Total number of employees employed during the year 420
Less: Casual employees employed on 1.7.2025 who do not 120
participate in recognized provident fund
Regular employees employed on 1.5.2025, since their total 125
monthly emoluments exceed ` 25,000
Regular employees employed on 1.9.2025 since they have
been employed for less than 240 days in the P.Y.2025-26. 100 345
Number of “additional employees” 75

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Notes –
(i) Since casual employees do not participate in recognized provident fund, they do not
qualify as additional employees. Further, 125 regular employees employed on
1.5.2025 also do not qualify as additional employees since their monthly emoluments
exceed ` 25,000. Also, 100 regular employees employed on 1.9.2025 do not qualify
as additional employees for the P.Y.2025-26, since they are employed for less than
240 days in that year.
Therefore, only 75 employees employed on 1.4.2025 qualify as additional employees,
and the total emoluments paid or payable to them during the P.Y.2025-26 is deemed to
be the additional employee cost.
(ii) As regards 100 regular employees employed on 1.9.2025, they would be treated as
additional employees for previous year 2026-27, if they continue to be employees in
that year for a minimum period of 240 days. Accordingly, 30% of additional employee
cost in respect of such employees would be allowable as deduction under section
80JJAA in the hands of Mr. Vikas for the A.Y. 2027-28.
II. If Mr. Vikas is engaged in the business of manufacture of leather products
If Mr. Vikas is engaged in the business of manufacture of leather products, then, he would be
entitled to deduction under section 80JJAA in respect of employee cost of regular employees
employed on 1.9.2025, since they have been employed for more than 150 days in the
previous year 2025-26.

Additional employee cost = ` 2,16,00,000 + ` 24,000 × 7 × 100 = ` 3,84,00,000

Deduction under section 80JJAA = 30% of ` 3,84,00,000 = ` 1,15,20,000

(9) Deduction in respect of certain income of Offshore Banking Units and

International Financial Services Centre [Section 80LA]
(i) Eligible assessee:
This section is applicable to the following assessees -

(a) a scheduled bank having an Offshore Banking Unit in a SEZ; or

(b) any bank, incorporated by or under the laws of a country outside India, and having an
Offshore Banking Unit in a SEZ; or

(c) a Unit of an International Financial Services Centre (IFSC).

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(ii) Eligible income qualifying for deduction:

The deduction will be allowed on account of the following income included in the gross total
income of such assessees -
(a) income from an Offshore Banking Unit in a SEZ; or
(b) income from the business referred to in section 6(1) of the Banking Regulation Act,
1949, with -
(1) an undertaking located in a SEZ or
(2) any other undertaking which develops, develops and operates or develops,
operates and maintains a SEZ; or
(c) income from any Unit of the IFSC from its business for which it has been approved for
setting up in such a Centre in a SEZ; or
(d) income arising from the transfer of an asset, being an aircraft or a ship or a helicopter
or an engine of an aircraft or a helicopter, or any part thereof, which was leased by a
unit of an IFSC referred to in clause (c) to a person, subject to the condition that the
unit has commenced operation on or before 31.03.2030.
(iii) Quantum and period of deduction:
S. Eligible assessee Quantum and period Relevant previous year from
No. of deduction which deduction is allowed
(a) a scheduled bank having 100% of such income Beginning with the
an Offshore Banking Unit for 5 consecutive AYs. assessment year relevant to
in a SEZ, whose GTI Thereafter, 50% of the previous year in which
includes any income such income for the (1) the permission under
referred to in (ii) above next 5 consecutive section 23(1)(a) of the
(b) any bank, incorporated AYs. Banking Regulation
by or under the laws of a However, w.e.f. A.Y. Act, 1949 was
country outside India, 2023-24, such obtained; or
and having an Offshore deduction of 50% (2) the permission or
Banking Unit in a SEZ, available for next 5 registration under the
whose GTI includes any consecutive SEBI Act, 1992 was
income referred to in (ii) assessment years obtained; or
above has been enhanced to (3) the permission or
100% of such income. registration under the
(c) Unit of an International 100% of such income International Financial
Financial Services Centre for any 10 consecutive Services Centre
(IFSC), whose GTI AYs at the option of the Authority Act, 2019
includes any income assessee, out of 15 was obtained.
referred to in (ii) above years.

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(iv) Conditions:
The following conditions have to be fulfilled for claiming deduction under this section-
(a) The report of a Chartered Accountant in the prescribed form certifying that the
deduction has been correctly claimed in accordance with the provisions of this
section, should be submitted along with the return of income.
(b) A copy of the permission obtained under section 23(1)(a) of the Banking Regulation
Act, 1949 or copy of permission or registration obtained under the International
Financial Services Centre Authority Act, 2019 should also be furnished along with the
return of income.

(10) Deduction in respect of inter-corporate dividends [Section 80M]

(i) Eligible assessee: Deduction under this section would be allowable to a domestic company if its
gross total income includes in any previous year, any income by way of dividends received from
any other domestic company or foreign company or a business trust.
(ii) Quantum of deduction: In computing the total income of such domestic company, a
deduction of an amount equal to the amount of dividends received from other domestic
company or foreign company or business trust as does not exceed the amount of dividend
distributed by such domestic company on or before the due date.
In simple words, deduction under this section would be amount of dividend received from
other domestic company/foreign company/business trust or dividend distributed by the
domestic company, whichever is lower.

Example: X Ltd. a domestic company received dividend of ` 10 lakhs from “Y Ltd”, a

domestic company (100% subsidiary of X Ltd.) during the previous year 2025-26. On
15th May, 2026, X Ltd. declared and distributed dividend of ` 5 lakhs.

In this case, X Ltd. would be eligible for deduction under section 80M in respect of dividend
received from Y Ltd. to the extent of ` 5 lakhs, being the amount of dividend declared and
distributed by X Ltd. Hence, the deduction under section 80M would be ` 5 lakhs.
(iii) Meaning of due date: “Due date” means the date one month prior to the date for
furnishing the return of income under section 139(1).
(iv) No deduction: Where any deduction, in respect of the amount of dividend distributed by
the domestic company, has been allowed under this section in any previous year, no
deduction shall be allowed in respect of such amount in any other previous year.

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Note - Deduction u/s 80M would be available to Indian company irrespective of the regime under
which it pays tax.

(11) Deduction in respect of income of co-operative societies [Section 80P]

(i) Applicability:

Under this section, certain specified income of a co-operative society would be allowed as a
deduction, provided such income is included in the gross total income of the society.
(ii) Eligible income for deduction and quantum of deduction:

Deduction in respect of profit attributable to certain specified activities

100% deduction shall be allowed in respect of profits and gains attributable to any one or
more of the following activities to a co-operative society engaged in -
(1) carrying on the business of banking or providing credit facilities to its members; or
(2) a cottage industry; or
(3) the marketing of the agricultural produce grown by its members; or
(4) the purchase of agricultural implements, seeds, livestock or other articles intended for
agriculture or for the purpose of supplying them to its members; or
(5) the processing without the aid of power, of the agricultural produce of its members; or
(6) the collective disposal of the labour to its member; or
(7) fishing and other allied pursuits, such as catching, curing, processing, preserving,
storing and marketing of fish or the purchase of materials and equipment in
connection therewith for the purpose of supplying them to their members.
However, the exemption in respect of income referred to in (6) or (7) will be available
only in the case of those co-operative societies which, under their rules and by-laws,
restrict the voting rights to
(i) members who contribute their labour force or who actually carry on the fishing
or other allied activities,

(ii) the co-operative credit societies which provide financial assistance to the
society and
(iii) the State Government.

