DIRECT TAXATION AY 21 - 22

INDEX
NO PARTICULARS PAGE NO
1 Minimum Alternate Tax – MAT 2–9
1A Analysis of MAT Format 10 – 15
1B Computation of Book Profit under Section 115JB 16 – 34
2 MAT for IND AS Companies 35 – 46
3 MAT Route in Special Cases 47 – 48
4 MAT Credit under Section 115JAA 49 – 52
5 Computation of Income under Normal Route & MAT Route 53 – 63
6 Questions for Own Practice 64 – 78
7 Alternate Minimum Tax 79 – 86
8 Section – 10AA Provisions 87 – 95
9 Assessment of Individuals 97 – 141
10 Assessment of AOP / BOI 142 – 154
11 Assessment of Co – Operative Society 155 – 168
12 Assessment of Partnership Firm 169 – 184
13 Questions for Own Practice 185 – 195
14 Assessment of LLP 196 – 203

15 Taxation of Business Trust 204 – 204

16 Introduction to Business Trust 205 – 207

17 Special Incomes to REIT / INVIT 208 – 217

18 Exemptions & TDS Provisions 218 – 226

19 Assessment of Investment Fund 227 – 235

20 Taxation of Securitization Trust 236 – 239

21 Tax Regime for IFSC 240 – 245

22 Taxation of Political Party 244 – 248

23 Taxation of Electoral Trusts 249 - 251

24 Taxation of Income of Units 252 – 254

25 Taxation of VPA 255 – 258

26 Case Laws 259 - 265

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CHAPTER - 1
MINIMUM ALTERNATE TAX - MAT

MAT

Computation
MAT for Ind
Introduction MAT in MAT credit of TI under
AS
to MAT Special Cases u/s 115JAA MAT &
Companies
Normal Route

ASSESSMENT OF COMPANIES

Assessment of Companies

Computation of Total Determination of Tax

MAT Questions U/s
Income under Normal Payable by Comparing
115JB
Provisions both Routes

SECTION 115JB (1)

 Notwithstanding anything contained in any other provisions of the Income - tax Act,
 where in the case of a company,
 the income - tax, payable on the total income as computed under the Income - tax Act in
respect of any previous year relevant to assessment year 2020 - 21 or subsequent assessment
years, is less than 15% of its book profits,
 such book profits shall be deemed to be the total income of the assessee and the
 Tax payable on such total income shall be the amount of income - tax at the rate of 15%.

Note:
For a company located in International Financial Service Centre which derives its income solely in
convertible foreign exchange, the rate shall be 9% instead of 15%.

If the tax is less than the Then, BP willl And tax

Incase
payable under tax payable under be treated as payable will be
of Co.
normal route MAT route DTI MAT Payable

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 DIRECT TAXATION AY 21 - 22

SECTION 115JB (2)

Preparation of Profit & Loss Account
Every assessee -
No Particulars
a Being a company, other than a company referred to in clause (b), shall, for the purposes of
this section, prepare its statement of profit and loss for the relevant previous year in
accordance with the provisions of Schedule - III to the Companies Act, 2013; or
b Being a company, to which second proviso to section 129(1) of the Companies Act, 2013 is
applicable, shall, for the purposes of this section, prepare its statement of profit and loss for
the relevant previous year in accordance with the provisions of the Act governing such
company.

Profit & Loss A/c

Normal Company Abnormal Company

In accordance with
As per Schedule - III
Provisions of Act
to Companies Act -
governing such
2013
Company

Provided that while preparing the annual accounts including statement of profit and loss -
No Particulars
1 The accounting policies
2 The accounting standards adopted for preparing such accounts including statement of
profit and loss
3 The method and rates adopted for calculating the depreciation

Shall be the same as have been adopted for the purpose of preparing such accounts including
statement of profit and loss as laid before the company at its annual general meeting in accordance
with section 129 of the Companies Act, 2013

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EXPLANATION 4 TO SECTION 115JB (2)
Non - Applicability of Section 115JB for Certain Foreign Companies
The provisions of this section shall not be applicable to an assessee, being a foreign company,
if -
No Particulars
1 The assessee is a resident of a country or a specified territory with which India has Double
Taxation Avoidance Agreement under section 90 / 90A and the assessee does not have a
permanent establishment in India in accordance with the provisions of such agreement; or
2 The assessee is a resident of a country with which India does not have Double Taxation
Avoidance Agreement and the assessee is not required to seek registration under any law for
the time being in force relating to companies

115JB not Applicable to 2 FC

FC is a resident of country or
FC is a resident of country where
specified teritory where India
India does not having DTAA
having DTAA

FC does not have PE in India as FC not require to take registration

per that DTAA in India

EXPLANATION 4A TO SECTION 115JB (2)

For the removal of doubts, it is hereby clarified that the provisions of this section shall not be
applicable and shall be deemed never to have been applicable to an assessee,
 Being a foreign company, where its total income comprises solely of profits and gains from
business referred to in
 Section 44B or
 Section 44BB or
 Section 44BBA or
 Section 44BBB
 And such income has been offered to tax at the rates specified in those sections.

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 DIRECT TAXATION AY 21 - 22

SECTION 115JB - OTHER PROVISIONS

Other Provisions

115JB (3) 115JB (4) 115JB (5) 115JB (5A)

No Particulars Explanation
1 Section – Nothing contained in section 115JB shall affect the determination of the
115JB(3) – amounts in relation to the relevant PY to be carry forward to the
Carry subsequent year or years under the provisions of section 32, section 72,
forward of section 73, section 74 or Section 74A
losses and The company can Carry forward of losses and Depreciation to the extent
Depreciation it could have carried forward had section – 115JB not been there
2 Section – Every company to which this section applies shall furnish a report from a
115JB(4) – CA in form 29B certifying that from the book profit has been computed in
Furnishing accordance with the provisions of section – 115JB and such report shall be
of Report furnished before the specified date (i.e. 1 month prior to the due
date of furnishing of return of income u/s 139(1))
3 Section – Save as otherwise provided in this section, all other provisions of this Act,
115JB(5) – shall apply to every company, mentioned in this section. (Therefore, the
Applicability company to which MAT applies shall be liable to pay advance tax , interest
of other u/s 234A, 234B and 234C. The company shall also be liable to pay penalty
provisions of for concealment of income.)
Income Tax
Act
4 Section The provisions of section 115JB shall not apply to –
115JB(5A) – No Particulars
MAT not 1 Any income accruing or arising to a company from life insurance
applicable to business referred to in section 115B
certain 2 A person who has exercised the option referred to in section
Companies 115BAA or section 115BAB

Life Company Company

MAT not
Insurance opted u/s opted u/s
Applicable to
Business 115BAA 115BAB

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MAT FORMAT

NO PARTICULARS AMOUNT
Net profit as per P&L A/ c xxxx
1 Income tax paid / payable xxx

{ 2
3
Reserves created by whatever name called
Set aside for unascertained liability
xxx
xxx

4 Divident paid or payable xxx

{ 5
6
7
Diminution in the value of the asset
Depreciation
Deferred Tax
xxx
xxx
xxxx

8 Expenditure incurred u/s 10/ 11/ 12 xxx

{ 9
10
11
Expenditure incurred by a Foreign Company on account of IFRS & CG
Expenditure incurred to earn income from AOP / BOI covered u/s 86
Expenditure incurred to earn royalty income covered u/s 115BBF
xxx
xxx
xxx

12 Provision for loss of subsidy debited to P&L A / c xxx

13 Sub total xxxx
Less: Items covered under Explanation 1 to 115JB
1 Tonnage Tax Income xxx

2 Income covered u/s 10 / 11 / 12 xxx

{ 3
4
5
Income earned by a Foreign Company on account of IFRS & CG
Income earned from AOP / BOI covered u/s 86
Income earned from royalty covered u/s 115BBF
xxx
xxx
xxx

6 Reserves withdrawn xxx

7 Depreciation excluding Revaluation reserve xxx
8 Deferred tax xxx

9 BFBL / BF Depreciation as per books Whichever is lower xxxx

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COMPUTATION OF BOOK PROFIT - EXPLANATION 1 BELOW SECTION 115JB (2)

For Computation of Book Profit, the profit shall be increased by the following amounts, if the
following amounts referred in (a) to (i) is debited in the Statement of Profit & Loss:
No Item Description
a Income Tax Income Tax Paid or Payable and the provision therefore. It may be
noted that Income Tax Includes;
No Particulars
1 Interest
2 Surcharge
3 Health &Education Cess

b Amounts carried to Amounts carried to any Reserves, by whatever name called

Reserves
c Provisions Amounts set aside to provisions for meeting liabilities other than
ascertained liabilities
d Provision for losses Amount of Provision for losses of Subsidiary Companies
of Subsidiary Co.
e Dividends Amount of Dividends paid or proposed.
f Expenditure Amount of Expenditure relatable to any income to which Section 10
relatable to Exempt or Section 11 or Section 12 apply
income
fa Expenditure Amount of Expenditure relatable to income, being share of the
relatable to share of assessee in the income of an AOP/BOI, on which no income tax is
an assessee in the payable in accordance with the provisions of Section 86
income of an
AOP/BOI,
fb Expenditure The amount or amounts of expenditure relatable to income
relatable to income accruing or arising to an assessee, being a foreign company, from
accruing to a No Particulars
foreign company A The Capital Gains arising on transactions in securities; or
B The interest, royalty, fees for technical services chargeable to
tax at the rate or rates specified in Chapter XII i.e Sec
– 115A
If the income tax payable thereon in accordance with the provisions
of this Act, other than the provisions of this Chapter, is at a rate less
than 15%
fd Amounts of The amount or amounts of expenditure relatable to income by way
expenditure of royalty in respect of patent chargeable to tax under section
relatable to income 115BBF.
referred u/s 115BBF
g Depreciation The amount of depreciation
h Deferred Tax The amount of deferred tax and provision therefore
i Provision for The amount set aside as provision for diminution in the value of any
diminution in the asset
value of any asset
j Amount standing in The profit shall also be increased by the amount of standing in
the revaluation Revaluation Reserve relating to the revalued asset on the retirement
reserve or disposal of such asset, in case of same is not credited to P&L a/c

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The profit shall be reduced by the following amounts:
No Item Description
i Amount withdrawn Amount withdrawn from any reserve or provision, if any such
from any reserve amount is credited to the Statement of Profit and Loss Account.
However, the amount withdrawn from reserves / Provisions shall
not be reduced from the book profit unless the book profit of that
year has been increased by those reserves / provisions;
ii Exempt Income Amount of income to which Section 10 or u/s 11 or u/s 12, apply, if
any such amount is credited to the Statement of Profit and Loss
Account.
iia Depreciation Amount of depreciation debited to the statement of P&L (excluding
the claim of depreciation on account of revaluation of assets)
iib Amount withdrawn Amount withdrawn from Revaluation Reserve and credited tom the
from RR statement of P&L to the extent it does not exceed the amount of
depreciation on account of revaluation of assets
iic Share of the The amount of income being the Share of the assessee in income
assessee in the from AOP/BOI, on which no Income Tax is payable in accordance
Income from with Section 86, if any such amount is credited to the Statement of
AOP/BOI Profit and Loss Account.
iid Income accruing to The amount of income accruing or arising to an assessee, being a
Foreign Company foreign company, from -
No Particulars
1 The capital gains arising on transactions in securities or
2 The interest, royalty or fees for technical services chargeable
to tax at the rate or rates specified in Chapter XII
i.e S. 115A
If such income is credited to the Statement of P&L and the income
tax payable thereon in accordance with the provisions of this Act,
other than the provisions of this Chapter XIIB, is at a rate less than
15%
iig Income by way of The amount of Income by way of royalty in respect of patent
royalty taxable chargeable to tax under Section 115BBF.
under Section
115BBF
iih Brought forward Aggregate amount of unabsorbed depreciation and loss brought
loss or unabsorbed forward in case of a –
depreciation No Particulars
1 Company, and its subsidiary and the subsidiary of such
subsidiary, where, the Tribunal, on an application moved by
the central govt u/s 241 of the Companies Act 2013, has
suspended the BOD of such Company and has appointed,
new directors who are nominated by the central govt u/s 242
of the said Act
2 Company against whim an application for corporate
insolvency resolution process has been admitted by the
Adjudicating Authority under sec 7 or sec 9 or sec 10 of the
Insolvency and Bankruptcy Code, 2016

It may be noted that loss does not include depreciation.

A company would be subsidiary of another company if such other

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 DIRECT TAXATION AY 21 - 22

company holds more than half in the nominal value of equity share
capital of the company.
iii B/F Losses and Amount of b/f loss or unabsorbed depreciation, whichever is less, in
Unabsorbed case of other companies as per books of account.
depreciation in case The loss shall not include depreciation; if either the figure of brought
of other companies forward loss or unabsorbed depreciation is ‚NIL‛, no deduction will
be allowed from the book profit of the relevant year.
vii Profit of Sick The amount of profits of Sick Industrial Company(BIFR company)
Industrial Company commencing from the PY in which the company became sick and
ending with the assessment year during which the entire net worth
of such company becomes equal to or exceeds the accumulated
losses. For this purpose, net worth shall have the same meaning as
assigned under section 3(1)(ga) of the Sick Industrial Companies
(Special Provisions) Act, 1985.
viii Deferred Tax The amount of deferred tax, if any such amount is credited to the
Statement of Profit and Loss Account.

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CHAPTER – 1A
ANALYSIS OF MAT FORMAT
ANALYSIS OF CLAUSE (h) & (viii)

No Item Description
h Deferred Tax The amount of deferred tax and provision therefore
viii Deferred Tax The amount of deferred tax, if any such amount is credited to the
Statement of Profit and Loss Account.

Prior to the amendment, there has been some ambiguity regarding the adding back of deferred tax
if debited to P&L account.

Deferred tax is the tax effect of timing differences. Deferred tax contemplates the adjustment in
respect of both, the deferred tax asset and deferred tax liability. Accordingly, in a case where there
are both types of timing differences (asset or liability), both need to be adjusted, either on gross
basis or net basis. And in case where there is a reversal of the deferred tax that should also be
adjusted.

ANALYSIS OF CLAUSE (fb) & (iid)

No Item Description
fb Expenditure The amount or amounts of expenditure relatable to income
relatable to income accruing or arising to an assessee, being a foreign company, from
accruing to a No Particulars
foreign company A The Capital Gains arising on transactions in securities; or
B The interest, royalty, fees for technical services chargeable to
tax at the rate or rates specified in Chapter XII i.e Sec
– 115A
If the income tax payable thereon in accordance with the provisions
of this Act, other than the provisions of this Chapter, is at a rate less
than 15%
iid Income accruing to The amount of income accruing or arising to an assessee, being a
Foreign Company foreign company, from -
No Particulars
1 The capital gains arising on transactions in securities or
2 The interest, royalty or fees for technical services chargeable
to tax at the rate or rates specified in Chapter XII
i.e S. 115A
If such income is credited to the Statement of P&L and the income
tax payable thereon in accordance with the provisions of this Act,
other than the provisions of this Chapter XIIB, is at a rate less than
15%

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 DIRECT TAXATION AY 21 - 22

QUESTIONS FOR PRACTICE

Illustration 1
Profit and Loss Account of Foreign Company for the year ended 31.03.2020
Amount Amount
Particulars Particulars
(in Lakhs) (in Lakhs)
Expenses on earning royalty & Royalty & Fees for technical
8 30
fees for technical services services
STT and expenses on STCG STCG referred to in section 111A
2 40
referred to in section 111A
STT and expenses on LTCG LTCG taxable under section 112A
3 50
taxable section 112A
STT and expenses on LTCG LTCG referred to in section 115AB
4 20
referred to in section 115AB
STT and expenses on shares sold LTCG on listed shares sold off
1 10
off market market
Net Profit 132
Total 150 Total 150

Total Income as per Normal Provisions of Income Tax Act

Amount Amount
No Particulars
(in Lakhs) (in Lakhs)
1 Net Profit 132
2 Add: Expenses on royalty and fees for technical services
8
disallowed under section 115A
3 Add: STT and expenses on capital gains not allowed
10
(2 + 3 + 4 + 1)
4 Less: Capital gains dealt with separately (40 + 50 + 20 + 10) 120
5 PGBP 30
6 Capital Gains
7 STCG under section 111A 40
8 LTCG under section 112A 50
9 LTCG referred in sections 115AB 20
10 LTCG on shares sold off - market (without indexation) 10 120
11 Total Income 150

Computation of Normal Tax Liability

No Particulars Amount
1 Tax on Royalty & Fees for technical services @ 10% u/s 115A on Rs. 30 lakh 3 lakh
2 Tax on STCG under section 111A @ 15% on Rs. 40 lakh 6 lakh
3 Tax on LTCG under section 112A @ 10% on Rs. 50 lakh 5 lakh
4 Tax on LTCG referred in 115AB @ 10% under section 115AB on Rs. 20 lakh 2 lakh
5 Tax on LTCG under section 112 @ 10% on Rs. 10 lakh 1 lakh
6 Total Tax 17 lakh
7 Add: Health & Education Cess @ 4% 68,000
8 Total 17,68,000

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Computation of Book Profits
No Particulars Amount
1 Net Profit as per profit & loss A/c 132 lakh
2 Less: LTCG & royalty & fees for technical services as per (iid) 110 lakh
3 Add: Expenses as per clause (fb) 16 lakh
4 Book Profit 38 lakh
5 Tax thereon @ 15.6% on 38 Lakhs 5,92,800

Therefore, tax liability of foreign company is Rs. 17, 68,000

ANALYSIS OF AMOUNT WITHDRAWN FROM REVALUATION RESERVE – CLAUSE (iia) & (iib)
Withdrawal from Any Reserve:-

No Item Description
b Amounts carried to Amounts carried to any Reserves, by whatever name called
Reserves
i Amount withdrawn Amount withdrawn from any reserve or provision, if any such
from any reserve amount is credited to the Statement of Profit and Loss Account.
However, the amount withdrawn from reserves / Provisions shall
not be reduced from the book profit unless the book profit of that
year has been increased by those reserves / provisions;

Withdrawal from Revaluation reserve :-

No Item Description
g Depreciation The amount of depreciation
iia Depreciation Amount of depreciation debited to the statement of P&L (excluding
the claim of depreciation on account of revaluation of assets)
iib Amount withdrawn Amount withdrawn from Revaluation Reserve and credited tom the
from RR statement of P&L to the extent it does not exceed the amount of
depreciation on account of revaluation of assets

One Line Summary :-

No Particulars Amount
1 Depreciation debited to P&L A / c xxx
2 Less: Deprecation excluding Revaluation reserve (xxx)
3 Less: Amount withdrawn from Revaluation reserve to the extent of depreciation (xxx)
on account of revaluation
4 Sub total xxxx

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 DIRECT TAXATION AY 21 - 22

SUMMARY

Withdrawal from Reserve

Withdrawal from
Withdrawal from
Revaluation
Any Reserve
Reserve

Already added Not added back To the extent of

back while earlier while Depreciation Not credited to
calculating calculating on Revaluation P&L
MAT MAT credited to P&L

Reduce while No Reduce while No

calculating BP Adjustment calculating BP Adjustment

Illustration 1
Suppose the P& L Account of the company for the year ended 31.03.2021 is as under
Particulars Amount Particulars Amount
To Expenses 40,00,000 By Sales 2,00,00,000
To Depreciation 25,00,000
To Net Profit 1,35,00,000
Total 2,00,00,000 Total 2,00,00,000

In order to reduce book profits, the company revalues the assets by Rs. 300 lakhs and assume
depreciation rate as per the Companies Act 2013 is 15%.

Revised P&L Account – Case 01

Particulars Amount Particulars Amount
To Expenses 40,00,000 By Sales 2,00,00,000
To Depreciation By Amt withdrawn from
70,00,000 45,00,000
reserves
To Net Profit 1,35,00,000
Total 2,45,00,000 Total 2,45,00,000

Revised P&L Account – Case 02

Particulars Amount Particulars Amount
To Expenses 40,00,000 By Sales 2,00,00,000
To Depreciation 70,00,000
To Net Profit 90,00,000
Total 2,00,00,000 Total 2,00,00,000

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AY 21- 22 DIRECT TAXATION
In case 02, the company transfers 45 lakhs from RR to GR by following Accounting entry:
No Particulars Debit Credit
1 Revaluation Reserve A/c 45 lakhs
2 To General Reserve A/c 45 lakhs

Now, after the amendment, the book profits u/s 115JB shall be computed as under:

Computation of BP under Case 01: -

No Particulars Amount
1 Net Profit as per Profit & Loss Account 1,35,00,000
2 Add: Depreciation debited to P&L 70,00,000
3 Less: Depreciation Excluding revaluation 25,00,000
4 Less: Amount transferred from RR to the extent of depreciation on account of 45,00,000
revaluation
5 Book Profit u/s 115JB 1,35,0000

Computation of BP under Case 02: -

No Particulars Amount
1 Net Profit as per Profit & Loss Account 90,00,000
2 Add: Depreciation debited to P&L 70,00,000
3 Less: Depreciation Excluding revaluation of Asset 25,00,000
4 Book Profit u/s 115JB 1,35,0000

Illustration 2
ANM Ltd furnishes the following particulars for the year ended 31.03.2021:
No Rs
Particulars
(in Crores)
1 Net Profit before Depreciation 300.00
2 Less: Depreciation (which includes Rs 50 Crores for revalued assets) 75.00
3 Net Profit after Depreciation 225.00
4 Withdrawal from Revaluation reserve credited to P&L account NIL

Compute the book profit in accordance with Section 115 JB for the AY 2021 - 22. Would your
book profit computation differ in the following situation?
No Particulars
1 Amount withdrawn from revaluation reserve - Rs 25 Crores
2 Amount withdrawn from revaluation reserve - Rs 50 Crores
3 Amount withdrawn from revaluation reserve - Rs 75 Crores

Solution
No Case Case Case
Particulars Base
01 02 03
1 Net Profit as per P&L Account 225.00 250.00 275.00 300.00
2 Add: Depreciation debited to P&L 75.00 75.00 75.00 75.00
3 Less: Depreciation Excluding revaluation(75 – 50) (25.00) (25.00) (25.00) (25.00)
4 Less: Amount transferred from RR to the extent of
- - - - (25.00) (50.00) (50.00)
depreciation on account of revaluation
5 Book Profit u/s 115JB 275.00 275.00 275.00 300.00

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 DIRECT TAXATION AY 21 - 22

Note
No Particulars
1 The amount of net profit as per P&L a/c shown above has been increased to the extent of
RR credited to P&L A/c
2 According to the S. 115JB the amount to be reduced in respect of RR credited to the P&L
A/c shall not exceed the amount of depreciation attributable to the revaluation.
Accordingly, in situation – C above, whether the Co. has withdrawn Rs. 75 Crores from
the RR the same has been restricted to Rs. 50Crores, being the amount of depreciation in
respect of revalued reserves.

Analysis of (iih) & (iii) &(vii)

No Item Description
iih Brought forward Aggregate amount of unabsorbed depreciation and loss brought
loss or unabsorbed forward in case of a –
depreciation No Particulars
1 Company, and its subsidiary and the subsidiary of such
subsidiary, where, the Tribunal, on an application
moved by the central govt u/s 241 of the Companies Act
2013, has suspended the BOD of such Company and has
appointed, new directors who are nominated by the
central govt u/s 242 of the said Act
2 Company against whim an application for corporate
insolvency resolution process has been admitted by the
Adjudicating Authority under sec 7 or sec 9 or sec 10 of
the Insolvency and Bankruptcy Code, 2016
It may be noted that loss does not include depreciation.
A company would be subsidiary of another company if such other
company holds more than half in the nominal value of equity share
capital of the company.
iii B/F Losses and Amount of b/f loss or unabsorbed depreciation, whichever is less, in
Unabsorbed case of other companies as per books of account.
depreciation in case The loss shall not include depreciation; if either the figure of brought
of other companies forward loss or unabsorbed depreciation is ‚NIL‛, no deduction will
be allowed from the book profit of the relevant year.
vii Profit of Sick The amount of profits of Sick Industrial Company(BIFR company)
Industrial Company commencing from the PY in which the company became sick and
ending with the assessment year during which the entire net worth
of such company becomes equal to or exceeds the accumulated
losses. For this purpose, net worth shall have the same meaning as
assigned under section 3(1)(ga) of the Sick Industrial Companies
(Special Provisions) Act, 1985.

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CHAPTER – 1B
COMPUTATION OF BOOK PROFIT
UNDER 115JB
Illustration 1
The Profit as per the Statement of Profit and loss account of XYZ Ltd., a Resident Company, for the
year ended 31.3.2021 is Rs. 190 Lacs arrived at after making the following adjustments
No Particulars In Lacs
1 Depreciation on Assets 100.00
2 Reserve for Currency Exchange Fluctuation 50.00
3 Provision for Tax 40.00
4 Proposed Dividend 120.00

Following further information are also provided by company:

No Particulars
1 Provision for tax includes Rs. 2 Lacs of interest payable on income – tax
2 Depreciation includes Rs. 40 Lacs towards revaluation of assets
3 Amount of Rs.50 lacs credited to statement of P& L account was drawn from revaluation
reserve
4 Balance of statement of profit and loss account shown in balance sheet at the asset side as at
31.3.2020 was Rs. 30 Lacs which includes unabsorbed depreciation of Rs. 10 Lakhs
Compute the Book Profit for the year ended 31.3.2021.

Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 1,90,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB(2)
1. Depreciation on assets debited to Statement of P&L 1,00,00,000
2. Reserve for currency exchange fluctuation, since the amount 50,00,000
carried to any reserve, by whatever name called, is to be
added back
3. Provision for tax 40,00,000
-For the purpose of section 115JB, book profit means the profit
as per the statement of profit and loss prepared in accordance
with Schedule III to the Companies Act, 2013, as adjusted by
certain additions/deductions as specified. One of the
adjustments is to add back income - tax paid or payable, and
the provisions therefore. Explanation 2 after sub - section (2) of
section 115JB clarifies that income - tax includes, inter alia,
interest on income. Therefore, the entire provision of Rs. 40
lacs for income - tax is added back for computing book profit

16 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

for levy
4. Proposed dividend 1,20,00,000 3,10,00,000
Sub Total 5,00,00,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB(2)
1. Depreciation other than depreciation on revaluation of 60,00,000
assets (Rs. 100 lacs –Rs. 40 lacs)
2. Withdrawal from revaluation reserve restricted to the extent 40,00,000
of depreciation on account of revaluation of assets (Rs. 50 lacs
or Rs. 40 lacs, whichever is less)
3. Unabsorbed depreciation or brought forward business loss, 10,00,000 1,10,00,000
whichever is less, as per the books of account. Unabsorbed
depreciation Rs. 10 lakhs and brought forward business loss
Rs. 20 lakhs – whichever is less
Book Profit u/s 115JB 3,90,00,000

Illustration 2
The profit of ABP Ltd as per Profit and Loss account for the previous year 2020 - 21 is Rs 100 Lakhs
after debiting / crediting the following items:
No Particulars
1 Provision for Income Tax Rs 15 Lakhs
2 Provision for Deferred Tax Rs 8 Lakhs
3 Proposed Dividend Rs 20 Lakhs
4 Depreciation debited to P & L A/c is Rs 12 Lakhs. It includes depreciation on Revaluation of
Asset of Rs 2 Lakhs
5 Profit from Unit established in Special Economic Zone Rs 30 Lakhs
6 Provision for Permanent Diminution in value of Investments Rs 2 Lakhs

Brought Forward Losses and Unabsorbed Depreciation as per books of the Company are as
follows
Brought Forward Loss Unabsorbed Depreciation
Previous Year
(Rs In Lakhs) (Rs In Lakhs)
2016 – 2017 2 5
2017 – 2018 -- 3
2018 – 2019 10 2

Compute Book Profit of the Company u/s 115JB for Assessment Year 2021 - 22.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 17

AY 21- 22 DIRECT TAXATION
Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount In Amount In
Lacs Lacs
Net profit as per the statement of Profit and Loss 100
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB(2)
1. Provision for Income Tax 15
2. Provision for Deferred Tax 8
3. Proposed Dividend 20
4. Depreciation debited to Profit and Loss Account 12
5. Provision for Permanent Diminution in Value of Investments 2 57
Sub Total 157
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB(2)
1. Depreciation excluding depreciation due to revaluation 10
2. Brought Forward loss or Unabsorbed Depreciation as per 10 20
Books, whichever is lower
Book Profit u/s 115JB 137
Note: No adjustment is required in respect of profit from unit of SEZ.