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Deduction in respect of profit of primary co-operative societies

100% of the profits and gains of the business would be allowed as deduction from the gross
total income of the co-operative society in case of a primary co-operative society engaged in
supplying milk, oilseeds, fruits or vegetables raised or grown by its members to –
- a federal co-operative society engaged in supplying milk, oilseeds, fruits or
vegetables, as the case may be, or
- the Government or a local authority or
- a Government company as defined in section 617 6 of the Companies Act, 1956 or a
corporation established by or under a Central, State or Provincial Act (engaged in
supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),
Deduction in respect of other activities
A co-operative society which is engaged in activities other than to those mentioned above
either independently of, or in addition to, all or any of the activities so specified, is eligible for
deduction upto ` 50,000 to the extent of its business income arising from other activities.
The limit is ` 1,00,000 in the case of consumer co-operative societies.
For this purpose, consumer co-operative society means a society for the benefit of the
consumers.
Deduction in respect of Interest or dividend income
Any income arising to a co-operative society by way of any interest and dividends derived
from its investments with any other co-operative society is deductible in full under this
section.
Deduction in respect of letting-out income for certain purpose
The income derived by a co-operative society from the letting out of godowns or warehouses
for storage, processing or facilitating the marketing of commodities is fully allowable as
deduction.
Deduction in respect of interest on securities and income from house property to
certain co-operative societies
Any income arising to a co-operative society by way of ‘Interest on securities’ or ‘Income
from house property’ (chargeable under section 22) is fully deductible under this section

6 As defined in section 2(45) of the Companies Act, 2013

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where the gross total income of the co-operative society does not exceed ` 20,000 and it is
not a housing society or an urban consumer’s society or a society carrying on transport
business or a society engaged in the performance of any manufacturing operations with the
aid of power. Thus, a majority of small co-operative societies would not have to pay any
income-tax.
(iii) Meaning of urban consumers’ co-operative society:

It means a society for the benefit of the consumers within the limits of a municipal
corporation, municipality, municipal committee, notified area committee, town area or
cantonment.

(iv) Deduction under other section of Chapter VI-A of the Act:

Where the co-operative society is also entitled to the deduction available under section 80-
IA, the deduction under this section shall be allowed with reference to the gross total income
as reduced by the deduction allowable under section 80-IA.

(v) Non-eligible co-operative societies:

Co-operative banks, other than primary agricultural credit societies (i.e. as defined in Part V
of the Banking Regulation Act, 1949) and primary co-operative agricultural and rural
development banks (i.e. societies having its area of operation confined to a taluk and the
principal object of which is to provide for long-term credit for agricultural and rural
development activities) are not eligible to claim deduction under section 80P. Moreover, the
CBDT has, vide Circular No. 6/2010 dated 20.9.2010 clarified that the Regional Rural Banks
are not eligible for deduction under section 80P.

However, co-operative societies engaged in providing credit facilities solely to its members
cannot be said to be a co-operative bank. Thus, such co-operative societies are eligible for
deduction under section 80P [PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari
Pathpedi Ltd. [2023] 454 ITR 117 (SC)].

Note - In case of co-operative societies, deduction under section 80P would not be available if they
opt for the special provisions u/s 115BAD/115BAE. In other words, deduction would be available
only if they pay tax under the normal provisions of the Act.

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(12) Deduction in respect of royalty income, etc., of authors of certain books other
than text books [Section 80QQB]
(i) Eligible assessee and Quantum of deduction: Under section 80QQB, deduction of up to a
maximum ` 3,00,000 is allowed to an individual resident in India, being an author including a
joint author in respect of income derived by him in the exercise of his profession i.e., the
deduction shall be the income derived as author or ` 3,00,000, whichever is less.

(ii) Eligible income:

(a) This income may be received either by way of a lumpsum consideration for the
assignment or grant of any of his interests in the copyright of any book.
(b) Such book should be a work of literary, artistic or scientific nature, or of royalties or
copyright fees (whether receivable in lump sum or otherwise) in respect of such book.

(c) This deduction shall not, however, be available in respect of royalty income from
brochures, commentaries, diaries, guides, journals, magazines, newspapers,
pamphlets, textbook for schools, tracts and other publications of similar nature.
Note - Where an assessee claims deduction under this section, no deduction in respect of
the same income may be claimed under any other provision of the Income-tax Act, 1961.

(iii) Manner of computation of deduction: For the purpose of calculating the deduction under
this section, the amount of eligible income (royalty or copyright fee received otherwise than
by way of lumpsum) before allowing expenses attributable to such income, shall not exceed
15% of the value of the books sold during the relevant previous year.
However, this condition is not applicable where the royalty or copyright fees is receivable in
lump sum in lieu of all rights of the author in the book.
(iv) Conditions:
(a) Furnishing of certificate in prescribed form: For claiming the deduction, the
assessee shall have to furnish a certificate in the prescribed manner in the prescribed
format, duly verified by the person responsible for making such payment, setting forth
such particulars as may be prescribed.
(b) Period for repatriation of income earned outside India: Where the assessee earns
any income from any source outside India, he should bring such income into India in
convertible foreign exchange within a period of six months from the end of the
previous year in which such income is earned or within such further period as the

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competent authority may allow in this behalf for the purpose of claiming deduction
under this section.

The competent authority shall mean the Reserve Bank of India or such other authority
as is authorised under any law for the time being in force for regulating payments and
dealings in foreign exchange.
Note - Deduction under section 80QQB would be available to an individual resident in India only if he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

ILLUSTRATION 19
Mr. Aakash earned royalty of ` 2,88,000 from a foreign country for a book authored by him, being a
work of literary nature. The rate of royalty is 18% of value of books. The expenditure incurred by
him for earning this royalty was ` 40,000. The amount remitted to India till 30th September, 2026 is
` 2,30,000. The remaining amount was not remitted till 31st March, 2027. Compute the amount
includible in the gross total income of Mr. Aakash and the amount of deduction which he will be
eligible for under section 80QQB if he has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).
SOLUTION
The net royalty of ` 2,48,000 (i.e., royalty of ` 2,88,000 less ` 40,000, being expenditure to earn
such income) is includible in gross total income. Deduction u/s 80QQB would be ` 1,90,000 as
calculated hereunder –
`
Deduction u/s 80QQB:
Royalty ` 2,88,000 x 15/18 = ` 2,40,000
Restricted to
Amount brought into India in convertible foreign exchange within the prescribed time 2,30,000
Less: Expenses already allowed as deduction while computing royalty income 40,000
Deduction u/s 80QQB 1,90,000

(13) Deduction in respect of royalty on patents [Section 80RRB]

(i) Eligible assessee: This deduction shall be available only to a resident individual who is
registered as the true and first inventor in respect of an invention under the Patents Act,
1970, including the co-owner of the patent and earning income by way of royalty of a patent
registered on or after 1.4.2003.

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(ii) Quantum of deduction: This section allows deduction to a resident individual in respect of
income by way of royalty of a patent registered on or after 1.4.03 up to an amount of
` 3 lakhs.
Note - No deduction in respect of such income will be allowed under any other provision of
the Income-tax Act, 1961

(iii) Eligible income: This deduction shall be restricted to the royalty income including consideration
for transfer of rights in the patent or for providing information for working or use of a patent, use of
a patent or the rendering of any services in connection with these activities.
The deduction shall not be available on any consideration for sale of product manufactured
with the use of the patented process or patented article for commercial use.
(iv) Conditions:
(a) In respect of any such income which is earned from sources outside India, the
deduction shall be restricted to such sum as is brought to India in convertible foreign
exchange within a period of 6 months or extended period as is allowed by the
competent authority (Reserve Bank of India).
(b) For claiming this deduction the assessee shall be required to furnish a certificate in the
prescribed form signed by the prescribed authority, alongwith the return of income.
(v) Rectification of assessment where patent is revoked subsequently: Where the patent is
subsequently revoked or the name of the assessee was excluded from the patents register
as patentee in respect of that patent, the deduction allowed during the period shall be
deemed to have been wrongly allowed and the assessment shall be rectified under the
provisions of section 155.
The period of 4 years for rectification shall be reckoned from the end of the previous year in
which the order of the revocation of the patent is passed.

Note - Deduction under section 80RRB would be available to an individual resident in India only if
he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

8.4 DEDUCTIONS IN RESPECT OF OTHER INCOME

(1) Deduction in respect of interest on deposits in savings accounts
[Section 80TTA]
(i) Eligible assessee and Quantum of deduction: Section 80TTA provides that in case the
gross total income of an assessee, being an individual or a Hindu Undivided Family, includes
any income by way of an interest on deposits in a saving account (not being time deposits,

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which are deposits repayable on expiry of fixed periods), deduction upto ` 10,000 in
aggregate shall be allowed while computing the total income of such assessee. Such
deduction shall be allowed in case the saving account is maintained with:
(a) a banking company to which the Banking Regulation Act, 1949, applies (including any
bank or banking institution referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank); or
(c) a post office.