Illustration 3
PVR Ltd furnishes the following information as per the books of accounts for computing the book
profit u/s 115JB for the year ended 31.03.2021. Ascertain the amount of loss to be set off with the
profit to arrive at book profit.
Year Ended Business Loss Unabsorbed Depreciation
31.03.2019 7,50,000 15,00,000
31.03.2020 NIL 10,00,000
31.03.2021 2,50,000 1,00,000
Total 10,00,000 26,00,000
Would your answer differ if PVR Ltd is a company against whom an application for corporate
insolvency resolution process has been admitted by the Adjudicating Authority
Solution
No Particulars
1  Year to year comparison, at least of business loss and unabsorbed depreciation works
out to Rs. 8,50,000 (7,50,000 + Nil + 1,00,000)
 Cumulative comparison the lower of the two works out to Rs. 10,00,000 (Rs. 10,00,000
and Rs. 26,00,000). However, based on the CBDT circular no. 495 dated 22.09.1987, PVR
Ltd shall be adopt Rs. 10,00,000 towards reducing from net profit while computing book
profit u/s 115JB
2 If the company is a company against whom an application for corporate insolvency
resolution process has been admitted by the Adjudicating Authority then the aggregate
amount of un absorbed depreciation and loss B/F shall be reduced while computing book
profits. Hence, the B/F loss to be set off will be Rs. 36,00,000(i.e 10,00,000 + 26,00,000)

18 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Illustration 4
XYZ Limited's profit & Loss Account for the year ended 31.03.2021 shows a Net Profit of
Rs 75 Lakhs after debiting / crediting the following items:
No Particulars
1 Depreciation Rs 24 Lakhs (including 4 Lakhs on Revaluation)
2 Interest to Financial Institution not paid before due date of filing return of Income Rs 6
Lakhs
3 Provision for Doubtful Debts Rs 1 Lakh
4 Provision for Unascertained Liabilities Rs 2 Lakhs
5 Transfer to General Reserve Rs 5 Lakhs
6 Net Agricultural Income Rs 16 Lakhs
7 Amount withdrawn from Reserve created during 2013 - 2014 Rs 3 Lakhs. (Book Profit was
increased by the amount transferred to such Reserve in AY (2014 - 2015)
Other Information
Brought Forward Loss and Unabsorbed Depreciation as per books are Rs 12 Lakhs and Rs
10 Lakhs respectively.
Compute Minimum Alternate Tax u/s 115JB for Assessment Year 2021 - 22
Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 75,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB
1. Transfer to General Reserve 5,00,000
2. Provision for Unascertained Liabilities 2,00,000
3. Provision for Doubtful Debts 1,00,000
4. Depreciation 24,00,000 32,00,000
Sub Total 1,07,00,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB
1. Amount withdrawn from Reserves and credited to 3,00,000
Statement of Profit and Loss - Since the book profit was
increased by the amount transferred to such reserve in the AY
2014 – 15
2. Depreciation (excluding Depreciation) 20,00,000
3. Loss B/f (12 L) or Unabsorbed Depreciation(10L), as per books 10,00,000
whichever is less
4. Net Agricultural Income Exempt u/s 10 (1) 16,00,000 49,00,000
Book Profit u/s 115JB 58,00,000

Computation of MAT under section 115JB

No Particulars Amount
1 15% of Book Profit (15% of Rs. 58 lakh) 8,70,000
2 Add : Health and Education Cess @ 4% 34,800
3 MAT Payable u/s 115JB 9,04,800

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AY 21- 22 DIRECT TAXATION
Note
Explanation 1 to Section – 115JB does not require adjustment of interest not paid before due date of
filing return of income, while computing book profit.

Illustration 5
Viraj Exports Ltd, a Domestic Company, earned profit of Rs 95 Lakhs as per statement of Profit &
Loss Account for the year ended 31.03.2021. After Debiting or Crediting the following items :
i) Items Debited to Statement of Profit and Loss
No Particulars Rs.
a Provision for Income tax (including interest of 50, 000) 5,00,000
b Sales Tax liability 70,000
c Depreciation 4,00,000
d Interest to Financial Institutions unpaid before due date of filing of Return of 1,20,000
Income
e Reserves for currency exchange fluctuation 1,30,000
f Penalty for infraction of law 60,000

ii) Items Credited to Statement of Profit and Loss

No Particulars Rs.
a Exempt income u/s 10 1,40,000
b Long term profit on sale of rural agricultural land 10,00,000
c Profit on unit established in SEZ 8,00,000
d Net Agricultural Income 6,00,000
e Royalty received from patents developed and registered in India 40,00,000

Other Information
No Particulars
1 Depreciation as per the Income Tax Act, 1961 Rs 3,50,000
2 Depreciation (as per books) includes Rs 1,90,000 on account of Revaluation of Assets
3 Interest on borrowed capital Rs 1,00,000 payable to Y, not debited to statement of Profit and
Loss
4 Loss as per Profit and Loss account in Balance Sheet on the assets side as at 31.03.2020 was
Rs. 4,70,000 which included unabsorbed depreciation of Rs 4,10,000
5 The company is an eligible assessee as per the provisions of Section 115 BBF of the Income
Tax Act 1961
Compute the Minimum Alternate Tax u/s 115 JB of the Income Tax Act 1961.

20 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 95,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB
1. Provision for Income Tax (including interest of Rs. 50,000) 5,00,000
- As per explanation 2 to section 115JB, Income tax shall
include inter alia, any interest charged under the Act,
therefore, whole of the amount of provision for income - tax
including Rs. 50,000 towards interest payable to be added back
as per clause (a) of Explanation 1 to section 115JB
2. Depreciation - To be added back as per clause (g) of 4,00,000
Explanation 1 to section 115JB
3. Reserves for foreign exchange fluctuation - Amount carried 1,30,000 10,30,000
to any reserves, by whatever name called, to be added back as
per clause (b) of Explanation 1 to S. 115JB
Sub Total 1,05,30,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB
1. Exempt income u/s 10 – As per Clause ii of explanation 1 to 1,40,000
section 115JB Exempt income u/s 10 shall be reduced while
computing the book profits
2. Net Agriculture Income - Net agricultural income is to be 6,00,000
reduced as per clause (ii) of Explanation 1 to section 115JB,
since it is exempt under section 10(1)
3. Royalty received from patents developed and registered in 40,00,000
India - Such royalty is to be reduced while computing book
profit as per clause (iig) of Explanation 1 to section 115JB since
the same is chargeable to tax under section 115BBF
4. Depreciation other than depreciation on revaluation of assets 2,10,000
is to be reduced while computing book profit as per clause
(iia) of Explanation 1 to section 115JB (Rs. 4,00,000 – Rs.
1,90,000)
5. Unabsorbed depreciation or brought forward business loss 60,000 50,10,000
whichever is less, as per books of account. - Lower of
unabsorbed depreciation Rs. 4,10,000 and brought forward
business loss Rs. 60,000 as per books of account is to be
reduced while computing book profit as per clause (iii) of
Explanation 1 to section 115JB
Book Profit u/s 115JB 55,20,000

Computation of MAT under section 115JB

No Particulars Amount
1 15% of Book Profit 8,28,000
2 Add : Health and Education Cess 33,120
3 MAT Payable u/s 115JB 8,61,120

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 21

AY 21- 22 DIRECT TAXATION
Working Notes:
No Particulars
1 Only the specified items mentioned under Explanation 1 to section 115JB can be added back
to the net profit as per the Statement of Profit and Loss prepared as per the Companies Act
for computing book profit for levy of MAT. Since the following items are not specified in the
said Explanation 1, the same cannot be added back for computing book profit:
 Sales tax liability.
 Unpaid interest to financial institutions
 Penalty for infraction of law
2 Long term profit on sale of rural agricultural land is not chargeable to tax under the normal
provisions of the Income-tax Act. 1961, since rural agricultural land is not a capital asset as
per section 2(14), However, the same cannot be reduced while computing book profit, since
no express provision is there under section115JB to exclude such profits while computing
book profit. Therefore, profit on sale of rural agricultural land reflected in the statement of
profit and loss shall be part of book profit, though the same is not chargeable to tax as per
the normal provisions of the Act, since rural agricultural land is not a capital asset under
section 2(14).
Note: An alternate view is possible that the capital gains on sale of rural agricultural land is
to be reduced while computing book profit, by considering the same as agricultural income.
In that case, book profits shall be Rs. 45,20,000instead of 55,20,000
3 No adjustment is required in respect of interest on borrowed capital of 1,00,000 payable to Y,
not debited to Statement of Profit and Loss, since the net profit as per the Statement of Profit
and Loss prepared as per the Companies Act has to be considered and the items specified
for exclusion/inclusion under section 115JB alone have to be considered while computing the
book profit for levy of MAT
4 Depreciation as per Income-tax Act, 1961 is not relevant for computing book profit for levy
of MAT

Illustration 6
Vishal Ltd furnishes the following details for the year ending 31.03.2021.
No Particulars Rs (in Lakhs)
1 Operating profit 220
2 Less: Transfer to General Reserve 13
3 Provision for diminution in the value of asset 12
4 Proposed dividend 15
5 Net Profit 180

You are further informed that the following items have been debited / credited to the profit and
loss account in arriving at the above mentioned operating profit.
No Particulars Debit Credit
1 Depreciation on SLM 80.00
2 Income Tax 40.00
3 Agricultural Income (Net) 60.00
4 Share of profit from a firm 20.00
5 Share of profit from a AOP not taxable u/s 86 50.00

22 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

The following additional information is provided:

No Particulars Rs (in Lakhs)
1 Depreciation as per WDV method 140.00
2 As per company law, book loss brought forward which includes
30.00
unabsorbed depreciation of Rs 10 Lakhs
3 As per Income Tax Law business loss brought forward including
45.00
unabsorbed depreciation of Rs. 40 Lakhs
4 Credit Balance in revaluation reserve transferred to general reserve upon
disposal of an asset which was revalued a few years ago (not routed 10.00
through profit and loss account)
5 Operating Profit includes a sum of Rs. 20 Lakhs representing LTCG on sale of land. The
company had invested in REC bonds as per provision of Section 54 EC

You are required to compute examine,

No Particulars
a The applicability of Section – 115JB and determine the tax liability accordingly, for the AY
2021 – 22
b Would your book profit answer differ if the application for corporate insolvency resolution
process has been admitted by the National Company law Tribunal under the Insolvency
and Bankruptcy code, 2016

Solution
Determination of tax liability A Ltd. for the AY 2021 - 22
No Particulars Rs
1 15% of book profit – WN 1 (Rs. 130 lakhs X 15% ) 19,50,000
2 Add: Surcharge @ 7% (Deemed Total Income exceeds Rs. 1 Crore) 1,36,500
3 Sub - Total 20,86,500
4 Add: Health & Education cess @ 4% 83,460
5 Total tax payable (Rounded off) 21,69,960

Computation of book profit in accordance with Sec. 115JB (Minimum Alternate Tax)
Rs. in Rs. in
No Particulars
Lakhs Lakhs
1 Net profit 180
2 Add:
Transfer to general reserve 13
Provision for diminution of asset 12
Proposed dividend 15
Income tax 40
Depreciation debited to P&L 80
Revaluation reserve not credited to P&L 10 170
3 Sub total 350
4 Less:
Income exempt
- - u/s. 10(1) – Agricultural Income 60
- - u/s. 10(2A) Share or profit from firm 20
Share of profit from AOP 50
Loss brought forward or unabsorbed depreciation, whichever is

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 23

AY 21- 22 DIRECT TAXATION
less, i.e. 20 or 10 lakhs whichever is less. 10
Deprecation 80 220
5 Book profit for the purpose of Sec. 115JB 130
6 Note: Brought forward losses and unabsorbed depreciation under Income - tax Act has no
role in computation of book profits.

b) Yes. In case an application for corporate insolvency resolution process has been admitted under
the insolvency and bankruptcy code, 2016 then both unabsorbed depreciation and brought
forward loss shall be reduced. In the given case brought forward loss Rs. 20 lakhs and unabsorbed
depreciation Rs. 10 lakhs both shall be reduced. Hence, revised book profit will be Rs. 110 Lakhs.

Illustration 7
Sona Ltd, a resident Company, earned a Profit of Rs 15 Lakhs after Debit/Credit of the following
items to its Statement of Profit and Loss for the year ended on 31.03.2021 –
Items Debited to P/L A/c Rs Items Credited to P/L A/c Rs
Provision for the Loss of subsidiary 70,000 Profit from Unit established in 5,00,000
SEZ
Provision for Doubtful Debts 75,000 Share in Income of an AOP as a 1,00,000
Member
Provision for Income Tax 1,05,000 Income from Units of UTI 75,000
Provisions for Gratuity based on 2,00,000 Long Term Capital Gains on 3,00,000
Actuarial Valuation sale of building
Depreciation 3,60,000
Interest to Financial Institution (unpaid 1,00,000
before filing of return)
Penalty for infraction of Law 50,000

Other Information:
No Particulars
1 Depreciation includes Rs 1,50,000 on account of Revaluation of Fixed Assets
2 Depreciation as per Income Tax Rules is Rs 2,80,000
3 Brought forward loss as per the books of account of the company of Rs. 10,00,000 which
includes Unabsorbed Depreciation of Rs 4 Lakhs
4 The AOPs, of which the Company is a Member, has paid Tax at Maximum Marginal Rate
5 Provision for Income Tax includes Rs 45, 000 of Interest payable on Income Tax

Compute Minimum Alternate Tax u/s 115JB of the Income tax Act, 1961 for AY 2021 – 22,
assuming that Sona Ltd is not required to comply with Indian Accounting Standards. Ignore the
provisions of section 115BAA.

24 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Answer:
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 15,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB
1. Provision for the loss of subsidiary 70,000
2. Provision for doubtful debts, being the amount set aside as 75,000
provision for diminution in the value of any asset
3. Provision for income - tax 1,05,000
-As per Explanation 2 to section 115JB, income - tax shall
include, inter alia, any interest charged under the Act.
Therefore, whole of the amount of provision for income - tax
including Rs. 45,000 towards interest payable has to be added
4. Depreciation 3,60,000 6,10,000
Sub Total 21,10,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB
1. Share in income of an AOP as a member 1,00,000
-In a case, where AOP has paid tax on its total income at
maximum marginal rate, no income - tax is payable by the
company, being a member of AOP, in accordance with the
provisions of section 86. Therefore, share in income of an AOP
on which no income - tax is payable in accordance with the
provisions of section 86, would be reduced while computing
book profit, since the same has been credited to statement of
profit and loss
2. Income from units in UTI -
w.e.f. AY 2021 – 22 income from units in UTI is taxable in the
hands of the unit holders thus, the same would not be
reduced while computing the book profits even though it
credited in the statement of P&L A/c.
3. Depreciation other than depreciation on revaluation of 2,10,000
assets (Rs. 3,60,000 – Rs. 1,50,000)
4. Unabsorbed depreciation or brought forward business loss, 4,00,000 7,10,000
whichever is less, as per the books of account
-Lower of unabsorbed depreciation Rs. 4,00,000 and brought
forward business loss Rs. 6,00,000 as per books of accounts has
to be reduced while computing the book profit
Book Profit u/s 115JB 14,00,000

Computation of MAT under section 115JB

No Particulars Amount
1 15% of Book Profit 2,10,000
2 Add : Health and Education Cess 8,400
3 MAT Payable u/s 115JB 2,18,400

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 25

AY 21- 22 DIRECT TAXATION
Working Notes:
No Particulars
1 It is only the specific items mentioned under Explanation 1 to section 115JB, which can be
adjusted from the net profit as per the Statement of Profit and Loss prepared as per the
Companies Act for computing book profit for levy of MAT. Since the following items are not
specified thereunder, the same cannot be adjusted for computing book profit:
 Interest to financial institution (unpaid before filing of return) and
 Penalty for infraction of law
2 Provision for gratuity based on actuarial valuation is an ascertained liability -CIT v. Echjay
Forgings (P) Ltd. (2001) 251 ITR 15 (Bom.). Hence, the same should not be added back to
compute book profit
3 As per proviso to section 115JB(6), the profits from unit established in special economic
zone cannot be excluded while computing the book profit, and hence, such income would
be liable for MAT

Illustration 8
No Particulars
1 M/s ABC Ltd has taxable income of Rs 65 Lakhs and the book profit is Rs 1.5 crores (turn
over for the year Rs. 450 Crores) for the AY 2021 - 22. Compute the tax liability u/s 115 JB
2 Compute total income adopting the similar figures as (a) for XYZ Ltd, a unit of
International Financial Service Centre earning income in convertible foreign exchange

Solution
Computation of Tax liability of ABC Ltd. u/s. 115JB for AY 2021 - 22
ABC Ltd XYZ
(15%) Ltd.(9%)
No Particulars
Amount in Amount in
Rs) Rs)
1 Tax on book profit – Rs. 1.50 Crore x 15% / 9% (A) 22,50,000 13,50,000
2 Tax on total income under normal provisions @ 30% - (B)
19,50,000 19,50,000
Rs. 65lakhs x 30%
3 Higher of the (A) or (B) 22,50,000 19,50,000
4 Add:
5 Surcharge- ABC Ltd. @ 7% (deemed Total Income
-
exceeds Rs. 1 Crore) 1,57,500
6 XYZ Ltd – Not leviable as the Total Income does not
- NIL
exceed Rs. 1 Crore)
7 Sub total 24,07,500 19,50,000
8 Add: Health & Education cess @ 4% 96,300 78,000
9 Total tax payable (Rounded Off) 25,03,800 20,28,000

Illustration 9

26 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Delta Ltd., an Indian company, earned a profit of Rs. 36 lakhs after debit / credit of the following
items to its Statement of Profit and Loss for the year ended on 31.3.2021 –

(i) Items debited to Statement of Profit and Loss:

No Particulars Rs.
1 Provision for the loss of subsidiary 92,000
2 Provision for doubtful debts 1,05,000
3 Provision for income – tax 2,17,000
4 Provision for gratuity based on actuarial valuation 3,25,000
5 Depreciation 2,70,000
6 Interest to financial institution (unpaid before filing of return) 80,000
7 Penalty for infraction of law 27,000

(ii) Items credited to Statement of Profit and Loss:

No Particulars Rs.
1 Profit from unit established in special economic zone 12,00,000
2 Share in income of an AOP as a member 2,25,000
3 Income from units of UTI 52,000
4 Long term capital gains 2,50,000

Other information:

No Particulars
1 Depreciation includes Rs. 1,20,000 on account of revaluation of fixed assets.
2 Depreciation as per Income - tax Rules. 1962 is Rs. 3,20,000
3 Balance of Statement of Profit and Loss shown in Balance Sheet at the asset side as at
31.3.2020 was Rs. 25 lakhs which includes unabsorbed depreciation of Rs. 12 lakhs.
4 The AOP, of which the company is a member, has paid tax at maximum marginal rate.
5 Provision for income - tax includes Rs. 70,000 of interest payable on income-tax.

Compute minimum alternate tax under section 115JB of the Income - tax Act, 1961, for A.Y. 2021 -
2022.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 27

AY 21- 22 DIRECT TAXATION
Answer

Computation of “Book Profit” for levy of MAT under section 115JB for A.Y.2021 - 22
No Particulars Rs. Rs.
1 Net Profit as per Statement of Profit and Loss 36,00,000
2 Add: Net profit to be increased by the following amounts as per
Explanation 1 to section 115JB:
3 Provision for the loss of subsidiary 92,000
4 Provision for doubtful debts, being the amount set aside as provision 1,05,000
for diminution in the value of any asset
5 Provision for income - tax - Further, as per Explanation 2 to section 2,17,000
115JB, income-tax shall include, inter alia, any interest charged under
the Act, therefore, whole of the amount of provision for income-tax
including Rs. 70,000 towards interest payable has to be added
6 Depreciation as per books of account 2,70,000 6,84,000
7 Sub total 42,84,000
8 Less: Net profit to be decreased by the following amounts as
perExplanation1 to section 115JB:
9 Share in income of an AOP as a member - In a case where AOP has 2,25,000
paid tax on its total income at maximum marginal rate, no income
- tax is payable by the company, being a member of AOP, in
accordance with the provisions of section 86. Therefore, share in
income of an AOP on which no income-tax is payable in accordance
with the provisions of section 86, would be reduced while computing
book profit, since the same has been credited to statement of profit and
loss
10 Depreciation other than depreciation on revaluation of
assets ( Rs. 2,70,000 - Rs. 1,20,000) 1,50,000
11 Unabsorbed depreciation or brought forward business loss,
whichever is less, as per the books of account. - Lower of unabsorbed 12,00,000
depreciation Rs. 12,00,000 and brought forward business loss Rs.
13,00,000 as per books of accounts has to be reduced while computing
the book profit 15,75,000
12 Book Profit 27,09,000

Computation of MAT liability under section 115JB

No Particulars Rs
1 15% of book profit 4,06,350
2 Add: Health & Education Cess @ 4% 16,254
3 Minimum Alternate Tax liability 4,22,604
4 MAT liability (rounded off) 4,22,600

28 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Notes:
No Particulars
1 It is only the specific items mentioned under Explanation 1 to section 115JB, which can be
adjusted from the net profit as per the Statement of Profit and Loss prepared as per the
Companies Act for computing book profit for levy of MAT. Since the following items are not
specified thereunder, the same cannot be adjusted for computing book profit:
 Interest to financial institution (unpaid before filing of return) and
 Penalty for infraction of law
2 Provision for gratuity based on actuarial valuation is an ascertained liability [CIT v. Echjay
Forgings (P) Ltd. (2001) 251 ITR 15 (Bom.)].Hence, the same should not be added back to
compute book profit.
3 As per proviso to section 115JB(6), the profits from unit established in special economic zone
cannot be excluded while computing the book profit, and hence, Such income would be
liable for MAT.
4 Income from units of UTI is taxable in the hands of the company, being a unit holder, since
exemption under section 10(35) is not applicable from A.Y. 2021 - 22. Hence the same should
not be reduced while computing book profit.

Illustration 10
Maitri Jeans (P) Ltd. is in the Business of Manufacturing Jeans. For the AY 2021 - 22, it paid tax @15%
on its Book Profit computed under Section 115JB. The Assessing Officer though satisfied that it is liable
to pay book profit tax U/s. 115JB, wants to charge Interest under Sections 234B and 234C as no advance
tax was paid during the Financial Year 2020 - 21. The Company seeks your opinion on the proposed
levy of interest. Advice.
Answer
No Particulars
1 The issue under consideration is whether interest under sections 234B and 234C can be
levied where a company is assessed on the basis of its book profit under section 115JB
2 The Supreme Court, in Joint CIT v. Rolta India Ltd. (2011) 330 ITR 470, observed that there is
a specific provision in section 115JB(5) providing that all other provisions of the Income -
tax Act, 1961 shall apply to every assessee, being a company, mentioned in that section.
Section 115JB is a self - contained code pertaining to MAT, and by virtue of sub - section (5)
thereof, the liability for payment of advance tax would be attracted
3 According to section 207, tax shall be payable in advance during any financial year, in
accordance with the provisions of sections 208 to 219 (both inclusive), in respect of the total
income of the assessee which would be chargeable to tax for the assessment year
immediately following that financial year
4 Under section 115JB(1), where the tax payable on total income is less than 15% of ‚book
profit‛ of a company, the ‚book profit‛ would be deemed to be the total income and tax
would be payable at the rate of 15%
5 Since in such cases, the book profit is deemed to be the total income, therefore, as per the
provisions of section 207, tax shall be payable in advance in respect of such book profit
(which is deemed to be the total income) also
6 Therefore, if a company defaults in payment of advance tax in respect of tax payable under
section 115JB, it would be liable to pay interest under sections 234B and 234C
7 Therefore, even though Maitri Jeans (P) Ltd. is assessed on the basis of its book profit under
section 115JB for A.Y.2021 - 22, it is liable to pay advance tax. Since Maitri Jeans (P) Ltd. has
not paid any advance tax during the financial year 2020 - 21, the levy of interest u/s 234B and
234C is valid

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 29

AY 21- 22 DIRECT TAXATION
Illustration 11
ABC Ltd has claimed exemption on the income from LTCG u/s 54EC by investing the bonds of
NHAI within prescribed time. In the computation of book profit u/s 115JB, the company claimed
exclusion of LTCG because of exemption available by virtue of Section 54 EC. The AO reckoned
the book profit including LTCG for the purpose of levy of MAT payable u/s 115JB. Is the action of
AO justified in law?
Answer
No Particulars
1 The issue under consideration in this case is whether long term capital gain exempted by
virtue of section 54EC can be included in the book profit computed under section 115JB for
levy of minimum alternate tax
2 It may be noted that minimum alternate tax (MAT) is attracted under section 115JB, on
account of tax on total income being less than 15% of book profit. Section 115JB is a self -
contained code for computation of book profit. The net profit as per the statement of profit
and loss for the relevant previous year prepared in accordance with the provisions of
Schedule III to the Companies Act, 2013, as increased / reduced by the specified adjustment
provided for in explanation 1 to section 115JB would be the book profit for levy of MAT
under section 115JB
3 Therefore, if an assessee has claimed exemption under section 54EC by investing in bonds of
National Highways Authority of India within the prescribed time, the long term capital gain
so exempt would still be taken into account for computing book profit under section 115JB
for levy of MAT, since Explanation 1 to section 115JB does not provide for such deduction
4 As long as long term capital gain are part of the profits included in the statement of profit
and loss prepared in accordance with the provisions of schedule III to the Companies Act,
2013, capital gains cannot be excluded unless provided under explanation 1 to section 115JB.
It was so held by the Kerala High Court in N.J. Jose and Co. (P) Ltd. v. ACIT.
Therefore, the action of the assessing officer is justified in law

Illustration 12
Examine the following statement in the context of the provisions contained in the various chapters
of the Act: ‚The provisions of Section 115JB are not applicable in case of foreign companies‛.
(May – 2011)
Answer:
Explanation 4 Section 115JB provides as under:
The provisions of this section shall not be applicable to an assessee, being a foreign company, if
No Particulars
1 The assessee is a resident of a country or a specified territory with which India has Double
Taxation Avoidance Agreement under section 90 / 90A and the assessee does not have a
permanent establishment in India in accordance with the provisions of such agreement; or
2 The assessee is a resident of a country with which India does not have Double Taxation
Avoidance Agreement and the assessee is not required to seek registration under any law
for the time being in force relating to companies
Section 115JB shall not be applicable to the company covered in Explanation 4 to section 115JB.
However, it is incorrect to say that the provisions of section 115JB are not applicable in case of
foreign companies.

Illustration 13

30 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

ABC (P) Ltd made a provision of Rs. 30 Lakhs for doubtful debts by debit to Statement of
P& L. The assessing officer while computing book profit u/s 115JB wants to add back the
provision. Is the assessing officer justified in making such addition for computing Book - profit?
(May - 2010)
Answer
No Particulars
1 Explanation 1to section 115JB which provides for the computation of book profits, states
as under:
For the purpose of this section, ‚Book profit‛ means the net profit as shown in the statement
of profit and loss for the relevant previous year prepared as per sub section (2) above AS
INCREASED BY -
The amount or amounts set aside as provision for diminution in the value of any asset,
The Finance Act, 2009 has inserted clause (i) in Explanation 1 to section 115JB to overrule
and nullify the decision of Supreme Court in clause of HCL Comnet Systems and Service
Ltd. (2008) 305 ITR 409 (SC). The Supreme Court in the said case held that provision for bad
and doubtful debts cannot be said to be amount set - aside for meeting unascertained
liabilities since there is no liability. As per Supreme Court, the provision for Bad and
doubtful debts cannot be added back under clause (c) of explanation 1 to section 115JB as
the same does not represent any liability. Further, the provision for bad and doubtful debts
does not represent amount set apart to any reserve. As per the said Judgement provision for
bad and doubtful debts amount to diminution in the value of assets, namely, debtors and is
not to be added back while computing book profit although the same is disallowable while
computing the total income under the Income Tax Act.
2 As per the amendment made by Finance Act, 2009 the following shall be added back
while computing the book profits:
No Particulars
1 Provision for bad and doubtful debts as it amounts to provision for diminution in
value of assets, namely, debtors
2 Provision for diminution in value of any investment or asset as per AS - 13/ AS – 28

The above are also disallowable while computing the total income under the Income - tax
Act.
The above said clause (i) to explanation 1 to section 115JB covers the provision for bad
and doubtful debts. Therefore, in view of the above said clause, the assessing officer is
justified in adding the provisions of Rs. 30 lakhs for doubtful debts.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 31

AY 21- 22 DIRECT TAXATION
Illustration 14
Share of member of an AOP / BOI in the income of the AOP / BOI is to be reduced from net profit
for computing ‚book profit‛ for levy of minimum alternate tax. Explain the rationale behind the
amendment.
Answer:
No Particulars
1 Under section 86, no income tax is payable on the share of a member of an AOP / BOI in the
income of the AOP / BOI in certain circumstances. A company which is a member of an AOP
is also not required to pay tax in respect of its share in the income of the AOP / BOI in such
cases
2 However, under section 115JB, a company which is a member of an AOP / BOI was liable to
pay Minimum Alternate Tax (MAT) on such share, since such income was not excluded
from the book profit while computing the MAT liability of the member, being a company
up to A.Y. 2016 – 17
3 It may be noted that in the case of a partner of a firm, the share in the profits of the firm is
exempt in the hands of the partner as per section 10(2A) and no MAT is payable by the
partner on such profits, since income in respect of which any provision of section 10 applies,
has to be reduced for computing book profit for levy of MAT
4 In order to ensure equity, with effect from A.Y. 2017 - 18, it has been provided in clause (iic)
inserted in Explanation 1 to section 115JB, the share of a member of an AOP or BOI, the
provisions of section 86, should be reduced while computing book profit for levy of MAT, if
any such amount is credited to Statement of Profit and Loss

Illustration 15
In the context of provisions contained in the Income - tax Act, 1961 examine the correctness of the
following:
Transfer pricing rules shall have no implication where income is computed on the basis of book
profits.
Answer
No Particulars Explanation
1 The For the purpose of computing book profit for levy of MAT, the net profit
statement shown in the Statement of Profit and Loss prepared in accordance with the
is correct. Companies Act can be increased / decreased only by the additions and
deductions specified in Explanation 1 to S.115JB. No other adjustments can be
made to arrive at the book profit for levy of MAT. The Explanation 1 to S.115JB
does not provide for adjustments for Transfer Pricing. Therefore, transfer
pricing adjustments cannot be made while computing book profit for levy of
MAT. Hence, the statement that transfer pricing rules shall have no implication
where income is computed on the basis of book profits is correct

Illustration 16
Interest under sections 234B and 234C is not be levied where the assessment of a company has
been made by the Assessing Officer on the basis of book profits under section 115JB. What do you
say? Examine critically in the context of provisions contained in the Act relevant for assessment
year 2021 - 22.
(Nov – 2013)

Answer

32 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

No Particulars
1 The issue under consideration is whether interest under sections 234B and 234C of the
Income - tax Act, 1961 can be levied where a company is assessed on the basis of book
profits under section 115JB
2 Section 115JB is a self - contained code pertaining to MAT, and by virtue of sub - section (5)
thereof, all other provisions of the Act shall apply to every assessee being a company and
hence the liability for payment of advance tax would be attracted
3 Therefore, interest under sections 234B and 234C would be attracted for failure on the part of
the company to pay advance tax on the basis of tax on book profits under section 115JB

Illustration 17
Examine and explain in the context of provisions contained in the Act as to correctness of the
action taken by the Assessing Officer for making adjustments of the following items while
assessing the book profits of ‚Sonu Pvt. Ltd.‛ for the year ended 31.03.2021:
No Particulars
1 Prior period expenses of Rs. 3 lacs debited in Statement of Profit & Loss
2 Depreciation @ 9.5%, as per rates prescribed under Companies Act, 2013, on the car valuing
Rs. 20 lacs purchased on 01 - 01 - 2021, charged for whole of the year in the profit & loss
account

Answer
The Assessing Officer’s power is restricted to examining whether the books of account are certified
by the authorities under the Companies Act, 2013 as having been properly maintained in
accordance with the Companies Act, 2013. Thereafter, he only has the limited power of making
additions and deductions as provided for in Explanation 1 below section 115JB.
The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the
audited Statement of Profit and Loss except to the extent provided in Explanation 1 below section
115JB. It was so held by the Apex Court in Apollo Tyres Ltd. v. CIT.

No Particulars Explanation
1 The action of No adjustment is required for prior period expenses which have to be
the Assessing shown separately in the Statement of Profit and Loss as per AS - 5. Prior
Officer is period expense is not an item which can be adjusted in terms of any of the
incorrect clauses covered in Explanation 1 below section 115JB
2 The action of If the Company has charged the depreciation in Profit & Loss Account and
the Assessing the same has been approved at the AGM of the shareholders, the Assessing
Officer is Officer cannot make adjustment under section 115JB
incorrect

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 33

AY 21- 22 DIRECT TAXATION
Illustration 18
Z Ltd. charged depreciation on its fixed assets at the rates prescribed in the Income tax Rules in its
accounts consistently. The Assessing Officer disallowed the same and considered depreciation
computed at the rates prescribed in the Companies Act, 2013, for the purpose of computation of
‚book profit‛ under section 115JB for the assessment year 2021 - 22. Examine the correctness of the
action of the Assessing Officer. Discuss.
(May – 2009)
Answer
No Particulars
1 The action of the Assessing officer is not tenable. The Assessing Officer has only limited
power to examine whether books of account have been certified by authorities under the
Companies Act, as having been properly maintained in accordance with said Act.
Thereafter, he does not have jurisdiction to go behind net profit shown in statement of profit
& loss except to extent provided in Explanation to section 115JB
2 Where an assessee is consistently charging depreciation in its books of accounts at rates
prescribed in Income - tax Rules and accounts of the assessee has been prepared and
certified as per provisions of the Companies Act, the Assessing Officer would not have any
jurisdiction under section 115JB to rework net profits of the assessee by substituting rates of
depreciation prescribed under the Companies Act - Apollo Tyres v. CIT (SC)

Illustration 19
A foreign company has put forth the following arguments amongst the others to say that the
provisions of section 115JB, regarding minimum alternate tax are not applicable to it:
No Particulars
1 The company does not prepare the accounts in accordance with the provisions of Part II of
Schedule III of the Companies Act, 2013
2 It does not lay its accounts before the general meeting in accordance with section 129 of the
Companies Act, since no meeting is held in India; and
3 It does not declare any dividend in India

Discuss the validity or otherwise of the above arguments. Give reasons

Answer
As per Explanation 4 of section 115JB, a foreign company is not liable to MAT if following
conditions are satisfied:
The provisions of this section shall not be applicable to an assessee, being a foreign company,
if
No Particulars
1 The assessee is a resident of a country or a specified territory with which India has Double
Taxation Avoidance Agreement under section 90 / 90A and the assessee has not have a
permanent establishment in India in accordance with the provisions of such agreement; or
2 The assessee is a resident of a country with which India does not have Double Taxation
Avoidance Agreement and the assessee is not required to seek registration under any law
for the time being in force relating to companies

Therefore, irrespective of argument given by foreign company, it is liable to MAT if conditions of

Explanation 4 to section 115JB are not satisfied

34 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

CHAPTER - 2
MAT FOR IND AS COMPANIES

MAT

Computation
MAT for Ind
Introduction MAT in MAT credit of TI under
AS
to MAT Special Cases u/s 115JAA MAT &
Companies
Normal Route

SECTION REFERENCE

Section

115JB (2A) 115JB (2B) 115JB (2C)

COMPUTATION OF BP FOR IND AS COMPLIANT COMPANIES

Adjustment in Book profit

due to adoption of Ind AS

Annual Adjustment - Transitional Adjustments

at the convergence date -
S. 115JB(2A) & (2B) S. 115JB(2C)

For a company whose financial statements are drawn up in compliance to the Indian
Accounting Standards the book profit as computed in accordance with Explanation 1 to the sub
– section (2) shall be further –

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 35

AY 21- 22 DIRECT TAXATION

No Particulars
1 Increased by all amounts credited to other comprehensive income in the statement of profit
and loss under the head ‚ Items that will not be reclassified to profit or loss ‚,
2 Decreased by all amounts debited to other comprehensive income in the statement of profit
or loss under the head ‚ Items that will not be reclassified to profit or loss ;
3 Increased by amounts or aggregate of the amounts debited to the statement of P&L on
distribution of non - cash assets to the shareholder in a demerger in accordance with
Appendix A of IND AS – 10
4 Decreased by all amounts or aggregate of the amounts credited to the statement of profit &
loss on distribution of non – cash assets to the statement of profit & loss on distribution of
non – cash assets to shareholders in a demerger in accordance with Appendix A of IND AS –
10

PROVISION IN DETAIL
No Particulars
1 According to section 115 JB(2A) , for a company whose financial statements are drawn up in
compliance to the Ind AS, the book profit as computed in accordance with sec.
115JB(2) shall be further
No Particulars
1 Increased / decreased by all amounts credited/debited to other comprehensive
income(OCI) in the statement of P & L under the head “items that will not be re -
classified to profit or loss”
2 Increased / decreased by amounts or aggregate of amounts debited/credited to the
statement of P & L on distribution of non - cash assets to shareholders in a
demerger in accordance with Appendix A of the Ind AS 10
2 It may be noted that, the following amount reflecting under the head ‚items that will not be
reclassified to profit or loss‛ shall not be increased or decreased from the book profit
No Particulars
1 Revaluation surplus for assets in accordance with the Ind AS 16 and Ind AS 38
2 Gains or losses from investments in equity instruments designated at fair value
through OCI in accordance with Ind AS 109
3 However the book profit of the PY in which the asset or investment referred to above is
 Retired,
 Disposed,
 Realized or
 Otherwise transferred
 Shall be increased or decreased, as the case may be, by the amount or the aggregate of
the amounts referred to above for the PY or any of the preceding PY and relatable to
such asset or investment

36 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

P&L ITEM

P & L Item

Item reclassified to Item not reclassified to

P&L P&L

No MAT Adjustments MAT Adjustments

required required

SECTION 115JB(2A)

115JB(2A)

Demerger
OCI Adjustment
Adjustment

Debited to P&L Credited to P&L Distribution of Distribution of

and Credited to and Debited to NCA to SH NCA to SH
OCI OCI Debited to P&L Credited to P&L

Added to BP Reduced from BP Added to BP Reduced from BP

EXCEPTIONS TO ITEM THAT WILL NOT BE RECLASSIFIED TO P&L

Exceptions to 115JB (2A)

Adjustments

Gain or losses from

Revaluation surplus investment in Equity
instrument designated @ FV

Note :-
Time of Taxation for the above two exceptions are, at the time of
 Retirement,
 Disposal,
 Realization or
 Otherwise transferred

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 37

AY 21- 22 DIRECT TAXATION
SECTION 115JB (2A) – TIME OF TAXATION

No Particulars
1 The other comprehensive income (OCI) includes certain items that will permanently be
recorded in reserves and hence, never be reclassified to the statement of P&L included in the
computation of book profits. These items shall be included in book profit for MAT purposes
at the point of time as specified below –
No Items Point of time
1 Changes in revaluation surplus of Property, To be included in book profit at the
Plant and Equipment (PPE) and Intangible time of realization / disposal /
assets (Ind AS 16 and Ind AS 38) retirement or otherwise transferred
2 Gains and losses from investments in equity To be included in book profits at the
instruments designated at fair value time of realization / disposal /
through other comprehensive income (Ind retirement or otherwise transferred
AS 109)
3 Remeasurements of defined benefit plans To be included in book profits every
(Ind AS 19) year as the re – measurements gains
and losses arise
4 Any other item To be included in book profits every
year as the gains and losses arise

SECTION 115JB (2B) & (2C)

No Section Particulars
1 Sec - In a demerger, in the case of a resulting company, where the property and the
115JB(2B) liabilities of the undertaking received by it are recorded at values different from
values appearing in the BOA of the demerged company immediately before the
demerger, any change in such value shall be ignored for the purpose of
computation of book profits of the resulting company
2 Sec - The book profit of the year of convergence and each of the following 4 PY shall
115JB be further increased or decreased, as the case may be, by 1/5 thof the transition
(2C) amount
 However the BP of the PY in which the asset or investment referred to in
points (B) to (E) below under the caption ‘transition amount’, is retired,
disposed, realised or otherwise transferred, shall be increased/decreased as
the case may be, by the amount or aggregate of the amounts referred to in
the points (B) to (E) relatable to such asset or investment.
 The BP of the PY in which the foreign operation referred to in point (F)
below under the caption ‘transition amount’, is disposed or otherwise
transferred, shall be increased or decreased, as the case may be, by the
amount or the aggregate of the amounts referred to in the point (F) below
relatable to such foreign operations

38 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

For the purpose of this section:

No Particulars Explanation
1 Transition Means the amount or the aggregate of amounts adjusted in the other equity
amount (excluding capital reserve, and securities premium reserve) on the
convergence date but not including the following –
No Particulars
A Amount or aggregate of the amounts adjusted in the OCI
on the convergence date which shall be subsequently re -
classified to the profit or loss
B Revaluation surplus of assets in accordance with the Ind
AS 16 &Ind AS 38 adjusted on the convergence date
C Gains or losses from the investments in equity
instruments designed at fair value through other

{
comprehensive income in accordance with the Ind AS 109
adjusted on the convergence date
D Adjustments relating to items of property, plant and
equipment and intangible assets recorded at fair value
deemed cost in accordance with the paragraph D5 and D7
of the Ind AS 101 on the convergence date
E Adjustments relating to investment in subsidiaries, joint
ventures and associates recorded at fair value as deemed
cost in accordance in accordance with paragraph D15 of
the Ind AS 101 on the convergence date
F Adjustments relating to cumulative translation difference
of a foreign operation in accordance with paragraph D13
of the Ind AS 101 on the convergence date

2 Year Means the PY within which the convergence date falls

of
convergence
3 Convergence Means the first day of the first Indian Accounting Standards reporting
date period as defined in the Ind AS 101

Under Ind AS, investment in preference share is considered to be a liability (debt) and the
corresponding dividend expense is debited to P&L account as interest cost. However, for
the purpose of computation of book profit u/s 115JB, profit/transition amount shall be
increased by dividend/interest on preference share whether presented as dividend or
interest.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 39

AY 21- 22 DIRECT TAXATION
Example 1:
Companies which adopt Ind AS with effect from 1 April 2016 are required to prepare their
financial statements for the year 2016 - 17 as per the requirements of Ind AS. Such companies are
also required to prepare an opening balance sheet as of 1st April 2015 and restate the financial
statements for the comparative period 2015 - 16.
In such a case, the first-time adoption adjustments as of 31 March 2016 shall be considered for
computation of MAT liability for the previous years, 2016 - 17 (AY 2017 - 18) and thereafter.
Further, in this case, the five years period shall be previous years 2016 - 17, 2017 - 18, 2018 - 19,
2019 - 20 and 2020 - 21.

IND AS MAT FORMAT

Format of Computation of tax u/s 115JB

Step – IA:
No Particulars – Non – Ind AS Compliant Company Amt
1 Net Profit arrived in accordance with the provisions of Companies Act or the relevant XXX
Act of Insurance / Banking / Electricity Company, as the case may be.
2 Add: - Adjustments contemplated u/s 115JB XXX
3 Sub Total XXX
4 Less: Adjustment contemplated u/s 115JB XXX
5 Book Profit computed in accordance with Expl.1 to sec.115JB XXX

Step – IB:
In case the company is required to comply with the Ind AS while preparing its FS, the following
additional adjustments shall be made to the BP as computed in Step – IA above:
No Particulars – Ind AS compliant company Rs. Rs.
1 BP computed in accordance with Expl.1 to sec.115JB – Step – IA
2 Add: Adjustment contemplated:
3 Items credited to OCI and not to be reclassified to statement of P/L a/c – Sec.
115JB (2A)
4 (a) Gain from changes in fair value of equity instruments through OCI &
revaluation surplus from assets on retirement, disposal, realization or XXX
transfer
(b) Gain from changes other than (a) mentioned above XXX
5 Amount debited to statement of P/L by way of distribution of non - cash asset
XXX
to shareholder in a demerger as per Appendix A to Ind AS 10 – Sec. 115JB (2A)
6 1/5 th of transition amount – Sec. 115JB (2C) XXX XXX
7 Sub total XXX
8 Less: Adjustments contemplated:
9 Items debited to OCI and not to be reclassified to statement of P/L – Sec.
115JB (2A)
10 (a) Loss from changes in fair value of equity instruments through OCI and
revaluation surplus from assets on retirement, disposal, realization or XXX
transfer
(b) Loss from changes other than (a) mentioned above XXX
11 Amount credited to statement of P/L by way of distribution of non - cash asset
to the shareholder in a demerger as per the Appendix A to Ind AS 10 – XXX
Sec.115JB(2A)

40 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

12 1/5 th of transition amount – Sec. 115JB(2C) XXX XXX

13 Step – IB: Book Profit – in respect of FS prepared in compliance with Ind AS XXX

Computation of MAT Liability

No Particulars Rs.
1 Book profit computed as per Step – IB XXX
2 Compute tax @ 15% / 9% of Book Profit as computed in Step IA/IB (A) XXXX

Step II :
No Particulars Rs. Rs.
1 Compute total income as per the normal provisions of the Income Tax Act XXX
2 Compute tax on the above @ 30% in the case of domestic company or 40% in a
foreign company
3 Total Tax liability as per normal provisions (B) XXX
4 Higher of (A) or (B) shall be the tax payable u/s 115JB (C) XXX
5 Add: Surcharge, as applicable XXX
6 Add: Education Cess @ 4% XXX
7 Total tax Payable XXX

QUESTIONS FOR PRACTICE

Illustration 1
BGR Ltd is a company whose financials are prepared in compliance with Ind AS. The extract of
statement of profit and loss of the company for the year ended on 31.03.2021 is given below:
Statement of Profit & Loss of BGR Ltd for the year ended 31.03.2021
No Particulars Rs (in Lakhs)
1 Revenue from operations 11,76,000
2 Other Income 37
3 Total Income 11,76,037
4 Expenses
5 Cost of raw materials and component consumed 5,77,749
6 Employee Benefits Expenses 1,18,614
7 Depreciation and Amortization Expenses 2,396
8 Finance Costs 26,268
9 Other Expenses 1,10,973
10 Total Expenses 8,36,000
11 Profit before tax 3,40,037
12 Current Tax 1,02,011
13 Profit for the period 2,38,026
14 Other Comprehensive Income
15 (i) Items that will not be reclassified to profit & loss (after tax) 54,881
16 (ii) Items that will be reclassified to profit & loss (after tax) 8,547
17 Total Comprehensive income and other comprehensive income for the
3,01,454
period

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 41

AY 21- 22 DIRECT TAXATION

Following additional details are available

No Particulars
1 Other expenses includes
No Particulars Amount
1 Provision for doubtful debt Rs. 4, 345 lakhs
2 Provisions for warranty (unascertained liability) Rs. 3, 495 lakhs
3 Penalty for infraction of law Rs. 1, 325 lakhs

2 Depreciation includes depreciation from revaluation of assets to the tune of Rs. 96 lakhs
3 Items that will not be reclassified to profit or loss comprises of
 reduction in post - employment benefit obligation on account of re - measurement for Rs.
45, 361 lakhs (Gross),
 gain from investment in equity instrument designated at fair value through other
comprehensive income of Rs. 33, 235 lakhs (Gross)
 deferred loss on cash flow hedge of Rs. 3, 461 lakhs (Gross) and
 surplus on revaluation of fixed assets Rs. 3, 267 lakhs (Gross)
4 Items that will be reclassified to profit or loss comprise of exchange loss on translation of
foreign operation of Rs. 23,461 lakhs (Gross) investment hedge gain of Rs. 35, 671 lakhs.
Compute book profit u/s. 115JB of BGR Ltd. for the AY 2021 - 22.

Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
In Lakhs In Lakhs
Net profit as per the statement of Profit and Loss 2,38,026
Add: Adjustment as per Explanation 1 to Section 115JB(2)
1. Current Tax 1,02,011
2. Provision for doubtful debts 4,345
3. Provision for Warranty (unascertained liability) 3,495
4. Depreciation charged to Statement of Profit & Loss 2,396 1,12,247
Sub Total
Less: Adjustment as per Explanation 1 to Section 115JB(2)
1. Depreciation (other than revaluation of assets) 2,300
Book Profit Computed in accordance with Explanation 1 to Sec 115JB 3,47,973
Add: Adjustment contemplated
1. Re - measurement of post - employment benefit obligation - Sec 115JB (2A) 45,361
Less: Adjustment contemplated
1. Deferred loss on cash flow hedge – Sec 115JB (2A) 3,461
Book Profit u/s 115JB 3,89,873

42 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Notes :
No Particulars
1 Penalty for infraction of law is not to be added back for computation of MAT
2 Gains or losses from changes in fair value of equity instruments through OCI and
revaluation surplus from assets shall be given effect for book profit computation on
retirement, disposal, realization or transfer only
3 Items in OCI that will be reclassified to profit or loss shall be ignored while computing
book profit

Illustration 2
Zenith Formulations Ltd., an Indian Company engaged in pharmaceutical formulations in Tamil
Nadu, started adoption of Ind AS compliance with effect from 1st April, 2018. The following
particulars are furnished for the year ended 31st March, 2021: -
No Particulars
1 The book profits after adjustments of all items specified in section 115JB(2) amounted to
Rs. 52.26 lakhs (except the adjustment for brought forward losses), for the year ended
31.3.2021
2 Brought forward losses as per books are as under: (Rs. in lakhs)
Financial year Business loss Depreciation
2016 – 17 4.60 4.90
2017 – 18 1.75 2.20
3 The business loss of Rs. 4.60 lakhs and Rs. 1.75 lakhs have been deducted while
computing book profits under section 115JB for the assessment years 2019 - 20 & 2020 -
21, respectively
4 The particulars of Other Comprehensive Income for the year ended 31.03.2021:
A: Other Comprehensive Income (OCI) that may be re -
Debit Credit
classified to profit and loss:
1. Deferred gain Cash flow hedges 5.50
2. Deferred costs of hedging 1.00
3. Comprehensive income from discontinued operations 4.20
4. Exchange Differences of foreign exchange operations 2.30
TOTAL 3.30 9.70
B: Other Comprehensive Income (OCI) that will not be re -
Debit Credit
classified to profit and loss:
1. Changes in fair values of equity instruments 10.00
2. Deferred gains on cash flow hedges 7.25
3. Deferred costs of hedging 4.10
4. Share of other comprehensive income of other associates 3.20
5. Re - measurements of post - employment benefit obligations 4.45
6. Revaluation surplus for assets 7.50
TOTAL 14.10 22.40

5 The transition amount as on convergence date (01 - 04 - 2018) stood at Rs. 52.50 lakhs
(credit balance) including capital reserve of Rs. 8 lakhs and adjustment of Rs. 4.50 lakhs
relating to translation difference in a foreign operation
6 The National Company Law Tribunal (NCLT). Chennai Bench has admitted an
application under section 7 of Insolvency and Bankruptcy Code, 2016(IBC) made by
financial creditor against the company for initiation of Corporate Insolvency Resolution

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 43

AY 21- 22 DIRECT TAXATION
Process on 30th March, 2021
7 Compute the MAT liability for the assessment year 2021 - 22, applying the provisions
relating to Ind AS compliant companies
8 Assuming that the income tax under normal provisions of Income - tax Act, 1961 for the
assessment year 2021 - 22 works out to Rs. 9.20 lakhs, compute the tax credit, if any, to be
carried forward by the company including the period up to which it will be available to
be carried forward

Computation of Book Profit as per Section 115JB

No Particulars Amount Amount
Book profit after adjustment of items under section 115JB(2) 52,26,000
-Except brought forward business loss and unabsorbed depreciation
Less: Adjustment as per Explanation 1 to Section 115JB(2)
1. Brought forward business loss -Rs. 4,60,000 + Rs. 1,75,000 7,10,000 7,10,000
Unabsorbed Depreciation -Rs. 4,90,000 + Rs. 2,20,000
-Since Zenith Formulations Ltd. is a company against which an
application for corporate insolvency resolution process has
been admitted by NCLT under section 7 of the Insolvency
Bankruptcy Code, 2016, the aggregate amount of loss brought
forward and unabsorbed depreciation is allowed to be
reduced from the book profit for the purpose of levy of MAT
under section 115JB. However, the business loss of Rs. 6,35,000
which have been deducted while computing the book profit of
AY 2019 - 20 and 2020 - 21 shall not be deducted again from
book profits.
Book profit computed in accordance with Experience 1 to section 115JB(2) 45,16,000
Add: Items Credited to OCI that will not be considered to profit and loss :
1. Deferred gains on cash flow hedge 7,25,000
2. Share of Other Comprehensive Income of other associates 3,20,000
3. Re - measurement of post - employment benefit obligations 4,45,000
4. Revaluation surplus for assets Rs. 7,50,000 Nil 14,90,000
-Book profit not to be increased by revaluation surplus for
assets as per proviso to section 115JB(2A)
Sub Total 60,06,000
Less: Items Credited to OCI that will not be reclassified to profit and loss :
1. Deferred cost of hedging 4,10,000 4,10,000
2. Changes in fair value of equity instruments Rs. 10,00,000 Nil
-Book profit not to decreased by changes in fair value of equity
instruments as per proviso to section 115JB(2A)
Sub Total 55,96,000
Add: One fifth to Transition amount (Credit Balance)
1. Transition Amount 52,50,000
Less: Amounts to be excluded from above
1. Capital Reserve 8,00,000
2. Transition difference in foreign operations 4,50,000
Sub Total 40,00,000
One Fifth of Rs. 40,00,000 8,00,000
Book Profit for levy of MAT 63,96,000
MAT on Book profit u/s 115JB (15% of Rs. 63,96,000) 9,59,400

44 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Add : Health and Education Cess @ 4% 38,376

MAT liability for AY 2021-22 9,97,776

Computation of MAT tax credit to be carried forward

No Particulars Amount
1 MAT liability for AY 2021 - 22 9,97,776
2 Income tax computed as per the normal provisions of the Act for AY 2021 - 22 9,20,000
-Since the Income tax liability computed as per the regular provisions of the
Income tax Act, 1961 is less than the MAT payable, the book profit would be
deemed to be the total income and tax is leviable @ 15%. The total tax liability is
Rs. 9,97,776.

Computation of tax credit to be carried forward

No Particulars Amount
1 Tax payable for AY 2021 - 22 on deemed total income 9,97,776
2 Less : Income tax payable as per the normal provisions of the Act 9,20,000
3 Tax Credit in respect of tax paid on deemed income 77,776
4 Can be carried forward for 15 Assessment years i.e up to A.Y 2036 - 37

Illustration 3
Anustup Chandra Flour mills Ltd., a domestic company engaged in manufacture of wheat flour
furnishes the following information pertaining to the year ended 31 - 03 - 2021:
No Particulars
1 Net Profit as per the statement of Profit and Loss is Rs. 77 lakhs, after considering the items
listed in (2) to (6) below
2 The company is a member of Vishnu Foods & Co., an AOP in which the members shares are
determinate and their shares in profit/loss are clearly known. The entire income of the AOP
is from business activities. During the year, the company has derived share income of Rs. 9
lakhs from the AOP. The company has spent a sum of Rs. 90,000 towards earning such
income
3 The company has provided for income - tax (including interest under section 234B and 234C
of Rs. 62,000) for Rs. 3 lakhs, and Rs. 5 lakhs towards share in loss of foreign subsidiary
4 Amount debited to the statement Profit and Loss towards interest to a public financial
institution is Rs. 12 lakhs. Of this, Rs. 4 lakhs was paid on 12 - 12 - 2020 only
5 The company committed breach of building norms while extending the factory building.
The City Corporation initiated proceedings against the company and the company settled
the issue by paying compounding fee of Rs. 1 lakh. This amount forms part of general
expenses, which has been debited to the Statement of Profit and Loss
6 In the administrative expenses, the company has debited a sum of Rs. 70,000 towards fee for
delayed filing of statement of TDS under section 234E of the Income - tax Act, 1961

Other Information
No Particulars
1 The company has credited revaluation surplus of Rs. 10 lakhs on fair valuation of assets
under Ind AS - 16 and Ind AS - 38 to other equity
2 The company has credited Rs. 5 lakhs to other comprehensive income on fair valuation of
equity instruments in which the company has Investment

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 45

AY 21- 22 DIRECT TAXATION
During the current year, the depreciation charged as per books of account of the company is the
same as allowable under the IT Act, 1961 - before considering the provisions of section 32(2). The
company proposes to adopt this practice consistently in the future years.