Note - Deduction under this section would, however, not be available to a senior citizen
eligible for deduction under section 80TTB.

(ii) Restriction: If the aforesaid income is derived from any deposit in a savings account held
by, or on behalf of, a firm, an AOP/BOI, no deduction shall be allowed in respect of such
income in computing the total income of any partner of the firm or any member of the AOP or
any individual of the BOI.
In effect, the deduction under this section shall be allowed only in respect of the income
derived in form of the interest on the saving bank deposit (other than time deposits) made by
the individual or Hindu Undivided Family directly.

Note - Deduction under section 80TTA would be available to an individual/HUF only if he/it
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

(2) Deduction in respect of interest on deposits in case of senior citizens

[Section 80TTB]
(i) Eligible assessee: A senior citizen (a resident individual who is of the age of 60 years or
more at any time during the relevant previous year), whose gross total income includes
income by way of interest on deposits (both fixed deposits and saving accounts) with –

(a) a banking company to which Banking Regulation Act, 1949 applies

(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank)

(c) a Post Office.

(ii) Quantum of deduction: Actual amount of interest on deposits or ` 50,000, whichever is lower.

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(iii) Non-availability of deduction to partner/member, where deposit held by firm/AOP/BOI:

Where interest income is derived from any deposit held by, or on behalf of, a firm, an AOP or
a BOI, the partner of the firm or member of AOP/BOI would not be allowed deduction in
respect of such income while computing their total income.

Note - Deduction under section 80TTB would be available an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).

ILLUSTRATION 20

Mr. Shivpal, a resident individual aged about 64 years, has earned business income (computed) of
` 1,40,000, lottery income of ` 1,60,000 (gross) during the P.Y. 2025-26. He also has interest on
Fixed Deposit of ` 51,000 with banks. He invested an amount of ` 1,50,000 in Public Provident
Fund account. What is the total income of Mr. Shivpal for the A.Y.2026-27 if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A)?
SOLUTION
Computation of total income of Mr. Shivpal for A.Y.2026-27
Particulars ` `
Profits and gains of business or profession 1,40,000
Income from other sources
- Interest on Fixed Deposit with banks 51,000
- lottery income 1,60,000
Gross Total Income 3,51,000
Less: Deductions under Chapter VIA [See Note below]
Under section 80C
- Deposit in Public Provident Fund 1,50,000
Under section 80TTB
- Interest on fixed deposits with banks, allowable as 50,000
deduction to the extent of
2,00,000
Restricted to 1,91,000
Total Income 1,60,000
Note: In case of resident individuals of the age of 60 years or more, interest on bank fixed deposits
qualifies for deduction upto ` 50,000 under section 80TTB.

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Though the aggregate of deductions under Chapter VI-A is ` 2,00,000, however, the maximum
permissible deduction cannot exceed the gross total income exclusive of long term capital gains
taxable under section 112 and section 112A, short-term capital gains covered under section 111A
and winnings from lotteries of the assessee.
Therefore, the maximum permissible deduction under Chapter VI-A = ` 3,51,000 – ` 1,60,000
= ` 1,91,000.

8.5 OTHER DEDUCTIONS

Deduction in the case of a person with disability [Section 80U]
(1) Section 80U harmonizes the criteria for defining disability as existing under the Income-tax
Rules with the criteria prescribed under the Persons with Disability (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995.
(2) Eligible assessee: This section is applicable to a resident individual, who, at any time
during the previous year, is certified by the medical authority to be a person with disability.
The benefit of deduction under this section has also been extended to persons suffering from
autism, cerebral palsy and multiple disabilities.
(3) Quantum of deduction: A deduction of ` 75,000 in respect of a person with disability and
` 1,25,000 in respect of a person with severe disability (having disability over 80%) is
allowable under this section.
(4) Conditions:
(a) The assessee claiming a deduction under this section shall furnish a copy of the
certificate issued by the medical authority in the form and manner, as may be
prescribed, along with the return of income under section 139, in respect of the
assessment year for which the deduction is claimed.
(b) Where the condition of disability requires reassessment, a fresh certificate from the
medical authority shall have to be obtained after the expiry of the period mentioned on
the original certificate in order to continue to claim the deduction.

Note - Deduction under section 80U would be available to an individual only if he exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).

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8.6 DEDUCTION UNDER SECTION 10AA

A deduction of profits and gains which are derived by an assessee being an entrepreneur from the
export of articles or things or providing any service, shall be allowed from the total income of the
assessee.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction would be available only if such person has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A). The deduction would be
available only under the optional tax regime, where they pay tax under the normal provisions of the
Act.
In case of companies and co-operative societies, deduction would not be available if they opt for the
special provisions u/s 115BAA/ 115BAB and section 115BAD/ 115BAE, respectively. The deduction
would be available if they pay tax under the normal provisions of the Act.

(1) Assessees who are eligible for deduction

Deduction is available to all categories of assessees who derive any profits or gains from an
undertaking, being a unit, engaged in the manufacturing or production of articles or things or
things or provision any service. Such assessee should be an entrepreneur referred to in
section 2(j) of the SEZ Act, 2005 i.e., a person who has been granted a letter of approval by
the Development Commissioner under section 15(9) of the said Act.

(2) Essential conditions to claim deduction

The deduction would be available to an undertaking which fulfils the following conditions:
(i) It has begun to manufacture or produce articles or things or provide any service in
any SEZ during the previous year relevant to A.Y.2006-07 or any subsequent
assessment year but not later than A.Y.2020-21.

However, in case where letter of approval, required to be issued in accordance with

the provisions of the SEZ Act, 2005, has been issued on or before 31st March, 2020
and the manufacture or production of articles or things or providing services has not
begun on or before 31st March, 2020 then, the date for manufacture or production of
articles or things or providing services has been extended to 31st March, 2021 or such
other date after 31st March, 2021, as notified by the Central Government.
Example: If SEZ unit has received the necessary approval by 31.3.2020 and
begins manufacture or production of articles or things or providing services on or

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before 31st March, 2021, then it would be deemed to have begun manufacture or
production of articles or things or providing services during the A.Y. 2020-21 and
would be eligible for exemption under section 10AA. [The Taxation and Other Laws
(Relaxation and Amendment of Certain Provisions) Act, 2020]

(ii) The assessee should furnish in the prescribed form, before the date specified in
section 44AB i.e., one month prior to the due date for furnishing return of income u/s
139(1), the report of a chartered accountant certifying that the deduction has been
correctly claimed.
(iii) No deduction under section 10AA would be allowed to an assessee who does not
furnish a return of income on or before the due date specified u/s 139(1).

Example: An individual, subject to tax audit u/s 44AB, claiming deduction u/s 10AA is
required to furnish return of income on or before 31.10.2026 for A.Y. 2026-27 and the
report of a chartered accountant before 30.9.2026, certifying the deduction claimed
u/s 10AA.

(iv) Deduction under section 10AA would be available to a Unit, if the proceeds from sale
of goods or provision of services is received in, or brought into, India by the assessee
in convertible foreign exchange, within a period of 6 months from the end of the
previous year or, within such further period as the competent authority may allow in
this behalf.
The export proceeds from sale of goods or provision of services shall be deemed to
have been received in India where such export turnover is credited to a separate
account maintained for that purpose by the assessee with any bank outside India with
the approval of the Reserve Bank of India.
Meaning of Competent authority – Competent authority means RBI or such
authority as is authorized under any law for the time being in force for regulating
payments and dealings in foreign exchange.

(3) Period for which deduction is available

The unit of an entrepreneur, which begins to manufacture or produce any article or thing or
provide any service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:

(i) 100% of the profits and gains derived from the export, of such articles or things or
from services for a period of 5 consecutive assessment years beginning with the

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assessment year relevant to the previous year in which the Unit begins to
manufacture or produce such articles or things or provide services, and

(ii) 50% of such profits and gains for further 5 assessment years.
(iii) so much of the amount not exceeding 50% of the profit as is debited to the profit and
loss account of the previous year in respect of which the deduction is to be allowed
and credited to a reserve account (to be called the "Special Economic Zone Re-
investment Reserve Account") to be created and utilised in the manner laid down
under section 10AA(2) for next 5 consecutive years.
However, Explanation below section 10AA(1) has been inserted to clarify that amount of
deduction under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act before giving effect to the provisions
of this section and the deduction under section 10AA shall not exceed such total income of
the assessee.