You are required to compute income tax payable by the company for the Assessment Year 2021 -
22. The company is an Indian Accounting Standard compliant company.
Note: The turnover of the company for Previous Year 2018 - 19 was Rs. 250 crores.
(Nov - 2018)
Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 77,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section115JB
1. Expenses on earning the share of income of AOP since share of 90,000
income from AOP is exempt under section 86
2. Income tax and Interest under the Income tax Act 3,00,000
3. Loss of foreign subsidiary company 5,00,000
4. Revaluation surplus on fair valuation of assets to be added at Nil
the time of disposal / realisation of assets. Hence, no
adjustment required.
5. Gain on fair valuation of equity instruments to be added at the Nil 8,90,000
time of sale of equity instruments. Hence, no adjustment
required.
Sub Total 85,90,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB
1. Share of AOP since it is exempt under section 86 (9,00,000)
Book Profit u/s 115JB 76,90,000

Computation of MAT under section 115JB

No Particulars Amount
1 15% of Book Profit 11,53,500
2 Add : Health and Education Cess 46,140
3 MAT Payable u/s 115JB 11,99,640

Working Notes:
No Particulars
1 No adjustment is required in computation of book profit under section 115JB for the
following expenses :
No Particulars
1 Interest on financial institution
2 Compounding fee for breach of building laws
3 Filing fees for late filing of TDS returns

2 As per SC in Malayala Manorama Co. Ltd., the company can follow rates of depreciation
given in the Income Tax Act, while preparing P&L as per Companies Act.

46 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

CHAPTER - 3
MAT ROUTE IN SPECIAL CASES

MAT

Computation
MAT for Ind
Introduction MAT in MAT credit of TI under
AS
to MAT Special Cases u/s 115JAA MAT &
Companies
Normal Route

For Computation of Book Profit, the profit shall be increased by the following amounts, if the
following amounts referred in (a) to (i) is debited in the Statement of Profit & Loss

No Particulars Explanation
(fc) Notional loss on the The amount representing,
units of business No Particulars
trust 1 Notional loss on transfer of capital asset, being share of a
special purpose vehicle, to a business trust in exchange of
units allotted by the trust
2 Notional loss resulting from any change in carrying
amount of said units or
3 Loss on transfer of such units

(k) Amount of gain When units of business trust are actually transferred, Amount of
arising on transfer gain on such transfer has to be added to compute to book profit,
units of business since, notional gains on transfer of shares of a special purpose
trust vehicle to a business trust in exchange for the units of the business
trust and notional gains resulting from change in carrying amount of
such units would have been deducted to compute book profits. The
amount of gain on such transfer, if any, credited to statement of P&L
in the year of transfer will also be reduced

In case where the shares are carried at cost:

The amount of gain has to be computed by taking into consideration
the cost of shares exchanged with the units of the Business trust

In the case where the shares are carried at a value other than the
cost through statement of P&L:
The carrying amount of shares at the time of exchange would be
taken into consideration for computing the amount of gain

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 47

AY 21- 22 DIRECT TAXATION
The profit shall be reduced by the following amounts:
No Particulars Explanation
iie Notional Gain on The amounts representing -
the units of No Particulars
Business Trust 1 The Notional gain on transfer of capital asset, being
share of a special purpose vehicle, to a business trust in
exchange of units allotted by the trust
2 Notional gain resulting from any change in carrying
amount of said units
3 Gain on transfer of such units
If any, credited to Statement of P&L
iif Loss on transfer of Amount of loss on transfer of units acquired in exchange of shares of
Units SPV computed by taking into account the cost of the shares
exchanged with units, where the shares are carried at cost. In case
shares are carried at the value other than cost through statement of
P&L , the amount of loss on transfer of such units has to be
computed by taking into account the carrying amount of the shares
at the time of exchange

48 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

CHAPTER - 4
MAT CREDIT U/S 115JAA

MAT

Computation
MAT for Ind
Introduction MAT in MAT credit of TI under
AS
to MAT Special Cases u/s 115JAA MAT &
Companies
Normal Route

MAT CREDIT UNDER SEC 115JAA

No Particulars
1 This section provides that where tax is paid in any assessment year in relation to the
deemed income under Section 115 JB(1), the excess of tax paid over and above the tax
payable under the other provisions of the Income Tax Act, 1961, will be allowed as tax
credit in the subsequent years. However, no interest would be payable on the tax credit
allowed
2 The tax credit is, therefore, the difference between the tax paid under Section 115 JB (1)
and the tax payable on the total income computed in accordance with the other
provisions of the Act
3 The tax credit is allowed to be carried forward for 15 Assessment Years succeeding the
assessment year in which the credit became allowable.
4 Such credit is allowed to be set off against the tax payable on the total income in an
assessment year in which the tax is computed in accordance with the provisions of the
Act, other than 115JB, to the extent of excess of such tax payable over the tax payable on
book profits in that year
Example
Tax as per
MAT as per MAT credit Actual tax MAT credit
P.Y regular
sec 115JB adjustment paid balance
provisions
2018 - 19 4,50,000 3,95,000 - 4,50,000 55,000
2019 - 20 4,70,000 4,10,000 - 4,70,000 1,15,000
2020 - 21 3,80,000 4,00,000 20,000 3,80,000 95,000

5 Where as a result of order passed, the amount of tax payable is reduced or increased; the
amount of tax credit allowed shall also be reduced or increased accordingly
6 In case of conversion of a private company or unlisted company into an LLP, the tax
credit under Section 115JAA for MAT paid by the company under section 115JB would
not be allowed to the successor LLP
7 A company opting for section 115BBA from AY 2020 – 21 or any subsequent year cannot
set – off MAT credit available to it u/s 115JAA from the year in which it exercises such
option

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 49

AY 21- 22 DIRECT TAXATION
Analysis of Section – 15JAA
MAT Credit Available
No Particulars Amount
1 Tax paid under section 115JB xxx
2 Less: Tax payable under the normal provisions of the Act had section 115JB not (xxx)
been there
3 MAT credit available xxxx

MAT Credit shall be allowed in the AY in which,

Tax payable under the normal provisions of the Act > Tax payable under section 115JB

MAT Credit to be allowed shall be,

No Particulars Amount
1 Total Tax payable under the normal provisions of the Act xxx
2 Less: Tax payable under section 115JB (xxx)
3 MAT Credit to be allowed xxxx

QUESTIONS FOR PRACTICE

Illustration 1
M/s VDP Ltd furnishes the following information for the year ending 31.03.2021. It seeks your
advice for MAT credit u/s 115JAA

No Particulars Rs.
1 Tax computed u/s 115JB for AY 2020 – 21 5,00,000
2 Tax computed under normal provisions for the AY 2020 – 21 3,00,000
3 Tax computed u/s 115JB for AY 2021 – 22 3,00,000
4 Tax computed under normal provisions for the AY 2021 – 22 4,00,000

Solution
Computation of credit to be carried forward of M/s VDP Ltd u/s 115JAA
For the AY 2020 – 21
No Particulars Rs.
1 Tax computed u/s 115JB 5,00,000
2 Tax computed under normal provisions 3,00,000
3 MAT credit to be carried forward u/s 115JAA 2,00,000

Computation of credit to be carried forward of M/s VDP Ltd u/s 115JAA

For the AY 2021 – 22
No Particulars Rs.
1 Tax computed u/s 115JB 3,00,000
2 Tax computed under normal provisions 4,00,000
3 Higher of the above shall be tax payable 4,00,000
4 Less: Set off of Credit u/s 115JAA (Refer Note - 1) 1,00,000
5 Balance tax payable after MAT credit 3,00,000

50 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Note – 1
No Particulars Rs.
1 Difference Between tax under normal provision an tax u/s 115JB 1,00,000
2 Tax credit available u/s 115JAA 2,00,000
3 Restricted to Lower of (1 and 2) 1,00,000

Balance MAT credit of Rs. 1,00,000 is eligible for carry forward up to AY 2035 – 36.

Illustration 2
Fun India Limited has a carried forward credit of Rs 2 Lakhs u/s 115JAA (3A) of the Income Tax
Act from Assessment Year 2020 - 21. In the PY 2020 - 2021, the Company's Total Income and Book
Profits u/s115 JB are Rs 5 Lakhs and Rs 8 Lakhs respectively.
Compute the Tax Payable by the Company for AY 2021 - 2022 and the amount to be carried
forward u/s 115JAA. (Turnover of Financial Year 2018 - 19 was Rs. 450 crores).

(Nov – 2009)

Answer
No As per Regular As per
Particulars
Provisions S.115JB
1 Total Income for the year ending 31.03.2021 5,00,000 8,00,000
2 Normal Tax @ 31.20% 1,56,000 -
3 Minimum Alternate Tax @ 15.6% - 1,24,800
4 Tax Payable 1,56,000 -
5 Less : Tax Credit -Rs. 1,56,000 – Rs. 1,24,800 31,200 -
6 Tax Payable 1,24,800 1,24,800

Balance tax credit under section 115JAA of Rs. 1, 68,800 shall be carried forward to next AY. It can
be carried forward up to AY 2035 - 36.

FOREIGN TAX CREDIT

No Particulars
1 Where the amount of tax credit in respect of any income tax paid in any country or specified
territory outside India, under Section 90 or Section 90 A or Section 91, allowed against the
tax payable under the provisions of section 115JB (1) exceeds the amount of such tax credit
admissible against the tax payable by the assessee on its income in accordance with the other
provisions of this Act, then, while computing the amount of credit under this sub - section,
such excess amount shall be ignored
2 In other words, the amount of tax credit in respect of MAT shall not be allowed to be carried
forward to subsequent year to the extend such credit relates to the difference between the
amount of Foreign Tax Credit (FTC) allowed against MAT and FTC allowable against the tax
computed under regular provisions of Act other than the provisions relating to MAT

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 51

AY 21- 22 DIRECT TAXATION
Example
No Tax as per
MAT as per
Particulars regular
section 115JB
provisions
1 Tax amount 1,50,000 1,75,000
2 FTC 1,60,000 1,60,000
3 Deduction in respect of FTC, being lower of tax payable in
1,50,000 1,60,000
India and FTC
4 Excess FTC allowed against MAT u/s 115JB 10,000
5 MAT credit 25,000
6 MAT credit as reduced by excess FTC allowable against
15,000
MAT liability (Rs.25,000 –Rs.10,000)

52 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

CHAPTER - 5
COMPUTATION OF INCOME
UNDER MAT & NORMAL ROUTE

MAT

Computation
MAT for Ind
Introduction MAT in MAT credit of TI under
AS
to MAT Special Cases u/s 115JAA MAT &
Companies
Normal Route

QUESTIONS FOR PRACTICE

Illustration 1
Arnold Ltd. (incorporated in UK) has a branch office (PE) in India. The Net Profit of the Branch as
per the Statement of Profit and Loss for the year ended 31.03.2021 was Rs. 83 lakhs. It includes the
following:
No Particulars
1 Dividend from Indian Companies (listed) Rs. 8,00,000
2 Dividend from Indian Companies (unlisted) Rs. 4,00,000
3 Interest received from MIMS Ltd. of Mumbai Rs. 7,00,000. The amount was received by the
Indian company MMS Ltd. in foreign currency as per loan agreement dated 01.04.2015
(section 194LC applicable)
4 Fee for technical services received from Barun Co. Ltd., Kolkata Rs. 25,00,000. The agreement
was made on 10.08.2009 and was approved by Central Government. Expenditure incurred
for providing technical service amounts to Rs. 6,00,000

Additional information
Total income chargeable to tax as per regular provisions of the income - tax Act, 1961 is Rs.
20,00,000 (without considering the items (i) to (iv) above).
You are required to compute the book profit tax under section 115JB of the Act for the assessment
year 2021 - 22 and also the total income - tax liability of the assessee. Your working should be
supported by notes.
(May - 2018)

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 53

AY 21- 22 DIRECT TAXATION
Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 83,00,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section115JB
1. Dividend income from listed and unlisted Indian companies, -
credited to statement of profit and loss
-Dividend income from listed and unlisted Indian companies is
taxable, in the hands of a foreign company. Since, the same has
been credited to P&L no adjustment is required
2. Interest income received from an Indian company as per loan 7,00,000
agreement dated 1.4.2015, where the loan is given in foreign
currency - Since income by way of interest chargeable to tax @
5% under section 115A, being a rate lower than 15%,has been
credited to statement of profit and loss, the same has to be
reduced to arrive at book profit
3. Fees for technical services under an agreement approved by Nil 7,00,000
the Central Government - No adjustment is required since the
foreign company carries on business through a permanent
establishment i.e a branch in India. Such, income being
effectively connected with the branch in India, is taxable @ 40%
u/s 44DA. Since the income is not taxable at a rate less than 15%
it should not be reduced for determining book profit
Book Profit u/s 115JB 76,00,000

Computation of MAT Liability

No Particulars Amount Amount
1 MAT on Book profit u/s 115JB = 15% of 76,00,000 11,40,000

Income - tax computed as per the regular provisions of the Act

No Particulars Amount Amount
1 40% - Since Arnold Ltd. is a Foreign Company of total income of Rs. 15,60,000
20 L plus fee for technical services Rs. 19 L (25 - 6)
2 Tax @ 20% of dividend income of Rs. 12,00,000, as per Section 115A 2,40,000
3 Tax @ 5% of dividend income of Rs. 7,00,000 received from MMS Ltd. 35,000
As per loan Agreement dated 1.4.2015, the loan being given in foreign
currency
4 Sub total 18,35,000
5 Since the income tax computed as per the regular provisions of the
income tax Act, 1961, is higher that the MAT liability, the income tax
payable would be computed as per the regular provisions of the
Income tax Act, 1961:
Income tax computed as per the regular provisions of Income tax
Act, 1961 18,35,000
6 Add: HEC @ 4% 73,400
7 Total income tax Liability 19,08,400

54 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Illustration 2

Netherlands Oil Corporation is a Foreign Company engaged in the exploration of Oil and Gas in
all countries including India. In respect of its Indian Business, the company has prepared the
Statement of Profit and Loss in accordance with Schedule III to the Companies Act, 2013 and such
Statement of Profit and Loss for the previous year ended 31.03.2021 shows a Net Profit of Rs. 65
Lakhs.
The Net Profit from activities in all other countries stands at Rs. 550 Lakhs. The company informs
that while arriving at the Net Profit as indicated above in respect of Indian business, the following
debits / credits have been made in its Statement of Profit and Loss.

Credits to the Profit & Loss Account:-

Rs
No Particulars
(in Lakhs)
1 Net agricultural income in India 14
2 Share of Profits from a firm engaged in business in India 15
3 Amount withdrawn from Reserve created during 2014 - 15 (Book Profit was 3
not increased by the amount transferred to such reserve in the year 2014 - 15)
4 Profits from an Industrial Undertaking covered and qualified for 30
deduction under section 10AA of Income - tax Act, 1961
5 Profits from an Industrial Undertaking covered and qualified under section 6
80 - IA of Income - tax Act, 1961
6 Deferred Tax Credit 2

Debits to the Profit & Loss Account :-

Rs
No Particulars
(in Lakhs)
1 Expenditure relating to 10AA undertaking 12
2 Depreciation for Current Year under Companies Act, 2013 24
3 Interest to Financial Institutions not paid up to the date of filing the return 6
4 Penalty for infraction of law 1
5 Proposed Dividend 3
6 Provision for Taxation (Income - tax) 2
7 Transfer to General Reserve 5
8 Provision for Unascertained Liabilities 2
9 Expenditure relating to 80 - IA undertaking 5

The following additional information is also provided:

Rs
No Particulars
(in Lakhs)
1 Brought forward Book Loss 12
2 Depreciation allowable under Income –tax rules 30
3 Brought forward Business Loss and unabsorbed depreciation as per income - 18
tax law (Loss Rs. 8 lakhs and Depreciation Rs. 10 Lakhs)
You are requested to compute the total tax liability of the company for Assessment Year

(NOVEMBER 2002)

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 55

AY 21- 22 DIRECT TAXATION
Answer:

Total income as per normal provisions of income - tax act Rs (in Lakhs)
No Particulars Amt Amt
1 Net profit as per P & L Account 65.00
2 Add: Expenses Disallowed
3 Depreciation under Companies Act 24.00
4 Expense disallowed under section 43B – Interest not paid to Financial 6.00
Institutions
5 Penalty for infraction of Law 1.00
6 Proposed Dividend 3.00
7 Provision for taxation (Income - tax) 2.00
8 Transfer to General Reserve 5.00
9 Provision for unascertained liability 2.00 43.00
10 Sub total 108.00
11 Less:
12 Net Agricultural Income being exempt u/s 10 14.00
13 Share of Profits from firm being exempt u/s 10 15.00
14 Deferred tax Credit 2.00
15 Amount withdrawn from Reserve 3.00
16 Depreciation allowable as per Income - tax Rules 30.00 64.00
17 Income under the head PGBP 44.00
18 Less:
19 Brought forward Business Loss 8.00
20 Brought forward depreciation 10.00 19.00
21 Total income 7.00
22 Tax thereon @ 41.60% 2,91,200

Computation of book profit under section 115JB

No Particulars Amt Amt
1 Net profit as per P & L Account 65.00
2 Add:
3 Expenditure relating to 10AA undertaking NIL
4 Proposed Dividend 3.00
5 provision for taxation (Income - tax) 2.00
6 Amount transferred to General Reserve 5.00
7 provision for unascertained liability 2.00 12.00
8 Sub total 77.00
9 Less:
10 Net Agricultural Income exempt under section 10 14.00
11 Share of Profit from firm exempt under section 10 15.00
12 Deferred tax credit 2.00
13 profit from undertaking qualified for deduction u/s 10AA NIL
14 loss Brought forward or Unabsorbed depreciation whichever is less NIL 31.00
(See Note 3)
15 Book Profit as per section 115JB 46.00
16 Tax as per section 115JB = 15.6% of Rs. 46 lakhs = Rs. 7,17,600

56 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Therefore, the foreign company shall pay tax of Rs. 7,17,600 under section 115JB on its book
profits. MAT credit available is Rs. 4,26,400

Note

No Particulars
1 Amount withdrawn from reserve created during 2014 - 15 credited to Profit & Loss Account
shall not be reduced since book profits of the year 2014 - 15 was not increased by such
reserve
2 Profits from an industrial undertaking qualified for deduction under section 80 - IA and
10AA shall not be reduced since section 115JB provides that only the profits referred to in
sections 10, 11 & 12 are to be reduced. Similarly, expenditure relating to 80 - IA and 10AA
undertaking shall not be added back
3 As per the question the unabsorbed depreciation as per books is NIL. Therefore, lower of the
following shall be deducted:
i B/F Loss as per books Rs. 12,00,000
ii B/F Depreciation as per books NIL

Illustration 3

A domestic company, ABC Ltd. has an undertaking newly established for export of computer
software in a Special Economic Zone, the profits of which have been merged in the net profits of
the company as per Statement of Profit and Loss prepared in accordance with the provisions of
Schedule III to the Companies Act. It furnishes the following particulars in respect of assessment
year 2021 - 22 and seeks your opinion on the application of section I15JB. You are also required to
compute the total income and tax payable. (Assume turnover of company for financial year 2018 -
19 was 500 crores)

No Particulars Amount
1 Net profit as per Profit and Loss A/c as per Schedule III 200 Lakh
Credit side of Profit and Loss A/c includes - 20 Lakh
2 Income exempt u/s 10 30 Lakh
3 Excess realized on sale of land held as investment 100 Lakh
4 Net profit of the undertaking for export of computer software 100 Lakh
Debit side of Profit and Loss A/c includes -
5 Depreciation on straight line method basis 100 Lakh
6 Provision for losses of subsidiary company 60 Lakh
7 Depreciation allowable as per income - tax law 150 Lakh

No Particulars Amount
1 Capital Gains as computed as per income - tax law 40 Lakh
Losses brought forward as per books of account -
2 Business loss 50 Lakh
3 Unabsorbed depreciation 60 Lakh

The company has represented to you that the excess realized on sale of land cannot form part of
the book profit for purposes of section 115JB. You have to deal with his issue.

(MAY 2004)
CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 57
AY 21- 22 DIRECT TAXATION
Answer:

Computation of Book Profit Rs ( in lakhs)

No Particulars Amount
1 Net profit as per Profit and Loss A/c 200
2 Add:
3 Provision for losses of subsidiary company 60
4 Depreciation as per Straight line method 100
5 Less:
6 Income exempt under section 10AA NIL
7 Depreciation (100)
8 Exempt income u/s 10 (20)
9 Brought forward loss or depreciation, whichever is lower (50)
10 Book profit 190

Computations of Income under Normal Provisions Rs ( in lakhs)

No Particulars Amount
1 Computation of Book Profit
2 Net profit as per Profit and Loss A/c 200
3 Less: Exempt income u/s 10 20
4 Less: Capital gain 30
5 Add: Depreciation as per books of account 100
6 Less: Depreciation under section 32 150
7 Add: Provision for loss of subsidiary company 60
8 Business Income 160
9 Capital gain 40
10 Gross Total Income 200
11 Less: Income Exempt Under Section 10AA 100
12 Total Income 100

Tax on net income

No Particulars Amount
1 20% of Rs. 40 Lakh + 30% of Rs. 60 Lakh plus health & education cess 4% 27,04,000
2 Minimum alternate tax - 16.692% of Rs. 190 lakh 31,71,480
3 Tax payable 31,71,480
4 MAT Credit Available 4,67,480

Notes:

No Particulars
1 It is assumed that capital gain is long-term capital gain and is not taxable under section
112A.
2 It is further assumed that the company does not have any brought forward - unadjusted loss
under the income-tax provisions.
3 Profit on sale of capital asset is part of book profit.

Illustration 4

58 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

A Domestic Company, ABC Ltd., furnishes the following particulars in respect of Assessment Year
2021 - 22 and seeks your opinion on the application of Section 115JB. You are also required to
compute the Total Income and Tax Payable.
No Particulars In Lacs
1 Profits as per Statement of P&L as per Companies Act, 2013 215.00
Statement of Profit and Loss A/c Includes :
Credits
3 Dividend Income from Companies 20.00
4 Excess Realized on Sale of Land held as Investment 30.00
Debits
5 Depreciation on straight line method basis 100.00
6 Provision for loss of Subsidiary Company 60.00
7 Depreciation allowable as per the Income Tax Rules, 1962 150.00
8 STCG on Sale of land mentioned as computed under IT Act, 1961 40.00
Loss bought forward as per books of account and as per IT Act, 1961
9 Business Loss 50.00
10 Unabsorbed Depreciation 60.00

You will have to deal with this issue assuming that ABC Ltd is not required to comply with Indian
Accounting Standards. Ignore the provisions of section 115BAA. Note: The turnover of ABC Ltd
for the PY 2018 - 19 was Rs. 390 Crore.
Answer

In the case of a company, it has been provided that where tax on 15% of book profit exceeds tax on
TI computed as per normal provisions, the book profit shall be deemed to be the total income for
tax purposes. It is therefore necessary to compute total income as per Income - tax Act 1961, as
well as book profits.

Computation of Total Income as per Income Tax Act, 1961 Amount (In Lacs)
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 215
Add: Items debited to profit and loss A/c but not deductible or
income to be taxed
1. Depreciation debited to statement of P&L 100

2. Provision for Losses of Subsidiary 60 160

Sub Total 375
Less: Items credited to statement of profit and loss, but not includible
in business income/ permissible expenditure and allowance
1. Dividend Income from Indian Companies 20
2. Excess realised on sale of Land (considered separately) 30
3. Depreciation allowed as per Income Tax Rules, 1962 150 200
Business Income 175
Less: Set off of Bought forward of loss 50
Profit and Gains from business and profession 125
Short Term Capital Gains 40
Income from other sources 20

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 59

AY 21- 22 DIRECT TAXATION
(Dividend income chargeable to tax in the hands of shareholders)
Gross Total Income 185
Less: Set off of Unabsorbed Depreciation 60
Total Income as per Income Tax Act, 1961 125

Computation of Book profit u/s 115JB Amount (In Lacs)

No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 215
Add: Items covered in Explanation 1 to 115JB
1. Depreciation debited to statement of P&L 100
2. Provision for Losses of Subsidiary 60 160
Sub Total 375
Less: Items covered in Explanation 1 to 115JB
1. Depreciation 100
2. Business Loss or Unabsorbed Depreciation whichever is 50 150
lower
Book Profit u/s 115 JB 225

Computation of Tax Liability under the Normal Provisions of the Income Tax Act, 1961
Total income as per the IT Act, 1961 is Rs.125 lakhs,
No Particulars Amount
1 Tax Payable Rs. 105 Lacs @ 25% -Since the Turnover of the company for the PY 31,25,000
2018 - 19 doesn’t exceed Rs.400 Crore
2 Add : Surcharge @ 7% 2,18,750
3 Sub Total 33,43,750
4 Add : Health & Education Cess @ 4% 1,33,750
5 Total Tax Payable 34,77,500

Computation of Minimum Alternate Tax

No Particulars Amount
1 Tax @ 15% of Book Profit of Rs. 225 Lacs 33,75,000
2 Add : Surcharge @ 7% 2,36,250
3 Sub Total 36,11,250
4 Add : Health & Education Cess @ 4% 1,44,450
5 MAT Payable 37,55,700
Since 15% of Book profit exceeds the tax payable as per the Income Tax Act, 1961, the book profit
of Rs. 225 lakhs would be deemed to be the total income and the tax payable on such total income
shall be 15% thereof i.e 33,75,000 plus surcharge @ 7% being Rs. 2,36,250 plus Health and
Education Cess @ 4% (of tax and surcharge) being Rs. 1,44,450. Total tax liability would be Rs.
37,55,700.

60 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Illustration 5
Hyper Ltd engaged in diversified activities, earned a Net profit of Rs 14,25,00 after Debit / Credit
of the following items to its profit and loss account for the year ended on 31.03.2021
Item debited to Profit and Loss Account
No Particulars Rs
1 Expenses on Industrial Unit exempt u/s 80 - IE 2,10,000
2 Provision for Loss of Subsidiary 70,000
3 Provision for sales tax demand (paid before due date) 90,000
4 Provision for Income Tax Demand 1,05,000
5 Penalty 90,000
6 STT on purchase/sale of equity shares 15,000
7 Depreciation 3,60,000
8 Interest on deposit credited to Buyers on 31. 03. 2021 for advance received from 90,000
them, on which TDS was deposited on 31.07.2021

Items credited to Profit and loss account

No Particulars Rs
1 Income on Industrial Unit exempt u/s 80-IE 2,70,000
2 Profit from 100%EOU exempt under section 10AA 60,000
3 Long term Capital Gain on Sale of Equity Shares on which STT was paid at the 3,60,000
time of acquisition and sale
4 Exempt income u/s 10 75,000

The Company provides the following additional information

No Particulars
1 Depreciation includes Rs 1,50,000 on account of revaluation of Fixed Assets
2 Depreciation allowable as per Income Tax Rules is Rs 2,80,000
3 Brought forward Business Loss / unabsorbed Depreciation

Amount as per Books Amount as Per Income Tax

FY
Loss Depreciation Loss Depreciation
2012–2013 2,50,000 3,00,000 2,00,000 2,50,000
2017–2018 Nil 2,70,000 1,00,000 1,80,000
2018–2019 3,50,000 3,15,000 1,20,000 2,10,000

You are required to

No Particulars
1 Compute the total income of the company for AY 2021 - 2 giving the reasons for treatment of
items and
2 Examine the applicability of Sec 115JB of the Income tax Act, 1961 and compute Book Profit
and Tax Credit to be carried forward.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 61

 AY 21- 22 DIRECT TAXATION
Answer
Computation of Total Income as per Income Tax Act, 1961
No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 14,25,000
Add: Items debited to profit and loss A/c but not deductible or
income to be taxed
1. Provision for loss of subsidiary 70,000
2. Provision for sales tax (allowable as it is actually paid before Nil
due date
3. Penalty (not allowable) 90,000
4. Provision for Income Tax, (not allowable) 1,05,000
5. STT on purchase and sale of equity shares (not allowable) 15,000
6. Interest on deposit credited on which tax deduction was Nil
remitted on July 31, 2021 is allowable as per section 40(a)(ia)
since TDS paid before the due date of filing of return of income
7. Depreciation debited to statement of profit and loss 3,60,000
(considered separately
Sub Total 20,65,000
Less: Items credited to statement of profit and loss, but not
includible in business income/ permissible expenditure and
allowance
1. LTCG credited in P&L account ( taxable under section 112A) 3,60,000
2. Exempt income u/s 10 75,000
3. Current year Depreciation 2,80,000
4. Brought forward business loss 4,20,000 7,00,000
5. Sub - Total 9,30,000
6. Brought forward depreciation 6,40,000
Income from PGBP 2,90,000

II. Capital Gains

No Particulars Amount
1. LTCG taxable under sec 112A 3,60,000

Gross total income

No Particulars Amount Amount
1 PGBP + CG = 2,90,000 + 3,60,000 6,50,000
2 Deductions in respect of unit under section 80 - IE(net) 60,000
3 Deductions in respect of 100% EOU under section 10AA 60,000 1,20,000
4 Total taxable income 5,30,000

62 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Computation of Book Profit u/s 115JB

No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 14,25,000
Add:
1. Provision for loss of subsidiary 70,000
2. Provision for sales tax paid before due date being an Nil
ascertained liability – not liable for adjustment
3. Penalty – no adjustment required Nil
4. Provision for Income Tax 1,05,000
5. STT on purchase and sale of equity shares – no adjustment Nil
required
6. Depreciation debited to statement of profit and loss 3,60,000
7. Interest on deposits – No adjustments required Nil
Sub Total 19,60,000
Less: Long term capital gain credited in P&L account is taxable u/s Nil
112A but is liable for MAT (as it is credited to P&L account
no adjustment is required)
Less: Exempt income u/s 10 75,000
Less: Depreciation excluding depreciation on revaluation 2,10,000
Sub Total 16,75,000
Less: Brought forward depreciation or business loss whichever is 6,00,000
less as per books of account taken on cumulative basis
Book Profit 10,75,000

Tax on total income as per normal provisions:

No Particulars Amount
1 Tax @ 31.20% on 1,70,000 + @ 10.4% on 2,60,000 80,080
2 Income tax on book profits computed under sec 115JB @ 15.6% 1,67,700

Since tax payable under the provisions of sec 115JB is more than the normal tax liability, the
company will have to pay income-tax of Rs.87,620 (i.e.,Rs.1,67,700 – Rs.80,080) will be available as
MAT credit u/s 115JAA.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 63

AY 21- 22 DIRECT TAXATION

CHAPTER - 6
QUESTIONS FOR OWN PRACTICE
Illustration 1
Wythe Ltd. prepares the following statement of Profit and loss for the year ended 31.03.2020
Expenditure Amount Incomes Amount
Opening Stock 32,00,000 Sales 1,40,00,000
Purchases 70,00,000 Closing Stock 15,00,000
Salaries 12,00,000 Profit on sale of plot 90,00,000
Rents and Rates 5,00,000 Exempt income u/s 10 1,50,000
Provision for warranties 8,00,000 Sales of Agricultural produce 6,90,000
Provision for diminution in 4,00,000 Income of Developer of SEZ 5,00,000
value of investment from development of SEZ
Provision for losses of subsidiary 3,75,000 Withdrawal from General 3,00,000
company Reserve
Collection charges of income 50,000 Profits from undertaking located 30,00,000
exempt u/s 10 in J & K
Expenses on cultivation 1,10,000 Profits from business of 60,00,000
generation of power
General Expenses 3,60,000 LTCG taxable under section 25,00,000
112A
Donation to Mafia Don 1,00,000 Transfer from Revaluation 2,00,000
reserve account
Penalties 60,000 Share of income from AOP 2,00,000
Secret Commission 1,40,000
CSR Expenditure 15,000
Provision for Doubtful debts 70,000
Sales tax (not paid) 25,000
Deferred Tax 30,000
Customs Duty 1,80,000
Depreciation 5,95,000
Provision for Income Tax 3,00,000
Interest under Income Tax Act 44,000
Provisions for unascertained 56,000
liability
Proposed Dividend 3,30,000
Net Profits 2,21,00,000

Total 3,80,40,000 Total 3,80,40,000

64 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Additional Information
No Particulars
1 Depreciation as per Companies Act of Rs. 5,95,000 includes depreciation of Rs. 2,00,000 on
account of revaluation of assets
2 Depreciation as per Income tax act is Rs. 15,00,000
3 Plot of land was purchased for Rs, 70,00,000 and is sold for 3,60,00,000.00 on21.01.2021. The
entire capital gains have been invested in the units referred to in section 54EC. You are given
that capital gains are long term and indexed cost of acquisition of land is 2,93,77,050
4 The plot of land was revalued by the company in previous year 31.3.2020 by 2 crores and
therefore appeared in books at 2,70,00,000. Rs. 2 crores was debited to plot account and
credited to Revaluation Reserve. The company in previous year31.3.2021 on sale of plot of
land debited the Revaluation reserve by 2 crores and credited the said sum to General
Reserve
5 Deduction under section 80IA is 100% for business of power generation
6 Deduction under section 80IB is 30% for the undertaking in the J & K
7 Customs duty is not paid till the due date of filing of return of income

Answer
Total Income as per Normal Provisions of Income Tax Act
No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 2,21,00,000
Add: Expenses Disallowed
1. Provisions for warranties (Assuming on Scientific Basis Nil
allowed as per Supreme Court in Rotork Control (P.) Ltd.)
2. Provision for diminution in value of investment 4,00,000
3. Provision for loss of subsidiary company 3,75,000
4. Collection charges of exempt income u/s 10 50,000
5. Expenses on cultivation since agricultural income is exempt 1,10,000
u/s 10
6. Donation to Mafia Don 1,00,000
7. Penalties 60,000
8. Secret Commission 1,40,000
9. CSR Expenditure 15,000
10. Provision for Doubtful Debts 70,000
11. Sales Tax (Not paid) 25,000
12. Deferred Tax 30,000
13. Custom Duty Disallowed u/s 43B 1,80,000
14. Depreciation as per books 5,95,000
15. Provision for Income Tax 3,00,000
16. Interest under Income Tax Act 44,000
17. Provision for unascertained liability 56,000
18. Proposed Dividend 3,30,000 28,80,000
Sub Total 2,49,80,000

Less: Allowable Expenses

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 65
AY 21- 22 DIRECT TAXATION
No Particulars Amount Amount
1. Profit on sale of plot assessable as capital gains 90,00,000
2. Income exempt u/s 10 1,50,000
3. Sale of Agricultural produce exempt under section 10 6,90,000
4. Withdrawal from General Reserve 3,00,000
5. Transfer from Revaluation Reserve Account 2,00,000
6. LTCG taxable under section 112A 25,00,000
7. Share of income from AOP exempt under section 86 2,00,000
8. Depreciation as per Income Tax Act 15,00,000 1,45,40,000
Profits and Gains from business or Profession 1,04,40,000

II. Income under the head Capital Gains

No Particulars Amount
1. LTCG on Shares 25,00,000
2. LTCG on sale of plot
Sale price of Plot 3,60,00,000
Less : Indexed Cost of Plot 2,93,77,050
Sub Total 66,25,950
Less : Exempt u/s 54EC 50,00,000
Taxable LTCG on Sale of Plot 16,22,950 16,22,950
Gross Total Income 1,45,62,950

Deduction under Chapter VIA

No Particulars Amount Amount
1. U/s 80IA – 100% 60,00,000
2. U/s 80IB – 30% of Rs. 30,00,000 9,00,000
3. U/s 80IAB Developer of SEZ – 100% 5,00,000 74,00,000
Net Taxable Income(rounded off) 71,62,950

Computation of Tax Payable

No Particulars Amount
1 Tax payable on Rs. 24,00,000 @ 10.4% 2,49,600
2 Tax Payable on Rs. 16,22,950 @ 20.80% 3,37,574
3 On Balance Rs. 30,40,000 @ 26% 7,90,400
4 Total Tax Payable 13,77,574

66 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Computation of Book Profit as per Section 115JB

No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 2,21,00,000
Add: Expenses Disallowed
1. Provisions for warranties (Assuming on Scientific Basis Nil
allowed as per Supreme Court in Rotork Control (P.) Ltd.)
2. Provision for diminution in value of investment 4,00,000
3. Provision for loss of subsidiary company 3,75,000
4. Collection charges on exempt income u/s 10 50,000
5. Expenses on cultivation since agricultural income is exempt 1,10,000
u/s 10
6. Provision for Income Tax 3,00,000
7. Provision for unascertained liability 56,000
8. Provision for Doubtful Debts 70,000
9. Interest under Income Tax Act 44,000
10. Proposed dividend 3,30,000
11. Deferred tax 30,000
12. Amount standing in the Revaluation Reserve A/c relating to 2,00,00,000
revalued plot of land since this amount is not credited to
Statement of Profit and Loss on sale of asset -As per Clause (j)
13. Depreciation 5,95,000 2,23,60,000
Sub Total 4,44,60,000
Less: Allowable Expenses
1. Income exempt u/s 10 1,50,000
2. Sale of Agricultural produce exempt under section 10 6,90,000
3. Withdrawal from General Reserve 3,00,000
4. Depreciation excluding depreciation on revaluation (Clause 3,95,000
(iia))
5. Transfer from Revaluation Reserve Account[Clause (iib)] 2,00,000
6. Share of income from AOP 2,00,000
7. Income of Developer of SEZ Nil 19,35,000
Book Profit u/s 115JB 4,25,25,000
Tax as per Section 115JB (16.692% of 4,25,25,000) 70,98,270

Therefore the Company has to Pay Rs. 70,98,270 and MAT Credit available is Rs. 57,20,699.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 67

AY 21- 22 DIRECT TAXATION
Illustration 2
X Ltd. a closely held company, is engaged in the business of manufacture of chemical goods (value
of plant and machinery owned by the company is Rs. 55 lakhs). The following information for the
FY 2020 - 21 is given
Statement of Profit and Loss
No Particulars Amount
1 Royalty from patent referred to in section 115BBF 5,50,000
2 Sale proceeds of goods (domestic sale) 22,23,900
3 Sale proceeds of goods (export sale) 5,76,100
4 Amount Withdrawn from General Reserve 5,76,100
5 Total 35,50,000
6 Less : Expenses Amount
7 Salary & Wages 2,10,000
8 Depreciation 7,16,000
9 Entertainment Expenditure 12,500
10 Donations to political party 2,500
11 Travelling Expenditure 36,000
12 Income Tax 3,50,000
13 Expense on royalty from patent referred to in section 115BBF 50,000
14 Penalties 8,000
15 Outstanding Customs Duty 17,500
16 Provision for Unascertained liabilities 70,000
17 Proposed Dividend 60,000
18 Loss of Subsidiary Company 30,000
19 Consultation fees paid to a tax expert 21,000
20 Salary and perquisites of managing director 1,80,000
21 Net Profit 17,86,500

Additional Information:
No Particulars
1 Deduction u/s 80IB (30% of Rs. 17,86,500)
2 Excise duty pertaining 2010 - 11 paid during previous year 2020 - 21 (amount actually paid is
Rs. 75,500)
3 Depreciation u/s 32 Rs. 5,36,000
4 Customs duty of Rs. 17,500 has been paid after due date of filing ROI of AY 2021 - 22
5 Depreciation of Rs. 7,16,000 includes depreciation Rs. 3,00,000 on account of revaluation of
assets. The company has transferred Rs. 3,00,000 from Revaluation Reserve to General
Reserve during the PY 31.03.2021
6 The company wants to set off the following losses/allowances :

Particulars For tax purposes For Accounting purposes

Brought forward loss of 2013 – 14 11,80,000 9,10,000
Unabsorbed Depreciation Nil 2,45,000

Compute Total Income of the assessee.

68 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Answer
Computation of Book Profit as per Section 115JB
No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 17,86,500
Add: Expenses Disallowed
1. Expenses on royalty from patent referred to in S. 115BBF 50,000
2. Income Tax and CDT 3,50,000
3. Provision for unascertained liability 70,000
4. Loss of subsidiary company 30,000
5. Proposed dividend 60,000
6. Depreciation 7,16,000 12,76,000
Sub Total 30,62,500
Less: Allowable Expenses
1. Royalty from patent referred to in section 115BBF 5,50,000
2. Amount withdrawn from General reserve 2,00,000
3. Depreciation excluding depreciation on Revaluation of Assets 4,16,000
4. Unabsorbed depreciation or loss whichever is less as per 2,45,000 14,11,000
books
Book Profit u/s 115JB 16,51,500
Tax as per Section 115JB @ 15.60% 2,57,634

Total Income as per Normal Provisions of Income Tax Act

No Particulars Note Amount
1 Income from PGBP 1 5,49,000
2 Income from other sources 2 5,50,000
3 Gross total income 10,99,000
4 Deductions under Chapter VI – A 3 (1,67,200)
5 Total Income 9,31,800

Notes :-
1. Income from PGBP
No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 17,86,500
Add: Expenses Disallowed
1. Depreciation as pet Books 7,16,000
2. Donations to Political Party 2,500
3. Income Tax 3,50,000
4. Penalties 8,000
5. Outstanding Customs Duty 17,500
6. Provision for Unascertained Liability 70,000
7. Proposed Dividend 60,000
8. Expense on Royalty from patent referred to in section 115BBF 50,000
9. Loss on Subsidiary Company 30,000 13,04,000
Sub Total 30,90,500

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 69

AY 21- 22 DIRECT TAXATION
Allowable Expenses

No Particulars Amount Amount

1. Depreciation as per Income Tax Act 5,36,000
2. Royalty from Patent referred to in section 115BBF 5,50,000
3. Amount withdrawn from General Reserve 2,00,000
4. Excise Duty of 2011–12 75,500 13,61,500
Sub Total 17,29,000
1. Brought forward Business Loss 11,80,000
Profits and Gains from business or Profession 5,49,000

2. Income from Other Sources

Particulars Amount
1. Royalty referring to section 115BBF 5,50,000

3. Less: Deduction under Chapter VIA

No Particulars Amount Amount
1. U/s 80IB – 30% of Rs. 5,49,000 1,64,700
2. U/s 80GGB for donation to Political Party 2,500 1,67,200
Total Income 9,31,800
Tax payable on Rs. 5,50,000 @ 10.4% 57,200
Tax Payable on Rs. 3,81,800 @ 26% 99,268
Total Tax Payable 1,56,468

Therefore the Company has to Pay Rs. 2, 57, 634 and MAT Credit available is Rs. 1,01,166.

70 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Illustration 3
A company A Ltd. submits the following Profit & Loss Account for the year ended 31.03.2021.
No Particulars Amount
1 Sale proceeds of goods 25,00,000
2 Profit on sale of shares 1,00,000
3 Amount withdrawn from General Reserve 4,00,000
4 Income from undertaking referred in section 10AA 6,00,000
Interest from business of Financing 5,00,000
5 Dividend Income 50,000
6 Total 41,50,000
7 Less : Expenses
8 Salary & Wages 14,95,000
9 Depreciation 2,10,000
10 Donations to political party 30,000
11 Deferred Tax 25,000
12 Penalty 10,000
13 Expenses on undertaking referred to in section 10AA 40,000
14 Expenses on business financing 50,000
15 Income Tax 1,15,400
16 Education Cess on Income Tax 4,600
17 Loss on Subsidiary company 3,00,000
18 Interest under section 234B/C 35,000
19 Other Expenses 1,15,000
20 Net Profit 17,20,000

Additional Information :
No Particulars
1 Depreciation as per Income Tax Act is Rs. 3,30,000
2 Profit on sale of shares represents profit on sale of equity shares listed on stock exchange
and sold through stock exchange as per details below :

No Particulars Amount
1 Date of Purchase - 14.02.2010 3,00,000
2 Date of Sale – 31.03.2021 6,00,000

3 The company has revalued the shares by Rs. 2,00,000 in 2010 and debited the shares account
and credited the Revaluation Reserve Account. However, on sale of these shares, Rs. 2 lakhs
was transferred from revaluation reserve account to General reserve account

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 71

AY 21- 22 DIRECT TAXATION
Answer
Total Income as per Normal Provisions of Income Tax Act
No Particulars Note Amount
1 Income from PGBP 1 15,70,000
2 Income from CG 2 3,00,000
3 Gross total Income 18,70,000
4 Deductions under Chapter VI -A 3 (5,90,000)
5 Total Income 4 12,80,000

Notes :-
1. Income from PGBP
No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 17,20,000
Add: Expenses Disallowed
1. Depreciation as per Books 2,10,000
2. Donation to Political Party 30,000
3. Deferred Tax 25,000
4. Penalty 10,000
5. Income Tax 1,15,400
6. Education Cess on Income Tax 4,600
7. Interest under section 234B/C 35,000
8. Loss of Subsidiary Company 3,00,000 7,30,000
Sub Total 24,50,000
Less: Allowable Expenses
1. Profit on sale of shares 1,00,000
2. Amount withdrawn from General reserve 4,00,000
3. Exempt Income u/s 10 50,000
4. Depreciation as per Income Tax Act 3,30,000 8,80,000
Profits and Gains from business or Profession 15,70,000

2. Income from Capital Gains

No Particulars Amount
1. Taxable under section 112A assuming STT was paid on purchase 3,00,000

3. Deductions under Chapter VI – A

No Particulars Amount Amount
1. U/s 10AA 5,60,000
2. U/s 80GGB for donation to Political Party 30,000 5,90,000
Total Income 12,80,000
Tax payable on 2,00,000 @ 10.4% under section 112A 20,800
Tax Payable on Rs. 9,80,000 @ 26% 2,54,800
Total Tax Payable 2,75,600

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Computation of Book Profit as per Section 115JB

No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 17,20,000
Add: Expenses Disallowed
1. Expense on Income referred to section 10AA Nil
2. Income Tax 1,15,400
3. Education Cess on Income Tax 4,600
4. Loss of Subsidiary Company 3,00,000
5. Depreciation 2,10,000
6. Deferred Tax 25,000
7. Amount standing in the Revaluation reserve A/c relating to 2,00,000
revalued shares since this amount is not credited to Statement
of Profit and loss on sale of shares –As per Clause (j)
8. Interest under section 234B/C 35,000 8,90,000
Sub Total 26,10,000
Less: Allowable Expenses
1. Amount withdrawn from General Reserve 4,00,000
2. Income referred to in section 10AA Nil
3. Exempt income u/s10 50,000
4. Depreciation 2,10,000 6,60,000
Book Profit u/s 115JB 19,50,000
Tax as per Section 115JB @ 15.60% 3,04,200

Therefore the Company has to Pay Rs. 3,04,200 and MAT Credit available is Rs. 28,600.

Illustration 4
The Profit and loss account of a company for the year ended 31.03.2020 shows a net profit of Rs.
4,40,00,000 after debit and credit of the following items :
No Credits in the Statement of Profit and Loss Amount
1. Income referred to in section 80 – IC 14,00,000
2. Income referred to in section 80 – IE 15,00,000
3. Income referred to in section 10AA 16,00,000
4. Income from power generation qualifying conditions of section 80IA 10,00,000
5. Income from development of SEZ(Net) 11,00,000
6. LTCG taxable under section 112A 12,00,000
7. Amount withdrawn from Revaluation Reserve 13,00,000
8. Amount withdrawn from General Reserve 20,00,000
9. Deferred Tax Credit 6,00,000
10. Exempt income u/s 10 7,00,000
11. Share of Profit from a firm in India 8,00,000
12. Agricultural Income 9,00,000
13. Amount withdrawn from reserve created in 31.03.2014 and book profit of the 30,00,000
year 31.03.2014 was not increased by the said Reserve
14. Interest on Income Tax Refund 4,00,000

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No Debits in the Statement of Profit and Loss Amount
1. Expenses of 80IC undertaking 4,00,000
2. Expenses of 80IE undertaking 6,00,000
3. Expenses of 10AA undertaking 5,00,000
4. Expenses of power generation undertaking 2,00,000
5. Depreciation which includes depreciation on revaluation of assets amounting 27,00,000
to Rs. 13,00,000
6. Expenses on collection of exempt income u/s 10 1,00,000
7. Agricultural Expenses 3,00,000
8. Income Tax and Education and Health Cess 41,20,000
9. Provision for unascertained liability 8,00,000
10. Interest under Income Tax Act 3,00,000
11. Penalty for concealment of Income 7,00,000
12. Bad Debts Written off 5,00,000
13. Provision for Bad Debts 9,00,000
14. Provision for diminution in value of investment 12,00,000
15. Proposed Dividend 50,00,000
16. Loss of Subsidiary Company 10,00,000

Additional Information :
a) The company wants to set off the following losses/allowances :
Particulars As per Income Tax Act As per Books
Brought forward loss 25,00,000 45,00,000
Unabsorbed Depreciation 17,00,000 33,00,000
b) Depreciation as per Income Tax Act amounting to Rs. 70,00,000

Answer
Total Income as per Normal Provisions of Income Tax Act
No Particulars Note Amount
1 Income from PGBP 1 3,90,20,000
2 Income from CG 2 12,00,000
3 IFOS 3 4,00,000
4 Gross total Income 4,06,20,000
5 Deductions under Chapter VI -A 4 49,00,000
6 Total Income 3,57,20,000

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I. Income from PGBP

No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 4,40,00,000
Add: Expenses Disallowed
1. Depreciation as per books 27,00,000
2. Expenses on collection of exempt income u/s 10 disallowed as 1,00,000
per section 14A
3. Agricultural expenses under section 14A 3,00,000
4. Income Tax and Education and Health Cess 41,20,000
5. Provision for unascertained liability 8,00,000
6. Interest under Income Tax Act 3,00,000
7. Penalty for concealment of Income 7,00,000
8. Provisions for Bad Debts 9,00,000
9. Provision for diminution in value of investment 12,00,000
10. Proposed Dividend 50,00,000
11. Loss of Subsidiary Company 10,00,000 1,71,20,000
Sub Total 6,11,20,000
Less: Allowable Expenses
1. LTCG taxable under section 112A 12,00,000
2. Amount withdrawn from Revaluation Reserve 13,00,000
3. Amount withdrawn from General Reserve 20,00,000
4. Deferred Tax Credit 6,00,000
5. Income exempt u/s 10 7,00,000
6. Share of profit from firm exempt under section 10(2A) 8,00,000
7. Agricultural Income exempt under section 10 9,00,000
8. Amount withdrawn from reserve created in 31.03.2014 30,00,000
9. Interest on IT Refund 4,00,000 1,09,00,000
Sub Total 5,02,20,000
Less:
1. Current year depreciation 70,00,000
2. Brought Forward loss 25,00,000
3. Brought forward Depreciation 17,00,000 1,12,00,000
Profits and Gains from business or Profession 3,90,20,000

II. Capital Gains

No Particulars Amount
1. LTCG taxable under 112A 12,00,000

III. Income from Other Sources

No Particulars Amount Amount
1. Interest on IT Refund 4,00,000 4,00,000

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IV. Computation of Tax Payable
No Particulars Amount Amount
Gross Total Income 4,06,20,000
Less: Deduction under Chapter VIA
1. Under Section 80IC 10,00,000
2. Under Section 80IE 9,00,000
3. Under Section 80IA 8,00,000
4. Under Section 80IAB 11,00,000
5. Under Section 10AA 11,00,000 49,00,000
Total Income 3,57,20,000
Tax payable on 11,00,000 @ 11.128% 1,22,408
Tax Payable on Rs. 3,45,20,000 @ 27.82% 96,03,464
Total Tax Payable 97,25,872
Total Tax Payable (Rounded Off) 97,25,870

Computation of Book Profit as per Section 115JB

No Particulars Amount Amount
Net profit as per the statement of Profit and Loss 4,40,00,000
Add: Expenses Disallowed
1. Expenses of 10AA undertaking Nil
2. Depreciation 27,00,000
3. Expenses on collection of exempt income u/s 10 1,00,000
4. Agricultural Expenses 3,00,000
5. Income Tax and Health and Education Cess 41,20,000
6. Provision for unascertained liability 8,00,000
7. Interest under IT Act 3,00,000
8. Provisions for Bad debts 9,00,000
9. Provision for diminution in value of investments 12,00,000
10. Proposed dividend 50,00,000
11. Loss of Subsidiary Company 10,00,000 1,64,20,000
Sub Total 6,04,20,000
Less: Allowable Expenses
1. Income referred in section 10AA Nil
2. Income from Development of SEZ under section 80IAB Nil
3. Depreciation 14,00,000
4. Amount withdrawn from Revaluation Reserve 13,00,000
5. Amount withdrawn from General Reserve 20,00,000
6. Deferred Tax Credit 6,00,000
7. Exempt income u/s 10 7,00,000
8. Share of profit from Firm 8,00,000
9. Agricultural Income 9,00,000
10. Loss or depreciation whichever is less as per books 33,00,000 1,10,00,000
Book Profit u/s 115JB 4,94,20,000
Tax as per Section 115JB @ 16.692% 82,49,186

Therefore the Company has to Pay Rs. 97,25,870.

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Illustration 5

X ltd is manufacturing pumps in New Delhi since 1987. The company also has a business in North
Eastern States and also has a unit in SEZ. The assessee starts business of setting up and operating a
warehousing facility for agriculture produce on 1.6.2020. Net profit earned by X ltd is Rs.65,00,000
consisting the following incomes:

No Particulars Rs.
1 Profit from manufacturing pump 10,00,000
2 Profit from manufacturing warehousing facility 25,00,000
3 Profit from industrial undertaking qualifying for deduction under 17,00,000
section 80IE
4 Profit from industrial undertaking qualifying for deduction under 10,00,000
section 10AA
5 Long term capital gains taxable under section 112A 3,00,000
The following assets have been purchased for warehousing facility and the profit of
Rs.25,00,000 is computed without giving effect to the following:
1 Machinery purchased on 30.6.2019 5,00,000
2 Land purchased on 30.6.2019 11,00,000
3 Machinery purchased on 31.12.2020 6,00,000
4 Building purchased on 31.12.2019 8,00,000
5 Building constructed on 31.05.2020 17,00,000
6 Goodwill purchased on 31.5.2020 7,00,000
Long term capital gains have been invested in section 54EE start-up units.

Your required to compute total tax liability of the company for the AY 2021-22.

Computation of taxable Income for the AY 2021 – 22

No Particulars Note Amount
1 Income from PGBP 1 37,00,000
2 Income from CG 2 Nil
3 Gross total Income 37,00,000
4 Deductions under Chapter VI -A 3 (27,00,000)
5 Total Income 4 10,00,000

Notes :-
I. Income from PGBP
No Particulars Amount Amount
I. Income from Business or Profession
Net profit as per the statement of Profit and Loss 65,00,000
Less:
Profit from operating warehousing facility (see note) 25,00,000
capital gains considered separately 3,00,000
Profits and Gains from business or Profession 37,00,000

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II. Income from CG

No Particulars Amount Amount

1. LTCG taxable under 112A 3,00,000
2. Less: exempt u/s 54EE 3,00,000 Nil

III. Deductions under Chapter VIA

No Particulars Amount Amount

1 Under Section 10AA 10,00,000
2 Under Section 80IE 17,00,000 27,00,000
Total Income 10,00,000
Tax thereon @ 26% 2,60,000
Business loss of Rs.11,00,000 of specified business to be carried forward indefinitely

Computation of book profits under section 115JB

No Particulars Rs.
1 Net profit as per P&L account ( no adjustment required) 65,00,000
2 Book profit 65,00,000
3 Tax thereon @ 15.6% 10,14,000
Tax payable is Rs.10,14,000. MAT credit available Rs.7,54,000. Company shall carry forward loss of
Rs.11,00,000
Note: Computation of deduction allowable u/s 35AD

No Particulars Rs.
1 Machinery purchased on 30.6.2019 5,00,000
2 Machinery purchased on 31.12.2020 6,00,000
3 Building purchased on 31.12.2019 8,00,000
4 Building constructed on 31.5.2020 17,00,000
5 Total 36,00,000
6 Profit of specified business 25,00,000
7 Less: total deduction u/s 35AD @ 100% 36,00,000
8 Loss to be carried forward indefinitely 11,00,000
Loss of Rs.11,00,000 shall not be set off against the profits of any other business.

The loss of Rs.11,00,000 can be set off only against the profits of specified business in current year
and next years. Such loss can be carried forward indefinitely.