Example: An undertaking is set up in a SEZ and begins manufacturing on 15.10.2011. The

deduction under section 10AA shall be allowed as under:

(a) 100% of profits of such undertaking from exports from A.Y.2012-13 to A.Y.2016-17.
(b) 50% of profits of such undertaking from exports from A.Y.2017-18 to A.Y. 2021-22.
(c) 50% of profits of such undertaking from exports from A.Y.2022-23 to A.Y.2026-27
provided certain conditions are satisfied.

(4) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years)
[Section 10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the
following conditions are fulfilled, namely:-

(i) the amount credited to the Special Economic Zone Re-investment Reserve Account is
utilized -

(1) for the purposes of acquiring machinery or plant which is first put to use before
the expiry of a period of three years following the previous year in which the
reserve was created; and

(2) until the acquisition of the machinery or plant as aforesaid, for the purposes of
the business of the undertaking. However, it should not be utilized for

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(i) distribution by way of dividends or profits; or

(ii) for remittance outside India as profits; or

(iii) for the creation of any asset outside India;

(ii) the particulars, as may be specified by the CBDT in this behalf, have been furnished
by the assessee in respect of machinery or plant. Such particulars include details of
the new plant/ machinery, name and address of the supplier of the new plant/
machinery, date of acquisition and date on which new plant/machinery was first put to
use. Such particulars have to be furnished along with the return of income for the
assessment year relevant to the previous year in which such plant or machinery was
first put to use.

(5) Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]

Where any amount credited to the Special Economic Zone Re-investment Reserve Account -

(i) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount
was so utilised and charged to tax accordingly; or

(ii) has not been utilised before the expiry of the said period of 3 years, the amount not
so utilised, shall be deemed to be the profits in the year immediately following the said
period of three years and be charged to tax accordingly.
(6) Computation of profit and gains from exports of such undertakings
The profits derived from export of articles or things or services (including computer software)
shall be the amount which bears to the profits of the business of the undertaking, being the
unit, the same proportion as the export turnover in respect of such articles or things or
computer software bears to the total turnover of the business carried on by the undertaking
i.e.
Export turnover of Unit SEZ
Profits of Unit in SEZ x
Total turnover of Unit SEZ
Clarification on issues relating to export of computer software
Section 10AA provides deduction to assessees who derive any profits and gains from export
of articles or things or services (including computer software) from the year in which the Unit

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begins to manufacture or produce such articles or things or provide services, as the case
may be, subject to fulfillment of the prescribed conditions. The profits and gains derived from
the on site development of computer software (including services for development of
software) outside India shall be deemed to be the profits and gains derived from the export
of computer software outside India.
Meaning of Export turnover: It means the consideration in respect of export by the
undertaking, being the unit of articles or things or services received in India or brought into
India by the assessee in convertible foreign exchange within 6 months from the end of the
previous year or within such further period as the competent authority may allow in this
behalf.
However, it does not include
 freight
 telecommunication charges
 insurance
attributable to the delivery of the articles or things outside India or expenses incurred in
foreign exchange in rendering of services (including computer software) outside India

Computation of admissible deduction u/s 10AA of the Income-tax Act, 1961 [Circular
No. 4/2018, Dated 14-8-2018]
As per the provisions of section 10AA(7), the profits derived from export of articles or things
or services (including computer software) shall be the amount which bears to the profits of
the business of the undertaking, being the Unit, the same proportion as the export turnover
in respect of such articles or things or services bears to the total turnover of the business
carried on by the undertaking.
Further as per clause (ia) to Explanation 1 to section 10AA, "export turnover" means the
consideration in respect of export by the undertaking, being the unit of articles or things or
services received in India or brought into India by the assessee in convertible foreign
exchange within 6 months from the end of the previous year or within such further period as
the competent authority may allow in this behalf, but does not include freight,
telecommunication charges or insurance attributable to the delivery of the articles or things
outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India.
The issue of whether freight, telecommunication charges and insurance expenses are to be
excluded from both "export turnover"' and "total turnover' while working out deduction

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admissible under section 10AA on the ground that they are attributable to delivery of articles
or things outside India has been highly contentious. Similarly, the issue whether charges for
rendering services outside India are to be excluded both from "export turnover" and "total
turnover" while computing deduction admissible under section 10AA on the ground that such
charges are relatable towards expenses incurred in convertible foreign exchange in
rendering services outside India has also been highly contentious.
The controversy has been finally settled by the Hon'ble Supreme Court vide its judgment
dated 24.4.2018 in the case of Commissioner of Income Tax, Central-III Vs. M/s HCL
Technologies Ltd. (CA No. 8489-8490 of 2013, NJRS Citation 2018-LL-0424-40), in relation
to section 10A.
The issue had been examined by CBDT and it is clarified, in line with the above decision of
the Supreme Court, that freight, telecommunication charges and insurance expenses
are to be excluded both from "export turnover" and "total turnover', while working out
deduction admissible under section 10AA to the extent they are attributable to the
delivery of articles or things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India
are to be excluded from both "export turnover" and "total turnover" while computing
deduction admissible under section 10AA.
Note: Though this CBDT Circular is issued in relation to erstwhile section 10A, the same is
also relevant in the context of section 10AA. Accordingly, the reference to section 10A in the
Circular and the relevant sub-section and Explanation number thereto have been modified
and given with reference to section 10AA and the corresponding sub-sections, Explanation
number and clause of Explanation.

(7) Restriction on other tax benefits

(i) During the period of deduction, depreciation is deemed to have been allowed on the
assets. Written Down Value shall accordingly be reduced.
(iii) No deduction under section 80-IA and 80-IB shall be allowed in relation to the profits
and gains of the undertaking.
(iv) Any unabsorbed depreciation under section 32(2) or business loss under section
72(1) or loss under the head “Capital gains” under section 74 of the undertaking,
being the Unit shall be allowed to be carried forward or set off.
(v) The conditions laid down in section 80-IA(8) (relating to inter-unit transfer) and in
section 80-IA(10) (relating to showing excess profit from such unit) shall, so far as

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may be, apply in relation to the undertaking referred to in this section as they apply for
the purposes of the undertaking referred to in section 80-IA.

Conditions laid down in section 80-IA(8): Where any goods or services held for the
purposes of eligible business are transferred to any other business carried on by the
assessee, or where any goods or service held for any other business carried on by
the assessee are transferred to the eligible business and, in either case, if the
consideration for such transfer as recorded in the accounts of the eligible business
does not correspond to the market value thereof, then the profits eligible for deduction
shall be computed by adopting market value of such goods or services on the date of
transfer.
In case of exceptional difficulty in this regard, the profits shall be computed by the
Assessing Officer on a reasonable basis as he may deem fit.
Conditions laid down in section 80-IA(10): Where due to the close connection
between the assessee and the other person or for any other reason, it appears to the
Assessing Officer that the profits of eligible business is increased to more than the
ordinary profits, the Assessing Officer shall compute the amount of profits of such
eligible business on a reasonable basis for allowing the deduction.
(vii) Where a deduction under this section is claimed and allowed in relation to any
specified business eligible for investment-linked deduction under section 35AD, no
deduction shall be allowed under section 35AD in relation to such specified business
for the same or any other assessment year.
(8) Deduction allowable in case of amalgamation and demerger
In the event of any undertaking, being the Unit which is entitled to deduction under this
section, being transferred, before the expiry of the period specified in this section, to another
undertaking, being the Unit in a scheme of amalgamation or demerger, -
(i) no deduction shall be admissible under this section to the amalgamating or the
demerged Unit for the previous year in which the amalgamation or the demerger takes
place; and
(ii) the provisions of this section would apply to the amalgamated or resulting Unit, as
they would have applied to the amalgamating or the demerged Unit had the
amalgamation or demerger had not taken place.