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CHAPTER - 7
ALTERNATE MINIMUM TAX
SECTION REFERENCE

Section

115JC 115JD 115JE 115JEE

DEEMED TOTAL INCOME

Assessee

Other than
Company
Company

MAT Provisions u/s AMT Provisions

115JB u/s 115JC

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SECTION 115 JC - SPECIAL PROVISIONS FOR PAYMENT OF TAX BY CERTAIN ASSESSES
No Particulars
1 Notwithstanding anything contained in this Act,
 where the regular income tax payable for the previous year by a person, other than a
company,
 is less than the alternate minimum tax payable for such previous year,
 the Adjusted Total Income shall be deemed to be the total income of that person for
such previous year and
 it shall be liable to pay income - tax on such total income at the rate of 18.5% or
 9% in case of a unit located in International Financial Services Centre and deriving its
income solely in convertible foreign exchange.
No Particulars Explanation
1 Alternate Means the amount of tax computed on ‚Adjusted Total Income‛:
Minimum a) In case of an assessee being unit located in an International
Tax Financial Services Centre @ 9% (plus surcharge, if applicable,
plus 4% health and education cess in all cases)
b) In any other case @ 18.5% (plus surcharge, if applicable, plus
4% health and education cess in all cases)
2 Regular Means the income tax payable by a person on his total income in
Income Tax accordance with the normal provisions of the Income Tax Act

Incase of If the tax is less than the Then, ATI And tax
other than payable under tax payable under willl be payable will be
Co. NR AMT route treated as DTI AMT Payable

ADJUSTED TOTAL INCOME

No Particulars
1 Adjusted total income referred to in sub - section (1) shall be the total income before giving
effect to this chapter as increased by –
 Deductions claimed, if any, under any section (other than section 80P) included in
Chapter VI - A under the heading ‚ C. – Deductions in respect of certain incomes‛;
 Deduction claimed, if any, under section 10AA; and
 Deduction claimed, if any, u/s 35AD as reduced by the amount of depreciation
allowable in accordance with the provisions of section 32 as if no deduction u/s 35AD
was allowed in respect of the assets on which deduction under that section is claimed

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OTHER PROVISIONS

No Particulars
1 Every person to whom this section applies, shall furnish a report in prescribed form from a
chartered accountant before specified date (i.e., one month prior to the due - date of
furnishing the return of income u/s 139(1)) certifying the adjusted total income and the
AMT
2 The provisions of this section shall not apply where option is exercised u/s 115BAC or
section 115BAD

Provisions of Not If assessee S. 115BAC &

115JC applicable adopt 115BAD

SECTION 115JD - TAX CREDIT FOR ALTERNATE MINIMUM TAX

No Particulars
1 The credit for tax paid by a person u/s 115JC shall be allowed to him in accordance with the
provisions of this section
2 The tax credit of an assessment year to be allowed under sub section (1) shall be the excess
of alternate minimum tax paid over the regular income - tax payable of that year.

Provided that where the amount of tax credit in respect of any income tax paid in any
country or specified territory outside India, under section 90 or section 90A or section 91,
 allowed against the alternate minimum tax payable exceeds the amount of the tax credit
admissible against the regular income - tax payable by the assesse,
 then, while computing the amount of credit under this sub - section, such excess
amount shall be ignored
Example
Tax as per AMT as per
No Particulars regular section
provisions 115JC
1 Tax amount 1,50,000 1,75,000
2 FTC 1,60,000 1,60,000
3 Deduction in respect of FTC, being lower of tax
1,50,000 1,60,000
payable in India and FTC
4 Excess FTC allowed against AMT u/s 115JC 10,000
5 AMT credit 25,000
6 AMT credit as reduced by excess FTC allowable
15,000
against AMT liability (Rs.25,000 –Rs.10,000)

3 No interest shall be payable on tax credit allowed under sub - section (1)
4 The amount of tax credit determined under sub section (2) shall be carried forward and set
off in accordance with the provisions of sub - section (5) but such carry forward shall not be
allowed beyond the fifteenth assessment year immediately succeeding the assessment year
for which tax credit becomes allowable under sub section(1)
5 In any assessment year in which the regular income - tax exceeds the alternate minimum
tax, the tax credit shall be allowed to be set off to the extent of the excess of regular income -
tax over the alternate minimum tax and the balance of the tax credit, if any, shall be carried
forward
CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 81
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Example
Tax as per
AMT as per AMT credit Actual tax AMT credit
P.Y regular
sec 115JC adjustment paid balance
provisions
2018 - 19 4,50,000 3,95,000 - 4,50,000 55,000
2019 - 20 4,70,000 4,10,000 - 4,70,000 1,15,000
2020 - 21 3,80,000 4,00,000 20,000 3,80,000 95,000

6 The provisions of this section shall not apply where option is exercised under section
115BAC under section 115BAD

S. 115BAC
If Assessee Then AMT
or S. Will lapse
Adopt credit available
115BAD

SECTION 115JE - APPLICATION OF OTHER PROVISIONS OF THIS ACT

Save as otherwise provided in this chapter, all other provisions of this Act shall apply to a person
referred to in this chapter.

SECTION 115JEE - APPLICATION OF THIS CHAPTER TO CERTAIN PERSONS

No Particulars
1 The provisions of this chapter shall apply to a person who has claimed any deduction
under
 Any section (other than section 80P) included in Chapter VI - A under the heading
‚C - Deductions in respect of certain incomes‛; or
 Section 10AA; or
 Section 35AD
2 AMT is not payable by:
 Individual
 HUF
 AOP/BOI
 Artificial Juridical Person
If adjusted total income of such person does not exceed Rs.20 lakhs
3 Notwithstanding anything contained in sub - section (1) or sub - section (2), the credit for
tax paid under section 115JC shall be allowed in accordance with the provisions of S. 115JD
For the difference
Eventhough
AMT Still AMT Credit between AMT
Assessee not
route can be availed payable & Normal
Traveled through
Tax Payable

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FORMAT OF COMPUTATION OF TAX U/S 115JC

No Amount
Particulars
(Rs)
1 Step - I:
2 Compute total income as per the normal provisions of the Income Tax Act xxx
3 Compute tax at the rates applicable to the assessee (A) xxx
4 Step - II:
5 Total Income computed as per normal provisions (as above) xxx
6 Add: Adjustments contemplated u/s 115JC xxx
7 Adjusted Total Income xxx
8 Compute tax @ 18.50% of Adjusted total income (B) xxx
9 Higher of (A) & (B) shall be the taxable payable u/s 115JC (C) xxx
10 Add: Surcharge payable xxx
11 Income Tax Liability xxx
12 Add: Education Cess @ 4% xxx
13 Total tax payable xxx

Important Note
In case of Individual / HUF / AOP / BOI / AJP the provisions of Section 115JC will be applicable
only if the Adjusted Total Income exceeds Rs.20, 00,000
+/- Particulars Amount
Total Income as per Normal Route xxx
Add Deductions Claimed u/s 10AA(SEZ Units) xxx
Add Deductions Claimed U/s 35 AD as reduced by deduction allowable u/s xxx
32assuming deduction under section 35AD was not allowed on the assets on
which deduction under section 35AD is claimed
Add Deductions claimed u/s Chapter VI –A(Heading C - Deduction in respect of xxx
certain incomes except 80P
Adjusted Total Income xxxx

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Questions for Understanding
Illustration 1
An individual for previous year 31 - 3 - 2021 has business income of Rs.30,00,000. For
PY 31 - 3 - 2020 he was subject to AMT as he was claiming deduction u/s 80 - IE. He has an AMT
credit of Rs.4, 00,000. During PY 31 - 3 - 2021, he is not entitled to deductions under Chapter VI – A
/ 10AA / 35AD.

Answer:
Although AMT is not applicable to the assesse in PY 31.3.2021, yet he can claim AMT credit as per
section 115JEE.

No Particulars Rs.
1 Normal tax on Rs.30,00,000 7,41,000
2 Alternate minimum tax @ 19.24% on Rs.30,00,000 5,77,200
3 AMT credit available for set off 1,63,800

Therefore, tax payable by assesse shall be Rs.5, 77,200 after taking credit of AMT of Rs.1, 63,800.
Assesse will carry forward balance AMT of Rs.2, 36,200.

As per Finance Act, 2020, where the individual exercises option under section 115BAC(5), tax
payable shall be Rs.6,63,000 and AMT credit shall not be allowed as per section 115JD(6).

Also the credit shall lapse once the option is exercised under section 115BAC(5)

Illustration 2

Mr. Rajesh has Income of Rs. 45 Lakhs under the head ‚Profits and Gains of Business or
Profession‛. One of his businesses is eligible for deduction @ 100% of profits under Section 80 - IB
for A.Y. 2021 - 22. The Profit from such business included in the Business Income is Rs. 20 Lakhs.
Compute the Tax Payable by Mr. Rajesh, assuming that he has no other income during the
P.Y.2020–21 and he does not opt to pay section 115BAC
Answer

Computation of regular income - tax payable under the provisions of the Act
No Particulars Amount
1 Profits and gains of business or profession 45,00,000
2 Less: Deduction under section 80 - IB 20,00,000
3 Total Income 25,00,000
Tax payable:
4 Up to Rs.2,50,000 -
5 5% on next Rs.5,00,000 12,500
6 20% on next Rs.5,00,000 1,00,000
7 30% on balance Rs.15,00,000 4,50,000
8 Sub total 5,62,500
9 Add: Health and Education cess @ 4% 22,500
10 Tax liability 5,85,000

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 DIRECT TAXATION AY 21 - 22

Computation of Alternate Minimum Tax (AMT)

No Particulars Amount
1 Total Income as per the Income - tax Act, 1961 25,00,000
2 Add: Deduction under section 80 - IB 20,00,000
3 Adjusted Total Income 45,00,000
4 AMT (18.5% × 45,00,000) 8,32,500
5 Add: Health and education cess @ 4% 33,300
6 AMT liability 8,65,800

Since the regular income - tax payable as per the provisions of the Act is less than the AMT, the
adjusted total income of Rs. 45 lakhs would be deemed to be the total income of Mr. Rajesh and he
would be liable to pay tax @ 18.5% thereof. The tax payable by Mr. Rajesh for the A.Y.2021 - 22
would, therefore, be Rs. 8, 32,500 plus health and education cess @ 4%, totalling Rs. 8, 65,800.

Mr. Rajesh would be eligible for credit to the extent of Rs. 2, 80,800 (Rs. 8, 65,800 – Rs. 5, 85,000
(i.e., Rs.5, 62,500 + 4% cess)) to be set - off in the year in which tax on total income computed under
the regular provisions of the Act exceeds the AMT. Such credit can be carried forward for
succeeding 15 assessment years.

Illustration 3
Compute the tax payable in the following situations:
No Particulars Mr. A Mr. B Mr. C
1 Net total income (after claiming deductions if any) 80,00,000 15,00,000 30,00,000
2 Deduction u/s 80 – IA 43,00,000 2,00,000 7,00,000

Solution
Computation of tax payable of Mr. A, Mr. B & Mr. C for AY 2021 – 22
Step 1 - Net total income
No Particulars Mr. A Mr. B Mr. C
1 Step 1: Net total income 80,00,000 15,00,000 30,00,000
2 Tax payable as per slab rates - A 22,12,500 2,62,500 7,12,500

Step 2 - Net total income

No Particulars Mr. A Mr. B Mr. C
1 Step 2: Net total income 80,00,000 15,00,000 30,00,000
2 Add: Adjustments contemplated u/ s 115JC
3 Deduction claimed u/ s 80 – IA 43,00,000 2,00,000 7,00,000
Adjusted total income 1,23,00,000 17,00,000 37,00,000
4 22,75,500 NA 6,84,500
AMT @ 18.5% of ATI - B
(note 2)
5 Tax payable u/ s 115JC – Higher of A or B 22,75,500 2,62,500 7,12,500
6 Add: Surcharge as applicable - Since the assessee is
individual and total income exceeds Rs. 1 crore, 3,41,325 Nil Nil
Surcharge @ 15% is applicable
7 Total 26,16,825 2,62,500 7,12,500
8 Add: HEC @ 4% 1,04,673 10,500 28,500
9 Total tax payable – rounded off 27,21,498 2,73,000 7,41,000

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Notes:
No Particulars
1 Tax payable as per sec. 115JC is higher than tax payable as per normal provisions in case of
Mr. A. Credit of Rs. 1,90,398 (difference between AMT i.e., 27,21,498 and normal income tax
payable inclusive of surcharge and HEC i.e., 25,31,100) shall be available to him for setting –
off for next 15 AYs
2 In case of Mr. B, provisions of AMT shall not apply since ATI does not exceed Rs. 20,00,000.
Therefore tax shall be payable as per normal provisions; In case of Mr. C tax payable as per
normal provisions is higher than tax payable as per sec. 115JC. Therefore there shall be no
AMT credit

Illustration 4
Mr X, an individual, derived total income of Rs 30,00,000 after claiming deduction u/s 35 AD for
capital assets amounting to Rs 2,00,000. Depreciation eligible u/s 32 is Rs 30,000. Compute the
tax liability.
Solution
Computation of tax liability of Mr. X for AY 2021 – 22
Step 1 - Total income computed as per normal provisions
No Particulars Rs. Rs.
1 Step 1: Total income computed as per normal provisions 30,00,000
2 Income tax at slab rates – A 7,12,500

Step 2 - Total income computed as per normal provisions:

No Particulars Rs. Rs.
1 Add: Adjustments u/ s 115JC
2  Deductions u/ s 35AD 2,00,000
3  Depreciation u/ s 32 (30,000) 1,70,000
4 Adjusted Total Income 31,70,000
5 Tax @ 18.5% of ATI – B 5,86,450
6 Tax payable u/ s 115 JC – Higher of A or B 7,12,500
7 Add: HEC @ 4% 28,500
8 Total tax payable – rounded off 7,41,000

Note - Since tax payable as per the normal provisions exceeds 18.5% of ATI, tax payable as per the
normal provisions shall be the tax liability of Mr. X.
Illustration 5
AB & Sons which is an AOP has arrived at gross total income of Rs 32 L. Assessee has claimed deduction
of Rs 12L u/s 80 - IB, You are approached to seek advice in respect of tax payable by AOP.

Solution:
No Particulars Amount (Rs.)
1 Total income under normal provisions 20,00,000
2 Tax at normal slab rates 4,12,500
3 ATI 32,00,000
4 Tax under AMT 5,92,000
5 Add: HEC @ 4% 23,680
6 Total tax payable 6,15,680

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 DIRECT TAXATION AY 21 - 22

CHAPTER - 8
SECTION 10AA PROVISIONS
SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED UNITS IN SEZ
No Particulars Explanation
1 In computing the
No Particulars
total income of an
1  100% of the profits and gains derived from the export
undertaking,
of such articles or things or computer software for a
which begins to
period of 5 consecutive assessment years
manufacture or
 beginning with the assessment year relevant to the
produce articles or
previous year in which the undertaking begins to
things or computer
manufacture or produce such article or thing or
software on are
computer software, as the case maybe , and thereafter,
after 01.04.2006 but
 50% of such profits and gains for further 5 AYs, and
before 01.04.2021 in
2  Thereafter for the next 5 consecutive AY, so much of the
any Special
amount not exceeding 50% of the profits as is debited to
Economic Zone,
the profit and loss account of the previous year in
the deductions
respect of which deduction is to be allowed and
shall be
 credited to a reserve account (to be called the “Special
Economic Zone Re - investment Allowance Reserve
Account”) to be created and utilized for the purposes of
the business of the assessee in the manner laid down in
sub - section (2)

AMOUNT OF DEDUCTION U/S 10AA

10AA Deduction

First 5 Year Next 5 Years Next 5 Year

Lower of: 50% of Export

100% of Profits 50% of Profits Profit or Amount
deposited in SEZ Account

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No Particulars Explanation
1 The deduction a. The amount credited to the special economic zone re - investment
under clause (ii) of allowance reserve is to be utilized
sub – section (1) No Particulars
shall be allowed 1 for the purpose of acquiring new machinery or plant which is
only if the following first put to use before the expiry of a period of three years
conditions are next following the PY in which the reserve was created; and
fulfilled, namely 2 until the acquisition of new machinery or plant aforesaid, for
the purpose of the business of the undertaking (i.e., reserve
should be kept intact until the acquisition of new plant and
machinery)

b. The particulars, as may be prescribed in this behalf, have been

furnished by the assesse in respect of new machinery or plant 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
2 Where any amount
No Particulars
credited to the
a has been utilized for any purpose other than those referred to
Special Economic
in sub - section (2), the amount so utilized, or
Zone Re -
investment b has not been utilized before the expiry of the period specified
Allowance Reserve in sub - clause (i) of clause (a) of sub - section (2), the amount
Account under not so utilized,
clause (ii) of sub -  in a case referred to in clause (a), in a year in which the
section (1) amount was so utilized; or
 in a case referred to in clause (b) in the year immediately
following the period of three years specified in sub -
clause (i) of clause (a) of sub - section(2),
and shall be charged to tax accordingly
shall be deemed to be the profits
3 If deduction u/s Where a deduction under this section is claimed and allowed in
10AA claimed then respect of profits of any of the specified business, referred to in
no Deduction u/s section 35AD, for any assessment year, no deduction shall be allowed
35AD under the provisions of section 35AD in relation to such specified
business for the same or any other assessment year

UTILIZATION OF AMOUNT IN SEZ ACCOUNT

Amount in SEZ
Account

Not utilised Misutilised

within 3 years

NOTE :
Then such amount shall be deemed to be profits of that year.

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 DIRECT TAXATION AY 21 - 22

COMPUTATION OF DEDUCTION

For the purposes of computing deduction, the profits derived from export of articles or things or
computer software shall be the amount which bears to the profits of the business of the
undertaking, 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.
No Particulars Explanation
1 Deduction u/s Profits derived from export of
10AA Deduction u/s 10AA = articles or things or computer
software
2 Profits derived Profits of the business Export TO of the undertaking to
from export of undertaking to which which S. 10AA applies
articles or things S. 10AA applies. (As x Total TO of the - to which S.
or computer computed under the head 10AA applies
software PGBP)

AMOUNT OF DEDUCTION
No Particulars Amount
1 Export Profit – A xxx
2 Export Turnover of SEZ Unit – B xxx
3 Total Turnover of SEZ Unit – C xxx
4 Percentage of Deduction – D xxx
5 Deduction u/s 10AA - (A x B / C) x D xxxx

OTHER PROVISIONS

No Particulars
1 In computing the depreciation allowance in section 32, the written down value of any asset
used for the purposes of the business of the undertaking shall be computed as if the assesse
had claimed and been actually all7owed the deduction in respect of depreciation for each of
the relevant assessment years
2 Section 10AA is a deduction and not an exemption. Therefore, losses and depreciation of
undertaking to which section 10AA applies shall be carried forward normally

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COMPUTATION OF PROFITS FOR THE PURPOSES OF SECTION 10AA
For the purpose of section 10AA
No Particulars Explanation
1 Export turnover shall
not include No Particulars
1 Freight, telecommunication charges or insurance
attributable to delivery of articles or things or computer
software outside India
2 Expenses if any incurred in foreign exchange in providing
technical services outside India
3 CCS, Duty drawback and profits on sale of import
entitlement licenses

2 Total turnover shall

not include No Particulars
1 Freight, telecommunication charges or insurance
attributable to delivery of articles or things or computer
software outside India
2 Expenses if any incurred in foreign exchange in providing
technical services outside India
3 CCS, Duty drawback and profits on sale of import
entitlement licenses

3 Profits of the Profit of the undertaking under the head profits and gains of
business of the business and profession. In case of LIBERTY INDIA, the Supreme
undertaking shall Court recently held that export incentives like duty drawback
mean receipts, DEPB benefits are on account of statutory provisions in the
Customs Act / Schemes framed by Central Government and do not
form part of profits of the eligible undertaking for the purposes of
section 80 - IA and 80IB. The said judgement will also apply to
section 10AA. Therefore,
No Particulars
1 Cash Compensatory Support (CCS)
2 Duty Drawback
3 Profit on sale of import entitlement licenses
4 Duty Exemption Pass Book (DEPB)

Shall not form part of the profits of the business of undertaking for
the purposes of section 10AA The same are also not eligible for
deduction under sections 80 - IA, 80 - IAB, 80 - IB, 80 - IC, 80 - ID
and 80 - IE

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Key Points :-

No Particular Explanation
1 Export turnover It means the consideration in respect of export by the undertaking of
articles or things or computer software received in, or bought into
India by the assesse in convertible foreign exchange, within a period of
six months from the end of the previous year or within such further
period as may be permitted by the RBI, but does not include freight,
telecommunication charges or insurance attributable to the delivery of
the articles or things or computer software outside India or expenses,
if any, incurred in foreign exchange in providing the technical services
outside India.

Note:
The sale proceeds referred to above shall be deemed to have been
received in India where such sale proceeds are credited to a separate
bank account maintained for the purpose by the assesse with any bank
outside India with the approval of Reserve Bank of India.
2 On - site Profits and gains derived from on-site development of computer
development software (including services for development of software) outside
India shall be deemed to be profits and gains derived from export of
computer software outside India.

DEFINITION OF EXPORT TURNOVER

Export Turnover Doesnot Include

Freight,
Telecommunication
Expenses if any incurred in CCS, Duty drawback
charges, Insurance
foreign exchange in and profits on sale of
attributable to delivery of
providing technical services import entitlement
articles or things or
outside India licenses
computer software outside
India

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AY 21- 22 DIRECT TAXATION
Q UESTIONS F OR P RACTICE
Illustration 1
ABC LLP, a limited liability partnership in India is engaged in development of software and
providing IT enabled services through two units, one of which is located in a notified Special
Economic Zone (SEZ) in Chennai. The particulars relating to AY 2021 - 22 furnished by the
assessee are as follows:
No Particulars SEZ Unit (In Other Unit (In
Lakhs) Lakhs)
1 Total Sales 120 100
2 Export Sales 100 60
3 Net Profit 50 40

The assessee has no other income during the year

No Particulars
a Compute total income by ABC LLP for the AY 2021 - 22
b Will the amount of tax payable change if ABC LLP is an overseas entity?

Nov 2013
Answer:
a) Computation of total income and tax liability of ABC LLP as per normal provisions for
AY.2021 - 22
No Amount in
Particulars
lakhs
1 Business Income (Rs. 50 lakhs + 40 lakhs) - Before depreciation under 90.00
section 10AA
2 Less : Deduction under section 10AA - Rs. 50 lacs x Rs. 100 lacs / Rs. 120 lacs 41.67
3 Total Income 48.33
4 Tax on total income @ 30% 14.50
5 Add: HEC @ 4% 0.58
6 Tax liability as per Normal Provisions 15.08

Computation of Adjusted total income and AMT of ABC LLP as per the provisions of sec.
115JC for AY 2021 – 22
No Amount
Particulars
in lakhs
1 Total income as per normal provisions 48.33
2 Add: Deduction u/ s 10AA 41.67
3 Adjusted Total Income – ATI 90.00
4 Tax @ 18.5% of ATI 16.6500
5 Add: HEC @ 4% 0.6660
6 AMT as per sec. 15JC 17.3160

Since the tax payable as per normal provisions of the Act is less than the AMT payable, the ATI
shall be deemed to be the total income of ABC LLP and the tax payable to AY 2021 – 22 shall be
17.3160 lakhs.
b) In case ABC LLP is an overseas entity, the amount of tax payable shall remain the same.

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 DIRECT TAXATION AY 21 - 22

Note:
While computing the deduction under section 10AA, it has been assumed that AY 2021 - 22 falls
within first five year period commencing from the year of provision of services by the Unit in SEZ
of ABC LLP and therefore, deduction 100% of the profit derived from export of such services has
been provided.

Illustration 2
Rudra Ltd has one unit at SEZ and other unit in DTA, the company provides the following details
for the previous year 2020 - 21.
Rudra Ltd (Rs) Units in DTA
No Particulars
(Rs)
1 Total Sales 6,00,00,000 2,00,00,000
2 Export Sales 4,60,00,000 1,60,00,000
3 Net Profit 80,00,000 20,00,000

Calculate the eligible deduction u/s 10AA of Income Tax Act, for the Assessment Year 2021 - 22, in
the following situations
No Particulars
a If both the units were set up and start manufacturing from 22 – 05 - 2013
b If both the units were set up and start manufacturing from 14 – 05 - 2017

Answer

No Particulars Explanation
1 Computation of As per section 10AA, in computing the total income of Rudra Ltd.
deduction under from its unit located in a Special Economic Zone (SEZ), which begins
section 10AA of to manufacture or produce articles or things or provide any services
the Income - tax during the previous year relevant to the assessment year
Act, 1961 commencing on or after 01.04.2006 but before 1.4.2021, there shall be
allowed a deduction of 100% of the profit and gains derived from
export of such articles or things or from services for a period of five
consecutive assessment years beginning with the assessment year
relevant to the previous year in which the Unit begins to
manufacture or produce such articles or things or provide services, as
the case may be, and 50% of such profits for further five AYs.
2 If Unit in SEZ was Since A.Y. 2021 - 22 is the 8th assessment year from A.Y. 2014 - 15, in
set up and began which the SEZ unit began manufacturing of articles or things, it shall
manufacturing be eligible for deduction of 50% of the profits derived from export of
from 22 – 05 - 2013 such articles or things, assuming all the other conditions specified in
section 10AA are fulfilled
3 If Unit in SEZ was Since A.Y.2021 - 22 is the 4th assessment year from A.Y. 2018 - 19,
set up and began relevant to the previous year 2017 - 18, in which the SEZ unit began
manufacturing manufacturing of articles or things, it shall be eligible for deduction of
from 14 – 05 - 2016 100% of the profits derived from export of such articles or things,
assuming all the other conditions specified in S. 10AA are fulfilled

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AY 21- 22 DIRECT TAXATION
Computation of eligible deduction under section 10AA
No Setup from Setup from
Particulars
22.05.2013 14.05.2017
1 Profit in SEZ 60,00,000 60,00,000
2 Export Turnover of Unit of SEZ 3,00,00,000 3,00,00,000
3 Total Turnover of Unit of SEZ 4,00,00,000 4,00,00,000
4 Percentage of Profit allowed as Deduction 50% 100%
5 Deduction u/s 10AA ((A x B/C) x D) 22,50,000 45,00,000

Computation of Total Sales, Export Turnover and Net profit of unit in SEZ
No Particulars Rudra Ltd Units in Unit in
(Rs) DTA (Rs SEZ
1 Total Sales 6,00,00,000 2,00,00,000 4,00,00,000
2 Export Sales 4,60,00,000 1,60,00,000 3,00,00,000
3 Net Profit 80,00,000 20,00,000 60,00,000

The unit set up in Domestic Tariff Area is not eligible for the benefit of deduction u/s 10AA in
respect of its export profits, in both situations.

Illustration 3
Siddarth Ltd has an undertaking (Unit X) in Special Economic Zone (SEZ) & another undertaking
(Unit Y) in Free Trade Zone operations (FTZ) for manufacturing of Computer Software. It
furnishes the following particulars of its 2nd year of operations ending March, 31, 2021
No Unit X Unit Y
Particulars
(Lakhs) (Lakhs)
1 Total Sales 180 120
2 Export Sales (Incl. of 10 Lakhs Onsite Development of Computer 120 10
Software outside India by Unit X)
3 Profit Earned (After claim of Bad Debts u/s 36(1)(vii) in Unit X) 63 36
Plant and Machinery used in the Business has been depreciated at 15% on Straight Line Method
(SLM) basis and depreciation of Rs9 Lakhs was charged to Profit and Loss Account in the
proportion of Sales during the Previous Year. Rs100 Lakhs were realized out of Export Sales in
time and balance of Rs20 Lakhs becomes irrecoverable due to bankruptcy of one of the foreign
buyers in Unit X.
Compute the deduction u/s 10AA of the Income Tax, 1961 & Taxable Income of Siddarth Ltd for
the Year 2021 - 22 MAY - 2012

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 DIRECT TAXATION AY 21 - 22

Answer
Depreciation of the second year on straight line method at the rate of 15% is Rs. 9 lakh. Actual cost
of plant and machinery is Rs. 60 lakhs. (i.e Rs. 9 lakhs / 0.15). Depreciation under section 32 will be
calculated as follows:
Computation of Depreciation
+/ - Particulars Amount
Actual cost of Plant and Machinery acquired during the PY 2019 - 20 60,00,000
Less: Depreciation for the PY 2019 - 20 @ 15(It is assumed that additional 9,00,000
depreciation is not available)
Depreciated value of the block on April 1,2020 51,00,000
Less: Depreciation for the PY 2020 - 21 @ 15% 7,65,000
(To be divided in the ratio 3:2 between X and Y)
Depreciated value of the block on April 1, 2021 43,35,000
Computation of deduction eligible u/s 10AA
No Particulars Rs.
1 Total turnover 1,80,00,000
2 Export turnover as per books 1,20,00,000
3 Less: Amount not recoverable 20,00,000
4 Export turnover 1,00,00,000
5 Profit derived from the eligible undertaking 63,81,000
6 Profit eligible for deduction u/s 10 AA – 63.81lacs x 100/180 35,45,000

Computation of Total Income

+/ - Particulars Unit X Unit Y
Profit Earned 63,00,000 36,00,000
Add: Depreciation debited in profit and loss account - Rs. 9,00,000 in 5,40,000 3,60,000
the ratio of 3:2
Less: Depreciation under section 32 - Rs. 7,65,000 in the ratio 3:2 (4,59,000) (3,06,000)
Balance 63,81,000 36,54,000
Less: Deduction u/s 10AA - Rs. 63,81,000 x 100 / 180 35,45,000 -
Net Income 28,36,000 36,54,000

Taxable Income = 28, 36,000 + 36, 54,000 = Rs. 64,90,000.

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TAXATION OF ENTITIES

No VARIOUS ENTITIES SPECIAL ENTITIES OTHER ENTITIES

1 Taxation of Individual / HUF Taxation of Business Trust Taxation of Political Parties

Taxation of Investment
2 Taxation of AOP / BOI Taxation of Electoral Trusts
Fund

Taxation of Co – Operative Taxation of Securitisation Taxation of Investments

3
Society Trust from Units

4 Taxation of Partnership Firm Tax Incentive for IFSC Taxation of VPA

5 Taxation of LLP

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 DIRECT TAXATION AY 21 - 22

CHAPTER - 9
ASSESSMENT OF INDIVIDUAL & HUF
ASSESSMENT OF VARIOUS ENTITIES

Assessment of Various Entities

Assessment Assessment Assessment of

Assessment Assessment
of Individual of AOP / Co - Operative
of Firm of LLP
& HUF BOI Society

I - RESIDENTIAL STATUS

Individual & HUF

Income Income
Residential Scope of Deemed to deemed to Tax rate &
Status Total Income be Received accrue & Surcharge
in India arise in India

RESIDENTIAL STATUS - OVERALL

Residential Status - Section 6

Individuals & HUF Other than Individual

& HUF

Resident Non
Non -
Resident Resident
Resident

Resident & Resident but not

Ordinarily ordinarily
Resident resident

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DETERMINATION OF RESIDENTIAL STATUS

Residential status of
Individual

Resident Non - Resident

Resident & Ordinarily Resident but not

resident ordinarily resident

The individual residents are classified into 3 categories based on their residential status -
 Resident - R
 Not - Ordinary Resident - NOR
 Non - Resident - NR

SECTION 6(1) RESIDENTIAL STATUS OF AN INDIVIDUAL

Conditions

Additional
Basic Conditions
Conditions

First Basic Second Basic 2 Additional

Condition Condition Conditions

The residential status of an individual will be determined as under –

Assessee Basic condition Additional conditions
Resident He must satisfy at least one of the Not required
basic conditions (As Given below)
Not - Ordinarily He must satisfy at least one of the He must satisfy any of the
Resident basic conditions (As Given below) additional conditions given u/s
6(6)
He is deemed to be resident u/s 6(1A)
Non – Resident Should not satisfy any of the basic Not required
conditions

2 Basic conditions: -
No Particulars
1 He must be in India for a period of 182 days or more during the previous year; or
2 He must be in India for a period of 60 days or more during the previous year &
365 days or more during the four years preceding the previous year

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Note:
No Particulars
1 As per section 2(25A), ‚India‛ means the
 territory of India,
 its territorial waters,
 seabed and subsoil underlying such waters,
 continental shelf,
 exclusive economic zone or
 any other maritime zone
2 The period of stay in India is not compulsorily required to be active or continuous.
It is not necessary for an individual to stay at his usual place of residence, business or
employment
3 While counting the number of days of stay in India, the date of arrival as well as departure
are to be included for determining the period of stay in India
4 Where an individual is in India for a part of a day, then the total no. of hours for which he
stayed in India shall be calculated and a total of 24 hours shall be considered equivalent to
one day
5 The residence has no relation with citizenship, place of birth or domicile, hence a person
can be resident in India even if he is not an Indian citizen

SUMMARY :-

Individual Satisfied

Both Basic None of the Basic

1 Basic Condition
Conditions Conditions

Resident Resident Non - Resident

EXCEPTION TO SECOND BASIC CONDITION -

AS PER EXPLANATION TO SECTION 6(1),

No Particulars
1 The period of 60 days ( given in (2) above) is substituted by 182 days in case of an
Individual –

No Particulars
1 Being an Indian citizen, leaves India during the previous year for employment
outside India
2 Being an Indian citizen, leaves India during the previous year as a member of the
crew of an Indian ship
3 Being an Indian citizen or a person of Indian origin, who being outside India,
comes on a visit to India in the previous year

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2  The period of 60 days ( given in (2) above) is substituted by 120 days in case of an
individual being an Indian citizen or a person of Indian origin,
 who being outside India, comes on a visit to India in the previous year,
 Having total income, other than the income from foreign sources, exceeding Rs.15
lakh during the previous year.
Thus, condition no (2) is not applicable in the above 3 cases

Terms in detail: -
No Particulars Explanation
1 Income from Income which accrues or arises outside India (except income
foreign sources derived from a business controlled in or a profession set up in
means India) and which is not deemed to accrue or arise in India.
(Amended by Finance Act, 2020 & Taxation and Other Laws
Relaxation and Amendment of Certain Provisions Act, 2020,
w.e.f. 01 - 04 - 2021 i.e. AY 2021 - 22)
2 Person is deemed According to Explanation to section 115C(e), a person is deemed to
to be of Indian be of Indian origin, if he, or either of his parents, or any of his
origin grandparents was born in undivided India

QUESTION FOR UNDERSTANDING

Illustration 1
Mr. Ram, an Indian Citizen, left India on 22.09.2020 for the first time to work as an officer of a
Company in Germany. Determine the Residential Status of Ram for the AY 2021 - 22.

Answer

Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies
any one of the following conditions-
No Particulars
1 He has been in India during the previous year for a total period of 182 days or more; or
2 He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year
In the case of Indian citizens leaving India for employment, the period of stay during the previous
year must be 182 days instead of 60 days given in (2) above.
During the previous year 2020 - 21, Mr. Ram, an Indian citizen, was in India for 175 days only (i.e.,
30 + 31 + 30 + 31 + 31 + 22 days). Thereafter, he left India for employment purposes.
Since he does not satisfy the minimum criteria for 182 days stay in India during relevant previous
year, he is a non - resident for the AY 2021 - 22.

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SUMMARY: -

Exception to Second Basic

Condition

Indian Citizen Indian Citizen Indian Citizen or

Leaves India for Leaves India POIO

As a crew
Employment Comes on visit to
member of Indian
outside India India
ship

182 Days or more

182 Days or More 182 Days or More or 120 Days as the
case may be

DETERMINATION OF PERIOD OF STAY IN INDIA FOR AN INDIAN CITIZEN

BEING A CREW MEMBER

No Particulars Explanation
1 Period of stay in  In the case of an individual, being a citizen of India and a member
case Indian citizen of the crew of a foreign bound ship leaving India, the period or
being crew member periods of stay in India shall, in respect of such voyage, be
of foreign bound determined in the manner and subject to such conditions as may
ship – To be be prescribed.
determined in  Accordingly, the CBDT has, vide Notification No.70/2015 dated 17
prescribed manner - 8 - 2015, inserted Rule 126 in the Income Tax Rules, 1962 to
- Explanation 2 compute the period of stay in such cases.
 Accordingly to Rule 126, for the purposes of section 6(1), in case
of an individual, being a citizen of India and a member of the
crew of a ship, the period or periods of stay in India shall, in
respect of an eligible voyage, not include the period beginning on
the date entered into the Continuous Discharge Certificate in
respect of joining the ship by the said individual for the eligible
voyage and ending on the date entered into the Continuous
Discharge Certificate in respect of signing off by that individual
from the ship in respect of such voyage
Period Commencing from Period Ending on
The date entered into the The date entered into the
Continuous Discharge Continuous Discharge
Certificate in respect of joining & Certificate in respect of Signing
the ship by the said individual off by that individual from the
for the eligible voyage. ship in respect of such voyage.

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2 Continuous Shall have the meaning assigned to it in the Merchant Shipping
Discharge (Continuous Discharge Certificate - cum Seafarer’s Identity
Certificate Document) Rules, 2001 made under the Merchant Shipping Act, 1958
3 Eligible voyage Shall mean a voyage undertaken by a ship engaged in the carriage of
passengers or freight in international traffic where -
No Particulars
1 For the voyage having originated from any port in India, has
as its destination any port outside India; and
2 For the voyage having originated from any port outside India,
has as its destination any port in India

QUESTION FOR UNDERSTANDING

Illustration 1

Mr. Anand is an Indian Citizen and a member of the crew of a Singapore bound Indian Ship
engaged in carriage of Passengers in International Traffic departing from Chennai port on 6th
June, 2020. From the following details for the P.Y. 2020 - 21, determine the residential status of Mr.
Anand for A.Y. 2021 - 22, assuming that his stay in India in the last 4 Previous Years (Preceding
P.Y. 2020 - 21) is 400 days

No Particulars Date
1 Date entered into the Continuous Discharge Certificate in respect of
6th June, 2020
joining the ship by Mr. Anand
2 Date entered into the Continuous Discharge Certificate in respect of
9th December, 2020
signing off the ship by Mr. Anand

Answer
No Particulars
1 In this case Mr. Anand is an Indian Citizen and leaving India during PY 2020 – 21 as a crew
member of Indian ship, he would be resident in India for 182 days or more
2 The voyage is undertaken by an Indian ship engaged in the carriage of passengers in
international traffic, originating from a port in India (i.e., the Chennai port) and having its
destination at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible
voyage for the purposes of section 6(1)
3 Therefore, the period beginning from 6th June, 2020 and ending on 9th December, 2020, being the
dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing
off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of the ship, has to
be excluded for computing the period of his stay in India. Accordingly, 187 days (25 + 31 + 31 + 30
+ 31 + 30 + 9) have to be excluded from the period of his stay in India. Consequently, Mr. Anand’s
period of stay in India during the P.Y.2020 - 21 would be 178 days (i.e., 365 days – 187 days). Since
his period of stay in India during the P.Y.2020 - 21 is less than 182 days, he is a non - resident
for A.Y.2021 – 22

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SECTION 6(1A) DEEMED RESIDENT IN INDIA

Deemed Resident in
India

TI other than Foreign Not liable to pay tax

Citizen of India
Sources exceeds 15L outside India

An individual shall be deemed to be resident in India if he fulfils the following conditions:

No Particulars
1 He must be a citizen of India
2 His total income , other than the income from foreign sources , must exceed Rs. 15 lakhs
during the previous year; and
3 He is not liable to tax in any other country or territory by reason of his domicile or
residence or any other criteria of similar nature

If these conditions are satisfied he is deemed to be not ordinarily resident in India as per section
6(1)(d).
No Particulars Explanation
1 Non – The above provision shall not apply in case of an individual who is said
Applicability - to be resident in India in the previous year u/s 6(1).
Explanation (Inserted by taxation and Other Laws (Relaxation and Amendment of
Certain Provisions) Act, 2020, w.e.f. 1 - 4 - 2021 i.e AY 2021 - 22)
2 Income from Income which accrues or arises outside India (except income derived
foreign sources from a business controlled in or profession set up in India) and which is
means not deemed to accrue or arise in India. .
(Amended by Finance Act, 2020 & Taxation and Other Laws Relaxation
and Amendment of Certain Provisions) Act, 2020, w.e.f. 01 - 04 - 2021
i.e. AY 2021 - 22)

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QUESTION FOR UNDERSTANDING
Illustration 1
Venkatesh, a citizen of India is a block chain specialist and set up his profession in India. Apart
from practice in India, he has set up his profession in country XYZ and settled there. In country
XYZ, he is not subject to income-tax. He derived Rs.10,00,000 as taxable income in India for the FY
2020 - 21. Income derived from XYZ are:
No Particulars Amount
1 Income from profession Rs.4,50,000
2 Interest and dividend income Rs.7,50,000

Ascertain the residential status of Venkatesh for the AY 2021-22 in the following situations:
No Particulars
1 Venkatesh never visited India from 1.4.2020 to 31.3.2021
2 Venkatesh visited India for performing daughter’s marriage and stayed for 115 days
during 1.4.2020 to [Link] his income from profession in India stood at Rs.16
lakhs for the FY 2020 - 21
3 Venkatesh never visited India and his income from profession in India is 11 lakhs,
instead of Rs.10 lakhs
4 Venkatesh visited India for 200 days during 1.4.2020 to 31.3.2021. Besides, his stay in FY
2019 - 20 was 100 days; FY 2018 - 19 was 110 days; FY 2017 -18 was 90 days; FY 2016 - 17
was 125 days. He happens to be a resident in only one year in the past 10 PYs in India

Answer:
Applying the provisions of sec 6(1) and sec 6(1A), the residential status of Venkatesh for the given
situations are as under:
No Particulars
1 He has not visited India during PY 2020 - 21, so he is not resident as per sec 6(1).
 Although, as provided in sec 6(1A), he is not liable to tax in any other country, his
total income does not exceed Rs.15 lakhs (Rs.10 lakhs from profession in India and
Rs.4.5 lakhs from XYZ on account of profession set up in India).
 Thus, he shall be considered as a non - resident in India.
 Being a non - resident, his income from profession of Rs.10 lakhs arising in India
alone shall be chargeable to tax in India and the foreign income are not taxable in
India
2  Total income in India exceeds Rs.15 lakhs during FY 2020-21. Venkatesh shall be
deemed to a resident in India u/s 6(1A).
 He will be treated a resident but not ordinarily resident in India as per sec 6(1A) read
with sec 6(6).
 Income chargeable to tax in India shall be Rs.20.50 lakhs being Rs.16 lakhs of income
from profession in India and Rs.4.5 lakhs (from XYZ) arising out of profession set up
in India.
 No of days of stay in India is not relevant. Interest and dividend income of Rs.7.5
lakhs are not chargeable to tax in India
3  As his total income exceeds Rs.15 lakhs ( Rs.15.5 lakhs being Rs.11 lakhs of from
profession in India and Rs.4.5 lakhs from XYZ on account of profession set up in
India), he shall be considered as a deemed resident in India.
 As stated above he will be a resident but not ordinarily resident and the income from
profession of Rs.11 lakhs in India and Rs.4.5 lakhs (from XYZ) arising out of

104 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

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profession set up in India shall be chargeable to tax in India.

 Interest and dividend income of Rs.7.5 lakhs are not chargeable to tax in India
4 By staying in India for more than 182 days, he satisfied the basic condition and thus,
covered by sec 6(1) itself. Further, he has satisfied both the additional conditions. Thus,
Venkatesh becomes resident and ordinarily resident in India for the FY 2020 - 21. His
total income chargeable to tax in India would be Rs.22 lakhs ( being Rs.14.5 lakhs of
aggregate income from profession in India and XYZ; and Rs.7.5 lakhs of other income
from XYZ)

2 ADDITIONAL CONDITIONS U/S 6(6)

No Particulars
1 A non - resident in India in any 9 years out of total 10 years preceding the previous year
or
2 In India for a period of 729 days or less during the 7 years preceding the previous year or

NOT - ORDINARILY RESIDENT

Individual

Satisfied 2
Satisfied 2 Satisfied 1 Satisfied 2 Satisfied 1
Basic
Basic Basic Basic Basic
Conditions &
Conditions & Condition & Conditions & Condition &
none of the
2 Additional 2 Additional 1 Additional 1 Additional
Additional
Conditions Conditions Condition Condition
Conditions

Resident but Resident but Resident but

Resident & Resident &
not not not
Ordinarily Ordinarily
Ordinarily Ordinarily Ordinarily
Resident Resident
Resident Resident Resident

Only individuals and HUF can be ‚not - ordinarily resident‛. Others are resident or non -
resident). The residential status of an individual is considered as ‘not ordinarily resident’ if it
fulfils:
No Particulars
1 At least one of the conditions as specified u/s 6(1) i.e. basic conditions and any of the
additional conditions as specified u/s 6(6)(a)
2 He is deemed resident u/s 6(1A) read with section 6(6)(d)

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A person is said to be “not - ordinarily resident” in India in any previous year if such person has
been -
No Particulars
1 A non - resident in India in any 9 years out of total 10 years preceding the previous year or
2 In India for a period of 729 days or less during the 7 years preceding the previous year or
3 A citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding Rs.15 lakhs during the previous year, and he comes to
India for the purpose of the visit to India during the relevant previous year and he has
been in India for a period or periods amounting in all to 120 days or more but less than
182 days; or
4 A citizen of India who is deemed to be resident in India u/s 6(1A)

Notes : -
No Particulars
1 Income from foreign sources means income which accrues or arises outside India
(except income derived from a business controlled in or a profession set up in India) and
which is not deemed to accrue or arise in India. .
(Amended by Finance Act, 2020 & Taxation and Other Laws (Relaxation and
Amendment of Certain Provisions) Act, 2020, w.e.f. 01 - 04 - 2021 i.e. AY 2021 - 22)

Objective of amendment: -
No Particulars
1 Instances have come to notice where period of 182 days specified in respect of an Indian
citizen or person of Indian origin visiting India during the year, is being misused
2 Individuals who are actually carrying out substantial economic activities from India,
manage their period of stay in India so as to remain a non - resident in perpetuity and not
be required to declare their global income in India
3 The category of NOR persons have been carved out essentially to ensure that a non -
resident is not suddenly faced with the compliance requirement of a resident, merely
because he spends more than specified no of days in India during a particular year
4 The conditions specified in the present law in respect of this carve out have been the
subject matter of disputes, amendments and further disputes. Further, due to reduction in
no of days, as proposed, for visiting Indian citizen or person of Indian origin, there would
be need for relaxation in the conditions
5 The issue of stateless persons has been bothering the tax world for quite some time. It is
entirely possible for an individual to arrange his affairs in such a fashion that he is not
liable to tax in any country or jurisdiction during a year. This arrangement is typically
employed by high net worth individuals (HNWI) to avoid paying taxes to any
country/jurisdiction on income they earn. Tax laws should not encourage a situation where
a person is not liable to tax in any country. The current rules governing tax residence make
it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable
for tax anywhere in the world. Such a circumstances is certainly not desirable; particularly
in the light of current development in the global tax environment where avenues for
double non - taxation are being systematically closed
6 In the light of the above, the above mentioned amendments have been made in section 6 of
the Act

NON - RESIDENT
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When an individual does not satisfy any of the basic conditions mentioned u/s 6(1), he becomes
non - resident. For him, the additional conditions are irrelevant.

RESIDENTIAL STATUS – INDIVIDUAL - SUMMARY

Residential Status of an Individual

Stay in India for 182 days or more during the PY

YES NO

Resident in India in any 2 PYs

Stay in India for 60 days or more
out of 10 PYs preceding the
during the PY
relevant PY
+
+
Stay in India for 365 Days or
Stay in India for 730 days or
more during 4 immediately
more during 7 PYs preceding the
preceding PYs
relevant PY

YES NO YES NO

ROR RNOR NR

QUESTIONS FOR PRACTICE

Illustration 1

Brett Lee, an Australian cricket player visits India for 100 days in every Financial Year. This has
been his practice for the past 10 Financial Years.

No Particulars
1 Find out his Residential Status for the Assessment Year 2021 - 22
2 Would your answer change if the above fact relates to Srinath, an Indian citizen who resides
in Australia and represents the Australian Cricket team
3 What would be your answer if, Srinath had visited India for 120Days instead of 100Days
every year, including PY 2020 - 21

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Answer

1. Determination of Residential Status of Mr. Brett Lee for the A.Y. 2021 - 22
Period of stay during the previous year 2020 - 21 = 100 days
Calculation of period of stay during 4 preceding previous years (100 x 4 = 400 days)
No Year No of Days
1. F.Y 2019 – 20 100 days
2. F.Y 2018 – 19 100 days
3. F.Y 2017 – 18 100 days
4. F.Y 2016 – 17 100 days
Total Days 400 days
Mr. Brett Lee has been in India for a period of more than 60 days during previous year 2020 - 21
and for a period of more than 365 days during the 4 immediately preceding previous years.
Therefore, since he satisfies one of the basic conditions under section 6(1), he is a resident for the
assessment year 2021 - 22.

Computation of period of stay during 7 preceding previous years = 100 x 7=700 days
No Year No of Days
1. F.Y 2019 – 20 100 days
2. F.Y 2018 – 19 100 days
3. F.Y 2017 – 18 100 days
4. F.Y 2016 – 17 100 days
5. F.Y 2015 – 16 100 days
6. F.Y 2014 – 15 100 days
7. F.Y 2013 – 14 100 days
Total Days 700 days

Since his period of stay in India during the past 7 previous years is less than 730 days, he is a not -
ordinarily resident during the assessment year 2021 - 22. (See Note below)
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the PY 2020 - 21 relevant to
the assessment year 2021 - 22.
Note: An individual, not being an Indian citizen, would not ordinarily resident person if he
satisfies any one of the conditions specified under section 6(6), i.e.,
No Particulars
1 If such individual has been non - resident in India in any 9 out of the 10 previous years preceding the
relevant previous year, or
2 If such individual has during the 7 previous years preceding the relevant previous year been in India
for a period of 729 days or less

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In this case, since Mr. Brett Lee satisfies condition (ii), he is a not - ordinary resident for the
A.Y. 2021 – 22

No Particulars
2 If the above facts relate to Mr. Srinath, an Indian citizen, who residing in Australia,
comes on a visit to India, he would be treated as non – resident in India irrespective of
his total income (excluding income from foreign sources), since his stay in India in the
current financial year is in any case, less than 120 days

3 In this case, if Srinath’s total income (excluding income from foreign sources) exceed Rs.
15,00,000, he would be treated as resident but not ordinarily resident in India for the PY
2020 – 21 since his stay in India is 120 days in the PY 2020 – 21 and 480 days (i.e. 120 days
x 4 years) in the immediately four preceding previous years
If his total income(excluding income from foreign sources) does not exceed Rs. 15,00,000,
he would be treated as non – resident in India for the PY 2020 – 21 , since his stay in India
is less than 182 days in the PY 2020 – 21

Illustration 2

Mr. B, a Canadian Citizen, comes to India for the first time during the P.Y. 2016 - 17. During the
Financial Years 2016 - 17, 2017 - 18, 2018 - 19 , 2019 - 20 and 2020 - 2021 he was in India for 55 days,
60 days, 90 days, 150 days and 70 days, respectively. Determine his Residential Status for the A.Y.
2021 - 22.

Answer:
During the PY 2020 - 21, Mr. B was in India for 70 days and during the 4 years preceding the
previous year 2020 - 21, he was in India for 355 days ( i.e. 55 + 60 + 90 + 150 days)

Thus, he does not satisfy section 6(1). Therefore, he is a non - resident for the previous year 2020 -
21.

Illustration 3

Mr. A, a Malaysian Citizen left India after a period of 10 years on 1.06.2018. During the Financial
Year 2019 - 20, he comes to India for 46 days. Later, he returns to India for good on 10.10.2020.
Determine his Residential Status for the A.Y.2021 - 22.

Will your answer be different if his date of departure was 15.05.2018?

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Answer:
No Particulars
1 During the PY 2020 - 21, Mr. A stays in India from 10.10.2019 onwards, amounting to 174
days Therefore, he does not fulfil the first basic condition, but he fulfils the second basic
condition as he has stayed for more than 60 days during 2020 - 21 and he has stayed for
more than 365 days during the 4 preceding previous years. Hence, he is a resident. He was a
resident in 9 out of 10 preceding previous years and was staying for more than 729 days
during the 7 preceding previous years
2 Therefore, he does not satisfy any of the additional conditions, By fulfilling the second basic
condition and not fulfilling any of the additional conditions, Mr. A is a resident and
ordinarily resident for AY 2021 - 22
3 If the date of departure during 2018 - 19 happens to be 15 – 05 - 2018, Mr. A fails to fulfil
either of the basic conditions( since he had stayed only for 45 days in the PY 2018 - 19)
making him a non - resident in that year. Besides he does not fulfil any of the basic
conditions for the previous year 2019 - 20(he has stayed for 46 days in that year). Therefore,
Mr. A was a non-resident in only 2 out of the 10 preceding previous years. He was a
resident in 8 out of 10 preceding previous years and he stayed for a period of more than 729
days in 7 preceding previous years. Being a resident and by not fulfilling any of the
additional conditions, he becomes resident and ordinarily resident for AY 2021 - 22. Hence
answer remains same even if he departs from India on 15.05.2018 instead of 01.06.2018

Illustration 4

Mr. D, a non - resident residing in US since 1990, came back to India on 1.4.2019 for permanent
settlement. What will be his residential status for assessment year 2021 - 22?
Answer:
Mr. D is a resident in AY 2021 - 22 since he has stayed in India for a period of 365 days (more than
182 days) during the PY 2020 - 21.
As per section 6(6), a person will be ‚Not ordinarily resident‛ in India in any previous year, if such
person, inter alia:
No Particulars
1 Has been a non - resident in 9 out of 10 previous years preceding the relevant previous year;
or
2 Has during the 7 previous years immediately preceding the relevant previous year been in
India for 729 days or less
If he does not satisfy either of these conditions, he would be a resident and ordinarily resident.
For the previous year 2020 - 21 (AY 2021 - 22), his status would be ‚ Resident but not ordinarily
resident‛ since he was non - resident in 9 out of 10 previous years immediately preceding the PY
2020 - 21. He can be resident but not ordinarily resident also due to the fact that he has stayed in
India only for 366 days (i.e., less than 730 days) in 7 previous years immediately preceding the PY
2020 - 21

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Illustration 5
An individual, who is an Indian Resident, is allowed to hold two different Citizenships
simultaneously. Is the Citizenship a determining factor for Residential Status of an Individual?

Answer
Citizenship of a country and residential status of that country are separate concepts. A person may
be an Indian national / citizen, but may not be a resident in India. On the other hand, a person may
be a foreign national / citizen, but he may be a resident in India. The citizenship of an individual
has no role in determining the residential status of an individual.
The residential status is determined on the basis of number of days an individual actually stays in
India during the previous year. The provisions of Sec 6 of the Income-tax Act, 1961 are
determining factor for residential status of an individual.

Illustration 6
Mrs. X is an Indian citizen. Currently she is in employment with an overseas company located in
Dubai. Her passport reveals the following information about her stay in India.
No Year Dates
1 2020 – 21 From April 3 to May 11th
rd

2 2019 – 20 From June 22nd to July 11th

3 2018 – 19 From February 10th to March 26th
4 2017 – 18 From September 7th to March 26th
5 2016 – 17 From May 17th to September 30th
6 2015 – 16 From April 3rd to July 11th
7 2014 – 15 From April 3rd to July 11th
8 2013 – 14 From April 3rd to July 11th
9 2012 – 13 From April 3rd to July 11th
Find out her residential status for the assessment year 2021-22 if Mrs. X is not taxable in Dubai or
any other country or territory by reason of her domicile or residence. Income of Mrs. X in India for
previous year 2020 - 21 (other than income from foreign sources) is Rs.20, 00, 000.

Answer:
An individual is said to be a resident in India in any previous year if he satisfies one or both of the
basic conditions as given u/s 6(1).
No Particulars
1 He must be in India for a period of 182 days or more during the previous year; or
2 He must be in India for a period of 60 days or more during the previous year and 365 days
or more during the four years preceding the previous year
If he does not satisfy either of these conditions, he would be a non-resident unless his case falls u/s
6(1A).
According to section 6(1A) of the Act, an individual shall be deemed to be resident in India if he
fulfils the following conditions:
No Particulars
1 He must be a citizen of India
2 His total income , other than the income from foreign sources , must exceed Rs. 15 lakhs
during the previous year; and
3 He is not liable to tax in any other country or territory by reason of his domicile or residence
or any other criteria of similar nature

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If these conditions are satisfied he is deemed to be not-ordinarily resident in India as per section
6(6)(d).
During the previous year 2020 - 21, Mrs. X was in India for 39 days (April: 28 + May: 11). Thus, she
does not satisfy the basic condition as per Section 6(1) of the Act. However, she satisfies the
conditions of section 6(1A) read with section 6(6)(d), hence she is resident but not ordinarily
resident in India.