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Circular No. 1/2013, dated 17.01.2013 provides certain clarifications in respect of following issues
arising out of the said provisions:

Issue Clarification given by the CBDT

(1) Would “On-site” The software developed abroad at a client’s place would be
development of eligible for such benefit, because these would amount to
computer software ‘deemed export’. However, it is necessary that there must exist
qualify as an export a direct and intimate nexus or connection of development of
activity for tax benefit software done abroad with the eligible units set up in India and
under section 10AA? such development of software should be pursuant to a contract
between the client and the eligible unit.
(2) Would receipts from Explanation 2 to section 10AA clarifies that profits and gains
deputation of technical derived from ‘services for development of software’ outside
manpower for such “On- India would also be deemed as profits derived from export.
site” software Therefore, profits earned as a result of deployment of technical
development abroad at manpower at the client’s place abroad specifically for software
the client’s place be development work pursuant to a contract between the client
eligible for deduction and the eligible unit should not be denied benefit under section
under section 10AA? 10AA provided such deputation of manpower is for the
development of such software and all the prescribed
conditions are fulfilled.

(3) Is it necessary to have As per the practice prevalent in the software development
separate master service industry, generally two types of agreement are entered into
agreement (MSA) for between the Indian software developer and the foreign client.
each work contract? Master Services Agreement (MSA) is an initial general
agreement between a foreign client and the Indian software
developer setting out the broad and general terms and
conditions of business under the umbrella of which specific
and individual Statement of Works (SOW) are formed. These
SOWs, in fact, enumerate the specific scope and nature of the
particular task or project that has to be rendered by a
particular unit under the overall ambit of the MSA. Clarification
has been sought whether more than one SOW can be
executed under the ambit of a particular MSA and whether
SOW should be given precedence over MSA.
It is clarified that the tax benefits under section 10AA would
not be denied merely on the ground that a separate and
specific MSA does not exist for each SOW. The SOW would
normally prevail over the MSA in determining the eligibility for
tax benefits unless the Assessing Officer is able to establish
that there has been splitting up or reconstruction of an existing
business or non-fulfillment of any other prescribed condition.

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(4) Would tax benefit under The answer to this issue would depend on the facts of each
section 10AA continue to case, such as how a slump-sale is made and what is its
be available in case of a nature. It will also be important to ensure that the slump sale
slump sale of a unit? would not result into any splitting or reconstruction of existing
business.
It is, however, clarified that on the sole ground of change in
ownership of an undertaking, the claim of exemption cannot be
denied to an otherwise eligible undertaking and the tax holiday
can be availed of for the unexpired period at the rates as
applicable for the remaining years, subject to fulfillment of
prescribed conditions.
(5) Can tax benefits under It is clarified that the tax holiday should not be denied merely
section 10AA be enjoyed on the ground of physical relocation of an eligible SEZ unit
by an eligible SEZ unit from one SEZ to another in accordance with Instruction No. 59
consequent to its of Department of Commerce, if all the prescribed conditions
transfer to another SEZ? are satisfied under the Income-tax Act, 1961.
It is further clarified that the unit so relocated will be eligible to
avail of the tax benefit for the unexpired period at the rates
applicable to such years.

ILLUSTRATION 21
ABC Ltd. furnishes you the following information for the year ended 31.3.2026:

Particulars ` (in lakhs)

Total turnover of Unit A located in Special Economic Zone 120
Profit of the business of Unit A 45
Export turnover of Unit A received in India in convertible foreign exchange on 60
or before 30.9.2026
Total turnover of Unit B located in Domestic Tariff Area (DTA) 225
Profit of the business of Unit B 25

Compute deduction under section 10AA for the A.Y. 2026-27, assuming that ABC Ltd. commenced
operations in SEZ and DTA in the year 2019-20.
SOLUTION

50% of the profit derived from export of articles or things or services is eligible for deduction under
section 10AA, since F.Y.2025-26 is the seventh year commencing from the year of manufacture or
production of articles or things or provision of services by the Unit in SEZ. As per section 10AA(7),

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the profit derived from export of articles or things or services shall be the amount which bears to the
profits of the business of the undertaking, being the Unit, the same proportion as the export
turnover in respect of articles or things or services bears to the total turnover of the business
carried on by the undertaking.

Deduction under section 10AA

Export Turnover of Unit A
= Profit of the business of Unit A x x 50%
Total Turnover of Unit A

`45 lakhs X ` 60 lakhs X 50% = ` 11.25 lakhs

` 120 lakhs

Note – No deduction under section 10AA is allowable in respect of profits of business of Unit B
located in DTA.

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SIGNIFICANT SELECT CASES

S. Case Law
No.
1. CIT v. Reliance Energy Ltd. (2022) 441 ITR 346 (SC)
Issue Analysis & Decision
Does profit-linked For the purpose of calculating profit-linked deduction under any
deduction under section of Chapter VI-A, loss sustained in other divisions or units
Chapter VI-A have to cannot be taken into account, as only profits from the eligible
be restricted to income business have to be taken into account as if it was the only source
computed under the of income. Profits and gains from eligible business cannot be
head “Profits and gains reduced by the loss suffered in any other business owned by the
of business or assessee for consideration of deduction, inter alia, under section
profession”? 80-IA.
The deduction admissible under section 80-IA could not be limited
to income under the head “Profits and gains of business or
profession”, by setting-off losses from non-eligible business against
profits from eligible business.
Note – The issue arises in a case where loss from non-eligible
business is being set-off against profits from eligible business,
which results in income under the head “Profits and gains of
business and profession” being lower than the profits from eligible
business. In such a case, deduction under Chapter VI-A in respect
of profits from eligible business would not be restricted to income
computed under the head “Profits and gains of business and
profession”. The same would however be restricted to gross total
income as per the requirement in section 80A(2).
For example, let us take the case of XYZ Ltd., an Indian company,
for P.Y.2025-26. The following are the particulars relating to the
said company –
(i) Profits from eligible business - ` 90 lakhs,
(ii) Loss from non-eligible business - ` 20 lakhs (which is set-off
against profits from eligible business)
(iii) Income under the head “Profits and gains of business or
profession” – ` 70 lakhs [` 90 lakhs – ` 20 lakhs]
(iv) Income from Other Sources, comprising of interest income -
` 15 lakhs
(v) Gross total income – ` 85 lakhs
In this case, assuming deduction under section 80-IA is the only
deduction under Chapter VI-A for XYZ Ltd., the same would not be
restricted to ` 70 lakhs (being the income under the head “Profits

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and gains of business or profession”). However, the same would be

restricted to ` 85 lakhs, being the gross total income as per the
requirement in section 80A(2).
If, in the above example, the gross total income was ` 95 lakhs
(instead of ` 85 lakhs), then, the entire profits of ` 90 lakhs from
eligible business would be allowed as deduction u/s 80-IA.
2. CIT v. Container Corporation of India Limited (2018) 404 ITR 397 (SC)
Issue Analysis & Decision
Can Inland Container Inland Container Depots function for the benefit of exporters and
Depots (ICDs) be importers located in industrial centres which are situated at distance
treated as from sea ports. The purpose of establishing them was to promote the
infrastructure facility, export and import in the country as these depots act as a facilitator
for profits derived and reduce inconvenience to the exporter or importer.
therefrom to be eligible Section 80-IA provides for a deduction of profits derived from
for deduction u/s 80- operation of an infrastructure facility. The definition of “infrastructure
IA? facility” in Explanation to section 80-IA(4)(i) includes an inland port.
Considering the nature of work such as custom clearance carried
out at inland container depots, it can be considered as an inland
port within the meaning of section 80-IA(4).
3. CIT v. Meghalaya Steels Ltd (2016) 383 ITR 217 (SC)
Issue Analysis & Decision
Can transport subsidy, There is a direct nexus between profits and gains of the undertaking or
interest subsidy and business, and reimbursement of such subsidies. Transport subsidy,
power subsidy interest subsidy and power subsidy from Government were revenue
received from the receipts which were reimbursed to the assessee for elements of cost
Government be treated relating to manufacture or sale of their products. Thus, the subsidies
as profits “derived were only in order to reimburse, wholly or partially, costs actually
from” business or incurred by the assessee in the manufacturing and selling of its
undertaking to qualify products.
for deduction u/s 80- Accordingly, these subsidies qualify for deduction u/s 80-IE.
IE?
Note – Though this decision was in relation to deduction under section
80-IB, presently, it is relevant in the context of section 80-IE.
4. CIT v. Orchev Pharma P. Ltd. (2013) 354 ITR 227 (SC) [Liberty India v. CIT (2009) 317
ITR 218 (SC) followed]
Issue Analysis & Decision
Can Duty Drawback be DEPB / Duty drawback are incentives which flow from the schemes
treated as profit framed by the Central Government or from section 75 of the Customs
derived from the Act, 1962. Section 80-IE provides for allowing of deduction in respect
business of the eligible of profits and gains derived by undertaking from business mentioned

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business to be eligible therein. However, incentive profits are not profits derived from eligible
for deduction u/s 80- business u/s 80-IE. They belong to the category of ancillary profits of
IE? such undertaking. Profits derived by way of incentives such as
DEPB/Duty drawback cannot be credited against the cost of
manufacture of goods debited in the statement of profit and loss and
they do not fall within the expression "profits derived from undertaking
from manufacturing" u/s 80-IE. Hence, Duty drawback receipts and
DEPB benefits do not form part of the profits derived by
undertaking from manufacturing business for the purpose of the
deduction u/s 80-IE.
Note – Though this decision was in relation to deduction under section
80-IB, presently, it is relevant in the context of section 80-IE.
5. CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012) 349 ITR 245 (Kar.)
Issue Analysis & Decision
Can unabsorbed The deeming provision contained in section 80-IA(5) cannot
depreciation of a override the provisions of section 70(1). The assessee had
business of an incurred loss in eligible business after claiming depreciation.
industrial undertaking Hence, section 80-IA becomes insignificant, since there is no profit
eligible for deduction from which this deduction can be claimed. It is thereafter that
u/s 80-IA be set off section 70(1) comes into play, whereby the assessee is entitled to
against income of set off the losses from one source against income from another
another non-eligible source under the same head of income. Therefore, the assessee
business of the was entitled to the benefit of set off of loss of eligible
assessee? business against the profits of non-eligible business.
However, once set-off is allowed u/s 70(1) against income from
another source under the same head, a deduction to such extent is
not possible in any subsequent assessment year i.e., the loss
(arising on account of balance depreciation of eligible business) so
set-off u/s 70(1) has to be first deducted while computing profits
eligible for deduction u/s 80-IA in the subsequent year.
6. CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630 (Bom)
Issue Decision
Is the increase in The assessee is entitled to claim deduction u/s 80-IBA in respect of
gross total income the enhanced gross total income as a consequence of
consequent to disallowance of expenditure u/s 40(a)(ia).
disallowance u/s Note - The CBDT has, in its Circular No.37/2016 dated 2.11.2016,
40(a)(ia) eligible for mentioned that the courts have generally held that if the
profit-linked deduction expenditure disallowed is related to the business activity against
under Chapter VI-A? which the Chapter VI-A deduction has been claimed, the deduction
needs to be allowed on the enhanced profits. Thus, the settled
position is that the disallowances made under sections 32,

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40(a)(ia), 40A(3), 43B, etc. and other specific disallowances,

relating to the business activity against which the Chapter VI-A
deduction has been claimed, result in enhancement of the profits of
the eligible business, and that deduction under Chapter VI-A is
admissible on the profits so enhanced on account of such
disallowance.
7. CIT v. Nestor Pharmaceuticals Ltd. / Sidwal Refrigerations Ind Ltd. v. DCIT (2010) 322
ITR 631 (Delhi)
Issue Analysis & Decision
Does the period of The assessee had started trial production in March 2015 whereas
exemption u/s 80-IE commercial production started only in April, 2015. With mere trial
commence from the production, the manufacture for the purpose of marketing the
year of trial production goods had not started which starts only with commercial
or year of commercial production, namely, when the final product to the satisfaction of the
production? Would it manufacturer has been brought into existence and is fit for
make a difference if marketing. However, in this case, since the assessee had effected
sale was effected from sale in March 2015, it had crossed the stage of trial production and
out of the trial the final saleable product had been manufactured and sold. The
production? quantum of commercial sale and the purpose of sale (namely, to
obtain registration of excise / sales-tax) is not material. With the
sale of those articles, marketable quality was established.
Therefore, the conditions stipulated in section 80-IE were fulfilled
with the commercial sale of the two items in that assessment year,
and hence the ten year period has to be reckoned from
A.Y.2015-16.
Note – Though this decision was in relation to deduction under
section 80-IA, as it stood prior to its substitution by the Finance
Act, 1999 w.e.f. 1.4.2000, presently, it is relevant in the context of
section 80-IE.
8. CIT v. Chetak Enterprises Pvt. Ltd. [2020] 423 ITR 267 (SC)
Issue Analysis & Decision
Can an agreement Section 80-IA(4)(i) requires that the assessee must be an
entered into by a firm enterprise carrying on business of (i) developing, (ii) maintaining
with a State and operating or (iii) developing, maintaining and operating any
Government and work infrastructure facility, which enterprise is owned by a company
done in pursuance registered in India fulfilling the conditions mentioned in sub-clauses
thereof survive upon (a) to (c) thereunder. Sub-clause (a) requires that the enterprise
its conversion into a should be owned by a company registered in India. Sub-clause (b)
company and be requires that the enterprise should have entered into an agreement
considered compliant with the Central Government or State Government or local
with sub-clauses (a) authority or any other statutory body for developing, operating and
and (b) of section 80- maintaining or developing, operating and maintaining a new

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IA(4)(i), to qualify for infrastructure facility. Sub-clause (c) requires that the enterprise
deduction thereunder? should start operating and maintaining infrastructure facility on or
after 1.4.1995.
The assessee-company Memorandum of Association states that its
main object was to acquire as a going concern, and continue the
business carried on by the firm. The effect of conversion of the firm
into a company was that all the properties of the firm, in law,
vested in the company and the firm ceased to exist and assumed
the status of a company after its registration as a company.
Accordingly, the assessee-company is qualified for the deduction
under section 80-IA being an enterprise carrying on the stated
business pertaining to infrastructure facility and owned by a
company registered in India on the basis of the agreement
executed with the State Government to which the assessee-
company has succeeded in law after conversion of the partnership
firm into a company.
9. Praveen Soni v. CIT (2011) 333 ITR 324 (Delhi)
Issue Analysis & Decision
Can an assessee who On this issue, the Delhi High Court held that the provisions of section
has not claimed 80-IE nowhere stipulated a condition that the claim for deduction under
deduction under this section had to be made from the first year of qualification of
section 80-IE in the deduction failing which the claim will not be allowed in the remaining
initial years, start years of eligibility. Therefore, the deduction under section 80-IE should
claiming deduction be allowed to the assessee for the remaining years up to the period for
thereunder for the which his entitlement would accrue, provided the conditions mentioned
remaining years during under section 80-IE are fulfilled.
the period of eligibility, Note – Though this decision was in relation to deduction under section
if the conditions are 80-IB, presently, it is relevant in the context of section 80-IE.
satisfied?
10. PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd. [2023] 454 ITR 117
(SC)
Issue Analysis & Decision
Would a co-operative Merely because a co-operative society gives credit to its members,
society engaged in it cannot be said to be a co-operative bank under the Banking
providing credit Regulation Act, 1949. Banking activities under that Act are
facilities solely to its altogether different activities. There is a vast difference between
members be eligible credit societies giving credit to their own members only and banks
for deduction under providing banking services including the credit to the public at large
section 80P? also.
Considering the CBDT Circulars and the definition of bank under
the Banking Regulation Act, the assessee cannot be said to be a

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co-operative bank/bank, and, therefore, section 80P(4) denying

benefit of deduction to a co-operative bank would not be applicable
in this case.
Accordingly, the assessee could not be termed as a bank or
cooperative bank. Being a credit society, it is entitled to deduction
under section 80P.
11. CIT v. Cognizant Technology Solutions of India Pvt. Ltd. [2023] 454 ITR 1 (SC)
Issue Analysis & Decision
Is deduction under In order to avail deduction under section 10AA, benefit earned by
section 10AA available the assessee derived by virtue of export made by the assessee is
in respect of foreign considered. The exchange value based on upward or downward of
exchange gain solely the rupee value is not in the hands of the assessee. The assessee
relating to the export does not determine the exchange value of the Indian rupee. But for
business of the the fact that, the assessee is an export house, there was no
assessee? question of earning any foreign exchange.
Therefore, when the fluctuation in foreign exchange rate was solely
relatable to the export business of the assessee and the higher
rupee value was earned by virtue of such exports carried out by the
assessee, the deduction under section 10AA would be available in
respect of such foreign exchange gains.
12 CIT v. HCL Technologies Limited (2018) 404 ITR 719 (SC)
Issue Analysis & Decision
Can expenditure Deduction u/s 10AA is based on the profit from export business,
incurred in foreign thus, expenses excluded from “export turnover” must also be
exchange for provision excluded from “total turnover”, since one of the components of
of technical services “total turnover” is export turnover. Expenses incurred in foreign
outside India, which is exchange for providing the technical services outside are thus, to
deductible for be excluded from total turnover also.
computing export If deductions in respect of freight, telecommunication charges and
turnover, be excluded insurance attributable to delivery of articles, things etc. or
from total turnover also expenditure incurred in foreign exchange in rendering of services
for the purpose of outside India are allowed only against export turnover but not from
computing deduction the total turnover for computing deduction u/s 10AA, then, it would
u/s 10AA? give rise to inadvertent, unlawful, meaningless and illogical results
causing grave injustice, which could have never have been the
intent of the Legislature. Hence, such expenditure incurred in
foreign exchange for providing technical services outside
India is deductible from total turnover also.

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TEST YOUR KNOWLEDGE

Questions
1. Mr. Srinivasan, aged 61 years, furnishes the following particulars for the year ending
31.03.2026:

(a) Life Insurance Premium paid – ` 15,000, actual capital sum of the policy assured for
` 2,30,000. The insurance policy was taken on 31.03.2012;
(b) Contribution to Public Provident Fund – ` 40,000 in the name of father;

(e) Tuition fee payment – ` 8,000 each for 2 sons pursuing full time graduation course in
Calcutta; Tuition fee for daughter pursuing PHD in Kellogg University, USA – ` 2.50
lakhs;
(d) Housing loan principal repayment – ` 32,000 to Axis Bank. This property is under
construction at Calcutta as on 31.03.2026;
(e) Principal repayment of housing loan taken from a relative – ` 70,000. The property is
self-occupied situated at Pune;
(f) Deposit under Senior Citizens Savings Scheme – ` 15,000;
(g) Five-year deposits in an account under Post Office Time Deposit Scheme – ` 50,000;

(h) Investment in National Savings Certificate – ` 70,000;

Compute the deduction eligible under appropriate provisions of section 80C for A.Y. 2026-27
if he shifts out of the default tax regime under section 115BAC.
2. X Ltd. has two units, unit ‘N’ and unit ‘Y’. Unit ‘N’ engaged in the business of power
generation installed a windmill in March, 2026 and had a profit of ` 100 lakhs in Assessment
Year 2026-27. X Ltd. claimed depreciation of ` 120 lakhs on windmill against the profit of
` 100 lakhs from power generation business which was eligible for deduction under section
80-IA. Unit ‘Y’, engaged in manufacturing of wires, non-eligible business, had a profit of ` 70
lakhs for Assessment Year [Link] loss of ` 20 lakhs, i.e., balance depreciation not set
off pertaining to unit ‘N’ was set-off against the profits of unit ‘Y’ carrying on non-eligible
business, by the assessee, X Ltd. The Assessing Officer was of the view that depreciation
relating to a business eligible for deduction under section 80-IA cannot be set-off against
non-eligible business income. Hence, unabsorbed depreciation should be carried forward to

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the subsequent year to be set off against eligible business income of the assessee of that
year.

Examine the correctness of the action of the Assessing Officer.

3. From the following details, compute the total income of Mr. A, Mr. B and Mr. C for A.Y.
2026-27 if they shift out of the default tax regime under section 115BAC –

Particulars Mr. A Mr. B Mr. C

` ` `
(i) Salary (computed) 9,25,000 10,45,000 11,15,000
(ii) Interest income (on fixed deposits) 75,000 85,000 95,000

The particulars of their other investments/payments made during the P.Y.2025-26 are given
hereunder –
Particulars `
(1) Deposit in Public Provident Fund (PPF) by Mr. A 1,50,000
(2) Life insurance premium paid by Mr. C, the details of which are as
follows –

Date of Person insured Actual Insurance

issue of capital sum premium paid
policy assured (`) during 2025-
26 (`)
31/3/2012 Self 2,48,000 15,000
11/6/2020 Spouse 1,25,000 15,000
31/7/2020 Handicapped son 2,00,000 32,000
(Section 80U
disability)
(3) Payment of medical insurance premium by the following persons
to insure their health:
Payer Amount in Mode of payment
`
Mr. A (aged 55 years) 30,000 Account payee cheque
Mr. B (aged 52 years) 15,000 Cash
Mr. C (aged 48 years) 20,000 Crossed cheque

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(4) Mr. B paid interest on loan taken for the purchase of house in which he 2,20,000
currently resides. He is claiming benefit of self-occupation under
section 23(2) in respect of this house. He does not own any other
house.
Repayment of principal amount of loan taken for purchase of the said 1,70,000
house
(5) Contribution by Mr. A by cheque to National Children’s Fund during the 30,000
year.
(6) Mr. B makes the following donations during the P.Y.2025-26 -
Donation to BJP by crossed cheque 50,000
Donation to Electoral trust by cash 50,000

4. Following issues have been raised by Navi Limited in connection with its eligibility for
claiming deduction under Chapter VI-A for your consideration and advice for the assessment
year 2026-27:
(i) It operates two separate undertakings. One undertaking is eligible for deduction under
section 80-IB, while the other undertaking is not eligible for such deduction. If the
eligible undertaking has profit and the other undertaking has loss, should it claim
deduction after setting off the loss of the other undertaking against profit of the
eligible undertaking?
(ii) Its profit from one undertaking in North Eastern States which is eligible for deduction
u/s 80-IE includes sale of import entitlement, duty drawback and interest from
customers for delayed payment. Is it permissible to claim deduction u/s 80-IE on
these items of income?
5. PQR Co-operative Bank, a co-operative society, having its area of operation confined to
Gubbi Taluk and the principal object of which is to provide for long-term credit for agricultural
and rural development activities, has received the following amounts during the year ending
31.3.2026:
(i) Interest amounting to ` 1,00,000 from its members on loans advanced to them.
(ii) Interest amounting to ` 1,50,000 on deposits with other co-operative societies.
(iii) Rent amounting to ` 2,00,000 from letting out its godowns for storage of commodities.
PQR Co-operative Bank seeks your advice in the matter of eligibility for deduction, if any, in
respect thereof for the assessment year 2026-27.

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Answers
1. Computation of eligible deduction under section 80C for A.Y.2026-27

Particulars `
Life Insurance Premium (See Note 1) 15,000
Contribution to Public Provident fund (See Note 2) Nil
Tuition fee of 2 sons for graduation course (See Note 3) 16,000
Housing loan principal repayment (See Notes 4 & 5) Nil
Senior Citizen Savings Scheme deposit (See Note 6) 15,000
Post Office Time Deposit Scheme (See Note 6) 50,000
Investment in National Savings Certificate (See Note 6) 70,000
Total Investment 1,66,000
Eligible deduction under section 80C restricted to 1,50,000

Notes:
1. Any amount of life insurance premium paid in excess of the specified percentage of
actual capital sum assured shall be ignored for the purpose of deduction under
section 80C. In the given case, since the insurance policy has been issued before
1.04.2012, therefore, premium paid upto 20% of actual capital sum assured i.e.,
` 46,000 shall be allowed as deduction. Hence, the premium of ` 15,000 paid during
the year is allowable as deduction under section 80C.
2. In the case of an individual, contribution to PPF can be made in his name or in the
name of his spouse or children to qualify for deduction under section 80C. As the
contribution was made in the name of his father, deduction is not allowable.
3. Tuition fee paid is eligible for deduction under section 80C for a maximum of two
children. Therefore, ` 16,000 shall be allowed as deduction. Tuition fee paid to an
educational institution situated outside India is not eligible for deduction.
4. In order to claim the principal repayment on loan borrowed for house property as
deduction, the construction of such property should have been completed and should
be chargeable to tax under the head "Income from house property". In the given case,
since the property is under construction, principal repayment does not qualify for
deduction.

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5. Repayment of principal on housing loan is not allowed as deduction in case the loan
is borrowed from friends, relatives etc. In order to qualify for deduction, the loan
should have been obtained from Central Government / State Government / bank /
specified employer / institution.
6. The following investments are also eligible for deduction under section 80C:-

(1) five year time deposit in an account under Post Office Time Deposit Rules,
1981; and
(2) deposit in an account under the Senior Citizens Savings Scheme Rules, 2004.
(3) investment in National Savings Certificate.
2. In CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012) 349 ITR 245, the Karnataka High Court
observed that it is a generally accepted principle that the deeming provision of a particular
section cannot be breathed into another section. Therefore, the deeming provision contained
in section 80-IA(5) cannot override the provisions of section 70(1).
In this case, X Ltd. had incurred loss in eligible business (power generation) on account of
claiming depreciation of ` 120 lakhs. Hence, section 80-IA becomes insignificant, since there
is no profit from which this deduction can be claimed.
It is, thereafter, that section 70(1) comes into play, whereby an assessee is entitled to set off
the losses from one source against income from another source under the same head of
income. Accordingly, X Ltd. is entitled to the benefit of set off of loss of ` 20 lakhs
(representing balance depreciation not set-off) pertaining to Unit N engaged in eligible
business of power generation against profit of ` 70 lakhs of Unit Y carrying on non-eligible
business. Therefore, the net profit of ` 50 lakhs would be taxable in the A.Y.2026-27.
However, once set-off is allowed under section 70(1) against income from another source
under the same head, a deduction to such extent is not possible in any subsequent
assessment year i.e., the loss (arising on account of balance depreciation of eligible
business) so set-off under section 70(1) has to be first deducted while computing profits
eligible for deduction under section 80-IA in the subsequent year. Accordingly, in the
A.Y.2027-28, the net profits of Unit N has to be reduced by ` 20 lakhs for computing the
profits eligible for deduction under section 80-IA in that year.

The action of the Assessing Officer in not permitting set-off of loss of eligible business
against profits of non-eligible business in this case is, therefore, not correct.

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 8.116 DIRECT TAX LAWS

3. Computation of total income for A.Y.2026-27

Particulars Mr. A Mr. B Mr. C

` ` `
Salary 9,25,000 10,45,000 11,15,000
Income from house property (2,00,000)
[See Note 4]
Income from other sources (Interest) 75,000 85,000 95,000
(A) Gross total income 10,00,000 9,30,000 12,10,000
Less: Deductions under Chapter
VIA
Under section 80C
Deposit in PPF [See Note 1] 1,50,000
LIC premium paid [See Note 2] 57,500
Principal repayment of housing loan 1,50,000
(restricted to ` 1,50,000) [See Note
4]
Under section 80D
Medical insurance premium 25,000 Nil 20,000
[See Note 3]
Under section 80G
Contribution to National Children’s 30,000
Fund [See Note 5]
Under section 80GGC [See Note 6]
Donation to BJP by crossed cheque 50,000
Cash donation to Electoral Trust Nil
(B) Total deduction under Chapter VIA 2,05,000 2,00,000 77,500
(C) Total Income (A) – (B) 7,95,000 7,30,000 11,32,500

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.117

Notes:
(1) The maximum amount eligible for deduction under section 80C shall not exceed
` 1,50,000. Mr. A would be eligible for deduction of ` 1,50,000 in respect of PPF under
section 80C.
(2) Deduction u/s 80C in respect of life insurance premium paid by Mr. C

Date of Person insured Actual Insurance Restricted Deduction

issue of capital premium to % of u/s 80C
policy sum paid during sum
assured 2025-26 assured
31/3/2012 Self 2,48,000 15,000 20% 15,000
11/6/2020 Spouse 1,25,000 15,000 10% 12,500
31/7/2020 Handicapped Son
(section 80U 2,00,000 32,000 15% 30,000
disability)
Total 57,500
(3) Medical Insurance Premium
(i) Medical insurance premium of ` 30,000 paid by account payee cheque by Mr. A
is allowed as a deduction under section 80D, subject to a maximum of ` 25,000.
(ii) Medical insurance premium paid by cash is not allowable as deduction. Hence,
Mr. B is not eligible for deduction under section 80D in respect of medical
insurance premium of ` 15,000 paid in cash.
(iii) Mr. C is eligible for deduction of ` 20,000 under section 80D in respect of
medical insurance premium paid by crossed cheque.
(4) Deduction in respect of interest and principal repayment of housing loan
Mr. B is eligible for a maximum deduction of ` 2,00,000 under section 24 in respect of
interest on housing loan taken in respect of a self-occupied property, for which he is
claiming benefit of “Nil” annual value. Therefore, ` 2,00,000 would represent his loss
from house property.
Further, the maximum amount eligible for deduction under section 80C should not
exceed ` 1,50,000. Since, Mr. B has no other investment under section 80C during the
previous year 2025-26, he would be eligible for deduction of ` 1,50,000 in respect of
principal repayment of housing loan.
(5) Contribution to National Children’s Fund qualifies for 100% deduction under section
80G. Therefore, Mr. A is entitled to 100% deduction of the sum of ` 30,000 contributed
by him by way of cheque to National Children’s Fund.
(6) Mr. B is eligible for deduction under section 80GGC in respect of donation to a political
party made otherwise than by way of cash. However, cash donations to electoral trust
do not qualify for deduction under section 80GGC.

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 8.118 DIRECT TAX LAWS

4. (i) Section 80-IB(13) provides that the provisions contained in section 80-IA(5) shall,
so far as may be, apply to the eligible business under section 80-IB. Accordingly, for
the purpose of computing the deduction under section 80-IB, the profits and gains of
an eligible business shall be computed as if such eligible business was the only
source of income of the assessee.

Therefore, Navi Limited should claim deduction under section 80-IB on profit from
the eligible undertaking without considering the set off of losses suffered in the
other undertaking. It may be noted that the aggregate deduction under Chapter VI-
A, however, cannot exceed the gross total income of the assessee. It was held in in
case of Reliance Energy Ltd. (2022) 441 ITR 346 (SC).

(ii) Under section 80-IE, where the gross total income of an assessee includes any
profits and gains derived by an undertaking referred to in the section, there shall be
allowed, in computing the total income of the assessee, a deduction from such
profits and gains at the specified percentage and for such number of years as
specified in the section. In CIT vs. Sterling Foods (1999) 237 ITR 579 (SC) and
Liberty India vs. CIT (2009) 317 ITR 218 (SC), it was held that sale of import
entitlement and duty drawback cannot be construed as income derived from
undertaking. Therefore, such income cannot be included in computing income for
the purpose of deduction under section 80-IE.

Interest income derived by an undertaking on delayed collection of sale proceeds

shall be treated as income derived from the undertaking, and therefore, the same
would be eligible for deduction under section 80-IE. [Phatela Cotgin Industries
Private Limited vs CIT (2008) 303 ITR 411 (P & H)].

5. Sub-section (4) of section 80P provides that section 80P shall not apply to any co-
operative bank other than a primary agricultural credit society or a primary co-operative
agricultural and rural development bank.

Explanation to section 80P(4) defines a primary co-operative agricultural and rural

development bank to mean a society having its area of operation confined to a taluk and
the principal object of which is to provide for long-term credit for agricultural and rural
development activities.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.119

PQR Co-operative Bank is a primary co-operative agricultural and rural development bank
as defined in the said Explanation since it is a co-operative society having its area of
operation confined to Gubbi Taluk and its principal object is to provide long-term credit for
agricultural and rural development activities. Therefore, it is eligible for deduction under
section 80P.

Interest of ` 1,00,000 received by the bank on loans advanced to its members is eligible
for deduction in full under section 80P(2)(a)(i).

Interest of ` 1,50,000 received by the bank from deposits with other co-operative societies
qualifies for deduction in full under section 80P(2)(d).

Rent of ` 2,00,000 received by the bank from letting out its godowns for storage of
commodities is eligible for deduction in full under section 80P(2)(e).

© The Institute of Chartered Accountants of India