Illustration 7
Mr. C, who is a citizen of Singapore, has stayed in India for a period of 150 days during the
previous year 2020 - 21. Mr. C stayed in India throughout the previous year 2019 - 20. However, he
stayed in his home country for 330 days and 350 days during the PY 2018 - 19 and 2017 - 18
respectively. Determine his residential status for AY 2021 - 22.

Answer
In the given problem, Mr. C has stayed for 150 days during 2020 - 21 and 365 days during
2019 - 20. Therefore, he fulfils the second basic condition to become a resident. He satisfies the
additional condition of being a non - resident in 9 out of 10 preceding previous years. His period
of stay in India during 7 preceding previous years is less than 729 days. Therefore, Mr. C is a
resident but not ordinarily resident
Note :-
To be resident but not ordinarily resident it is enough if he satisfies even one of the two additional
conditions. In this case he satisfies both the additional conditions

Illustration 8
Ms. Christine furnishes the information about her period of stay in India during the previous years
2010 - 11 to 2020 - 21 which is as follows:
PY Days PY Days PY Days
2010 – 11 365 days 2014 - 15 75 days 2018 - 19 62 days
2011 – 12 365 days 2015 - 16 67 days 2019 - 20 70 days
2012 – 13 365 days 2016 - 17 178 days 2020 - 21 100 days
2013 – 14 110 days 2017 - 18 65 days
Determine her residential status for the AY 2021 - 22.

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Answer
No Particulars
1 Ms. Christine has stayed for 100 days during the PY 2020 - 21 and 375 days during the
immediately preceding 4 previous years. She thus fulfils the second basic condition.
Therefore, she is a resident
2 In order to determine whether she is ordinarily resident or not ordinarily resident, the
fulfilment of either of the additional conditions must be examined. On verifying the period
of stay for the preceding 10 years, it is clear that she is a resident in all the 10 preceding
previous years by fulfilling the first basic condition of 182 days stay during the previous
year 2010 - 11 to 2012 - 13 and by fulfilling the second basic condition for the previous year
2013 - 14 to 2020 – 21
3 So, she does not satisfy the first additional condition of being a non-resident in 9 out of 10
preceding previous years. However, Christine fulfils the second additional condition of
staying for a period of 729 days or less during the 7 immediately preceding previous years.
The aggregate period of stay during the 7 immediately preceding previous years works out
to 627 days only. Therefore, Christine is a resident but not ordinarily resident for AY 2021 –
22

Illustration 9
Smitha, a Chartered Accountant is presently working in a firm in India. She has received an offer
for the post of Chief Financial Officer from a company at Singapore. As per the offer letter she
should join the company at any time between 1st September, 2020 and 31st October, 2020. She
approaches you for your advice on the following issues to mitigate her tax liability in India.
No Particulars
1 Date by which she should leave India to join the company
2 Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her
mother to meet requirement of her family
3 Period for which she should stay in India when she comes on leave

Answer:
No Particulars
1 By staying in India for less than 182 days during the previous year the assesse will obtain the
status of non-resident and therefore, chargeability of global income in India could be
avoided. Accordingly, Smitha should plan to leave India on or before 28.09.2020
2 Irrespective of residential status, income received in India shall be charged to tax in India.
Accordingly, Smitha should plan to deposit the salary in any account outside India when the
employer remits the same. Subsequently, fund transfer, either fully or partly may be carried
out
3 A citizen of India or a person of Indian origin who is residing outside India and comes to
India on a visit in any previous year is required to stay in India for 182 days for being treated
as Resident. Therefore, Smitha can stay up to 181 days and still retain the status of ‚Non-
resident‛. However, if her total income (other than income from foreign sources) is
exceeding Rs.15 lakhs during the previous year, then Smitha can stay only up to 119 days to
retain the status of ‚ Non - resident‛

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Illustration 10
Muthu, an Indian citizen, left India for the first time as a member of the crew of an Indian ship on
15th November 2018. Thereafter he settles down abroad on employment and comes back on a visit
to India on 10.06.2020 and stays for 190 days. Determine his residential status for AY 2021 - 22.
Answer:
During the previous year 2020 - 21, Muthu has stayed for 190 days. Thus, he fulfils the basic
condition as modified by the second exception. Besides, he fails to fulfil the additional conditions
and therefore, becomes resident and ordinarily resident for AY 2021 - 22.

DETERMINATION OF RESIDENTIAL STATUS

Residential status of
HUF

Resident Non - Resident

Resident & Ordinarily Resident but not

resident ordinarily resident

RESIDENTIAL STATUS OF HUF

No Particulars Explanation
1 Resident HUF - HUF is resident in India if the control and management of is affairs is
Section 6(2) situated wholly or partly in India
2 Non - Resident HUF is a non - resident in India if the control and management of its
HUF affairs is situated wholly outside India
3 Not - Ordinarily A resident HUF becomes not ordinarily resident if karta or manager
Resident HUF satisfies one or both of the following additional conditions:
No Particulars
1 He has been non - resident in India in 9 out of the 10 years
immediately preceding the relevant previous year; or
2 He has been in India for 729 days or less during the 7 years
immediately preceding the previous year

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RESIDENTIAL STATUS OF HUF

Control & Management of HUF

Wholly or partly in India Wholly outside India

Resident Non - resident

Is the control and management of its affairs situated wholly or partly in India?

Yes No

Is Karta a ROR? Non - Resident

Yes No

HUF is ROR HUF is RNOR

QUESTIONS FOR PRACTICE

Illustration 1

The Business of a HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the Karta of the HUF, who was born in Kolkata, visits India during the P.Y. 2020 - 21 after
15 years. He comes to India on 1.4.2020 and leaves for Australia on 1.12.2020. Determine the
Residential Status of Mr. E and the HUF for A.Y. 2021 - 22.

Answer

No Particulars
1 During the P.Y.2020 - 21, Mr. E has stayed in India for 245 days (i.e., 30 + 31 + 30 + 31 + 31 + 30 + 31 + 30
+ 1 days). Therefore, he is a resident. However, since he has come to India after 15 years, he does not
satisfy the condition for being ordinarily resident.
Therefore, the residential status of Mr. E for the P.Y.2019 - 20 is resident but not ordinarily resident
2 Since the business of the HUF is transacted from Australia and policy decisions are taken there, it is
assumed that the control and management is in Australia i.e. the control and management wholly
outside India. Therefore, the HUF is a non - resident for the P.Y.2020 – 21

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II - SCOPE OF TOTAL INCOME

Individual & HUF

Income Income
Scope of
Residential Deemed to be deemed to Tax rate &
Total
Status Received in accrue & arise Surcharge
Income
India in India

SCOPE OF TOTAL INCOME – SECTION 5

Resident
Not
and Non –
No Particulars Ordinary
Ordinary Resident
Resident
Resident
1 Income Received or Deemed to be received in India
Yes Yes Yes
whether earned in India or elsewhere
2 Income Accrue or arise or Deemed to accrue or arise in
Yes Yes Yes
India
3 Income Accrue or arises to him or received outside India
from a Business controlled from India or profession setup in Yes Yes No
India
4 Income Accrue or arise received outside India Yes No No

SUMMARY :-

Income Received or Accrued or Arisen

From India Outside India

Income Accrue
Income Accrue or Arise &
Income Recived Income Accrue
or Arise or Received
or Deemed to be or Arise &
Deemed to Outside India
Received in Received
Accrue or Arisen from a Business
India Outside India
in India or Profession
From India

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QUESTIONS FOR UNDERSTANDING

Illustration 1

From the following particulars of Income furnished by Mr. Anirudh pertaining to the year ended
31.3.2021, Compute the Total Income for the Assessment Year 2021 - 22, if he is:

No Particulars
1 Resident and Ordinary Resident
2 Resident but Not Ordinarily Resident
3 Non – Resident

No Particulars Amount
1 STCG on sale of shares in Indian Company received in Germany 15,000
2 Dividend from a Japanese Company received in Japan 10,000
Rent from property in London deposited in a bank in London, later on
3 75,000
remitted to India through approved banking channels
4 Dividend from RP Ltd., an Indian Company 6,000
5 Agricultural Income from lands in Gujarat 25,000

Answer

Computation of Total income of Mr. A for AY 2021 - 22

No Particulars R&OR RNOR NR
1. Short term capital gains on sale of shares of an
15,000 15,000 15,000
Indian company, received in Germany
2. Dividend from a Japanese company received in
10,000 - -
Japan
3. Rent from property in London deposited in a
52,500 - -
bank in London - See Note (1) below
4. Dividend from RP Ltd., an Indian Company -
6,000 6,000 6,000
Taxable from AY 2021 - 22
5. Agricultural income from land in Gujarat - See
- - -
Note (2) below
Total Income 83,500 21,000 21,000

Notes

No Particulars
1 It has been assumed that the rental income is the gross annual value of the property. Therefore,
deduction @30% under section 24, has been provided and the net income so computed is taken into
account for determining the total income of a resident and ordinarily resident.
No Particulars Amount
1 Rent received - assumed as gross annual value 75,000
2 Less : Deduction under section 24 - 30% of Rs. 75,000 22,500
3 Income from House Property 52,500

2 Agricultural income is exempt under section 10(1)

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Illustration 2

Mr. Ramesh & Mr. Suresh are brothers and they earned the following Incomes during the financial
year 2020 - 21. Mr. Ramesh settled in Canada in the year 1996 and Mr. Suresh settled in Delhi.
Compute the Total Income for the Assessment Year 2021 - 22.

Mr. Mr.
No Particulars
Ramesh Suresh
Interest on Canada Development Bonds - only 50% of Interest
1 35,000 40,000
received in India
2 Dividend from British Company received in London 28,000 20,000
Profit from a Business in Nagpur, but managed directly from
3 1,00,000 1,40,000
London
Short Term Capital Gain on Sale of Shares of an Indian
4 60,000 90,000
Company received in India
5 Income from a Business in Chennai 80,000 70,000
Fees for Technical Services rendered in India, but received in
6 1,00,000 -
Canada
7 Interest on Savings Bank deposit in UCO Bank, Delhi 7,000 12,000
8 Agricultural Income from a Land situated in Andhra Pradesh 55,000 45,000
9 Rent received in respect of House Property at Bhopal 1,00,000 60,000
10 Life Insurance Premium paid - 30,000

Answer

Computation of Total Income of Mr. Ramesh & Suresh for the AY 2021 - 22

Note Mr. Mr.

No Particulars Ramesh Suresh
(NR) (Resident)
1 Interest on Canada Development Bonds 2 17,500 40,000
2 Dividend from British Company received in London 3 - 20,000
Profit from a Business in Nagpur, but managed directly 2
3 1,00,000 1,40,000
from London
Short Term Capital Gain on Sale of Shares of an Indian 2
4 60,000 90,000
Company received in India
5 Income from a Business in Chennai 2 80,000 70,000
Fees for Technical Services rendered in India, but received 2
6 1,00,000 -
in Canada
7 Interest on Savings Bank deposit in UCO Bank, Delhi 2 7,000 12,000
Agricultural Income from a Land situated in Andhra 4
8 - -
Pradesh
9 Income from House Property at Bhopal 70,000 42,000
10 Gross total income 4,34,500 4,14,000
11 Less: Deduction under Chapter VIA
Sec – 80C – Life Insurance premium - 30,000
Sec – 80TTA 6 7,000 10,000
12 Total Income 4,27,500 3,74,000

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Notes

No Particulars
1 Mr. Ramesh is a Non – resident since, he has been living in Canada since 1996.
Mr. Suresh is settled in Delhi hence he will be treated as resident and Ordinarily resident
2 In case of resident and ordinarily resident, the global income is taxable as per section –
5(1). However as per 5(2) in case of Non – resident only the following are taxable
 Income received or deemed to be received in India
 Income accruing or arising to be received in India or deemed to be accruing or arising
in India
Therefore, fees for technical services rendered in India would be taxable in the hands of
Mr. Ramesh even though he is a Non – resident
The income referred to in SI. No. 3,4,5 and 7are taxable both in the case of Ramesh and
Suresh since they accruing or arising to be received in India or deemed to be accruing or
arising in India
Interest from Canada development bond would be fully taxable in the hands of suresh
whereas only 50% which is received in India is taxable in the hands of Mr. Ramesh
3 Dividend received from British company in London by Mr. Ramesh being a NR is not
taxable since it accrued and received outside India. However such dividend received by
Mr. Suresh is taxable. Since he is a resident ROR
4 Agricultural income from land situated in India is exempt u/s 10(1) in case of both ROR
and NR
5 Income from House property,
No Particulars Ramesh Suresh
1 Rent received 1,00,000 60,000
2 Deduction u/s 24a (30% of NAV) 30,000 18,000
3 Net income from House property 70,00 42,000
The net income from HP in India would be taxable for both ROR and NR since, the
accrual and receipt of the same in India
6 In case of Individual, interest up to Rs. 10,000 from savings account with interalia, a bank
is allowable as deduction u/s 80TTA

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Illustration 3
Compute the total income in the hands of an individual, aged 35 years, being a resident and
ordinarily resident, resident but not ordinarily resident, and a non - resident for A.Y. 2021 - 22.

No Particulars Amount
1 Interest on UK Development Bonds, 50% of interest received in India 10,000
2 Income from a business in Chennai - 50% is received in India 20,000
3 Short term capital gains on sale of shares of an Indian company received in London 20,000
4 Dividend from British company received in London 5,000
5 Long term capital gains on sale of plant at Germany, 50% of profits are received in
India 40,000
6 Income earned from business in Germany which is controlled from Delhi - 40,000 is
received in India 70,000
7 Profits from a business in Delhi but managed, entirely from London 15,000
8 Income from house property in London deposited in an Indian Bank at London,
brought to India - Computed 50,000
9 Interest on debentures in an Indian company received in London 12,000
10 Fees for technical services rendered in India but received in London 8,000
11 Profits from a business in Mumbai managed from London 26,000
12 Income from property situated in Nepal received there - computed 16,000
13 Past foreign untaxed income brought to India during the previous year 5,000
14 Income from agricultural land in Nepal received there and then brought to India 18,000
15 Income from profession in Kenya which was set up in India, received there but spent
in India 5,000
16 Gift. Received on the occasion of his Wedding 20,000
17 Interest on savings bank deposit in State Bank of India 12,000
18 Income from a business in Russia, controlled from Russia 20,000
19 Dividend from, Reliance Petroleum Limited, an Indian Company 5,000
20 Agricultural income from a land in Rajasthan 15,000

Solution
Computation of Total Income for the AY 2021 - 22
No Particulars ROR RNOR NR
1 Interest on UK Development Bonds, 50% of interest received in
10,000 5,000 5,000
India
2 Income from a business in Chennai (50% is received in India) 20,000 20,000 20,000
3 Short term capital gains on sale of shares of an Indian company
20,000 20,000 20,000
received in London
4 Dividend from British company received in London 5,000 -- --
5 Long term capital gain on sale of plant at Germany, 50% of profits
40,000 20,000 20,000
are received in India
6 Income earned from business in Germany which is controlled from
70,000 70,000 40,000
Delhi, out of which Rs 40,000 is received in India
7 Profits from a business in Delhi but managed entirely from London 15,000 15,000 15,000
8 Income from property in London deposited in a Bank at London
50,000 -- --
later on remitted to India
9 Interest on debentures in an Indian company received in London 12,000 12,000 12,000
10 Fees for technical services rendered in India but received in London 8,000 8,000 8,000
11 Profits from a business in Mumbai managed from London 26,000 26,000 26,000
12 Income from property situated in Nepal received there 16,000 -- --
13 Past foreign untaxed income brought to India during the previous
-- -- --
year
14 Income from agricultural land in Nepal received there and then
18,000 -- --
brought to India

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15 Income from profession in Kenya which was set up in India,

5,000 5,000 --
received there but spent in India
16 Gift received on the occasion of his wedding (not taxable) -- -- --
17 Interest on savings bank deposit in State Bank of India 12,000 12,000 12,000
18 Income from a business in Russia, controlled from Russia 20,000 -- --
19 Dividend from Reliance Petroleum Limited, an Indian Company 5,000 5,000 5,000
20 Agricultural income from a land in Rajasthan(Exempt under
-- -- --
section 10 (1) )
21 Gross Total Income 3,52,000 2,18,000 1,83,000
22 Less Deduction under section 80TTA
(Interest on savings bank account subject to a maximum of Rs 10, (10,000) (10,000) (10,000)
000)
23 Total Income 3,42,000 2,08,000 1,73,000

III - INCOME DEEMED TO BE RECEIVED IN INDIA

Individual & HUF

Income Income
Residential Scope of Deemed to deemed to Tax rate &
Status Total Income be Received accrue & Surcharge
in India arise in India

The following income shall be deemed to be received in India-

No Particulars
1 The annual accretion in the previous year to the balance at the credit of an employee
participating in a recognized provident fund to the extent of the following:
 Employer’s contribution in excess of 12% of salary; and
 Interest credited to the recognized provident fund account in excess of 9.5 % p.a.
2 The transferred balance in a recognized provident fund to the extent of employer’s
contribution and interest thereon
3 The contribution made by the Central Government or any other employer in the
previous year, to the account of an employee under a pension scheme referred to in
section 80CCD
4  Cash credit,
 Unexplained investment,
 Unexplained money,
 Investment not fully disclosed,
 Unexplained expenditure,
 amount borrowed or repaid on Hundi
5 Tax deducted at source in the hands of payee
6 Deemed profits chargeable to tax under the Act

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INCOME DEEMED TO BE RECEIVED

Income Deemed To Be Received

Contribution in excess of Amount transferred from

12% of salary to Recognised Contribution by the CG or unrecognised provident
Provident Fund or interest other employer under a fund to recognised
credited in excess of 9.5% p.a pension scheme referred u/s provident fund (being the
(Annual accretion to the 80 CCD employer's contribution and
credit of RPF) interest thereon

IV - INCOME DEEMED TO ACCRUE & ARISE IN INDIA

Individual & HUF

Income Income
Residential Scope of Deemed to deemed to Tax rate &
Status Total Income be Received accrue & Surcharge
in India arise in India

INCOME DEEMED TO ACCRUE OR ARISEN IN INDIA – SECTION 9

Summary:-
No Section Income
1 9(1)(i) Any income through or from any business connection in India;
Any income through or from any property in India
Any income through or from any asset or source of income in India; or
Any income through transfer of capital assets situated in India.
2 9(1)(ii) Any salary income, if it is earned in India
3 9(1)(iii) Any salary payable by the Government to an Indian citizen for service outside
India
4 9(1)(iv) Dividend paid by an Indian company outside India
5 9(1)(v) Interest payable by Government, resident or non-resident
6 9(1)(vi) Royalty payable by Government, resident or non-resident
7 9(1)(vii) Fees for technical services payable by Government, resident or non-resident
8 9(1)(viii) Any sum of money paid/property transferred by a resident Indian to a non-
resident or foreign company, without or inadequate consideration (i.e. gifts)

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INCOME DEEMED TO ACCRUE OR ARISEN IN INDIA – SECTION 9 - BASICS

Income deemed to Accrue or Arise in India - Basic

S.9(1)(i) S.9(1)(ii) S.9(1)(iii) S.9(1)(iv)

Income from 4 Salary from Govt Dividend from

Salary from India
Sources of India Indian Co.

The following incomes are deemed to accrue or arise in India:

No Section Particulars
1 9(1)(i) All income accruing or arising, whether directly or indirectly, through or from-
 Any business connection in India or
 Any property in India, or
 Any asset or source of income in India; or
 Through the transfer of capital asset situated in India
2 9(1)(ii) Income which falls under the head ‚salaries‛, if it is earned in India
Explanation:
Salary shall be regarded as earned in India if it is payable for-
 Service rendered in India; or
 The rest period or leave period which is preceded and succeeded by services
rendered in India and forms part of the service contract of employment
3 9(1)(iii) Income chargeable under the head ‚salaries‛ payable by the government to a
citizen of India for service rendered outside India
4 9(1)(iv) A dividend paid by an Indian company outside India

SUMMARY :-
Income deemed to accrue or arise in
India
Clause (i), (ii), (iii) & (iv) Section 9 (1)

Salary Payable
Income
by
accruing or Salary earned Dividend paid
Government to
arising directly for services by Indian
India Citizen
or indirectly rendered in Company
for services
through or India Outside India
rendered
from
outside India

Transfer
Any Any asset
Any of capital
Business or source
property asset
Connectio of income
in India situated
n in India in India
in India

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INCOME DEEMED TO ACCRUE OR ARISEN IN INDIA – SECTION 9 - ADVANCED

Income deemed to Accrue or Arise

in India - Advanced

S.9(1)(v) S.9(1)(vi) S.9(1)(vii) S.9(1)(viii)

Fees for
Interest Royalty Technical Gift
Service

No Section Particulars
1 9(1)(v) Income by way of interest payable by-
No Particulars
1 The Government; or
2 A person who is a resident, except where the interest is payable in
respect of any debt incurred, or money borrowed and used for the
purposes of a business or profession carried on by such person outside
India or for the purposes of making or earning any income from any
source outside India; or
3 A person who is a non-resident, except where the interest is payable in
respect of any debt incurred, or money borrowed and used for the
purposes of a business or profession carried on by such person in India

1 S. 200 Income by way of royalty payable by –

9(1)(vi) No Particulars
1 The Government; or
2 A person who is resident, except where the royalty is payable in respect
of any right, property or information used or services utilized for the
purposes of a business or profession carried on by such person outside
India or for the purposes of making or earning any income from any
source outside India; or
3 A person who is non-resident, where the royalty is payable in respect
of any right, property or information used or services utilized for the
purposes of a business or profession carried on by such person in India
or for the purposes of making or earning any income from any source in
India

2 S. Income by way of fees for technical services payable by-

9(1)(vii) No Particulars
1 The Government; or
2 A person who is a resident, except where the fees are payable in respect
of services utilized in a business or profession carried on by such person
outside India or for the purposes of making or earning any income from
any source outside India; or

3 A person who is a non-resident, where the fees are payable in respect

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of services utilized in a business or profession carried on by such person

in India or for the purposes of making or earning any income from any
source in India

3 S. Income arising outside India, being any sum of money referred to on section
9(1)(viii) 2(24)(xviia) i.e. gifts, paid on or after 5.7.2019 by a person resident in India to a
non-resident, not being a company, or to a foreign company

Explanation to Section 9
No Particulars
1 a) Taxability of interest payment to a non-resident, being a person engaged in the
business of banking, by its Permanent Establishment (PE) in India:
In order to provide clarity and certainty, on the issue of taxability of interest payable by the
PE of a non-resident engaged in banking business to the head office, an Explanation has
been inserted in Section 9(1)(v).
No Particulars
1 Accordingly, in case of a non-resident, being a person engaged in the business of
banking, any interest payable by the PE in India of such non-resident to the head
office or any PE or any other part of such non-resident outside India, shall be
deemed to accrue or arise in India
2 Such interest shall be chargeable to tax in addition to any income attributable to the
PE in India
3 Further, the PE in India shall be deemed to be a person separate and independent of
the non-resident person of which it is a PE and the provisions of the Act relating to
computation of total income, determination of tax and collection and recovery
would apply accordingly
4 Further the PE in India has to deduct tax at source on any interest payable to either
the head office or any other branch or PE, etc. of the non-resident outside India.
Non-deduction would result in disallowance of interest claimed as expenditure by
the PE and may also attract levy of interest and penalty in accordance with relevant
provisions of the Act

b) “Permanent Establishment” shall have the meaning assigned to it in Section 92F(iiia)

2 The income of a non-resident shall be deemed to accrue or arise in India u/s 9(1)(v) / (vi) /
(vii) and shall be included in the total income of the non - resident, whether or not,-
No Particulars
1 The non-resident has a residence or place of business or business connection in
India; or
2 The non-resident has rendered services in India

Note:
Section 9 details the incomes deemed to accrue or arise in India and section9A details the
circumstances when the presence of eligible fund manager in India would not constitute
business connection in India for an eligible investment fund

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SUMMARY :-

Income deemed to accrue or arise in

India
Clause (v), (vi) & (vii) of Section 9(1)

Interest, Royalty, Fees for

technical services, if Income arising
payable by outside India,
being any sum
of money paid
Person resident in A Non - without
Government
India resident consideration,
by resident
Indian to a non
Exception - Corporate NR
If technical
services or or foreign
If the money Company,
royalty
If the money where
borrowed and If money is services are
borrowed and aggregate of
used or borrowed utlised for thr
used or such sum > Rs.
technical and used for purpose of
technical 50,000
services or the purpose business or
services or
royalty of business profession
royalty
services are or profession carried on
services are
utilised for carried on in India or
utlised for
the purpose India making
making
of business or income from
income from
profession any source in
any source
carried on India
outside India
outside India

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V - TAX RATE & SURCHARGE

Individual & HUF

Income Income
Residential Scope of Deemed to be deemed to Tax rate &
Status Total Income Received in accrue & Surcharge
India arise in India

TAX RATE

Tax Rate for Individual &

HUF

Normal Rates 115BAC Rates

RATES OF INCOME TAX FOR INDIVIDUAL

No Particulars
1 In case of every Individual, HUF, AOP, BOI, and every Artificial Judicial Person

No Total Income Rate

1 Up to Rs.2,50,000 Nil
2 Next Rs.2,50,000 5%
3 Next Rs.5,00,000 20%
4 Balance 30%

2 In case of Resident Individual of age 60 years or more but less than 80 years at any time
during the previous year.

No Total Income Rate

1 Up to Rs.3,00,000 Nil
2 Next Rs.2,00,000 5%
3 Next Rs.5,00,000 20%
4 Balance 30%

3 In case of a Resident Individual of age 80 years or more at any time during the previous
year

No Total Income Rate

1 Up to Rs.5,00,000 Nil
2 Next Rs.5,00,000 20%
3 Balance 30%

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SUMMARY:-

BEL to Resident Indivisdual

Super senior
Normal Person Senior citizen
citizen

Rs. 2,50,000 Rs. 3,00,000 Rs. 5,00,000

RATES OF INCOME TAX FOR HUF

In case of every Individual, HUF, AOP, BOI, and every Artificial Judicial Person

No Total Income Rate

1 Up to Rs.2,50,000 Nil
2 Next Rs.2,50,000 5%
3 Next Rs.5,00,000 20%
4 Balance 30%

SECTION 115BAC - TAX ON INCOME OF INDIVIDUALS & HUF

As per section 115BAC, individuals and HUFs have an option to pay tax in respect of their total
income (other than income chargeable to tax at special rates under Chapter XII) at following
concessional rates, if they do not avail certain exemptions/deductions like Leave Travel
Concession, standard deduction under the head ‚Salaries‛, interest on housing loan on self -
occupied property, deductions under Chapter VI - A (other than 80CCD(2) or section 80JJA) etc.

SPECIAL PROVISIONS RELATING TO TAX ON INCOME OF INDIVIDUALS AND

HINDUX UNDIVIDED FAMILY AS PROVIDED IN SECTION 115BAC

The relevant provisions are discussed as under -

No Particulars Explanation
1 Applicability Individual/HUF
2 Rate of Tax The Total Income shall be chargeable to tax as under :

No Total Income Rate

1 Up to Rs.2,50,000 Nil
2 Next Rs. 2,50,000 5%
3 Next Rs.2,50,000 10%
4 Next Rs.2,50,000 15%
5 Next Rs.2,50,000 20%
6 Next Rs.2,50,000 25%
7 Balance Income 30%

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3 Applicability of The rate of tax is notwithstanding anything contained in the

concessional rate of tax Income - tax Act, 1961, but subject to the provisions of Chapter
on total income of XII.
individual / HUF Note : This implies that this rate would prevail in respect of all
income, other than income subject to special rates of tax under
Chapter XII, for which the special rates would continue to apply.
For example,
Long - term capital gains chargeable to tax u/s 112 and 112A and
short - term capital gains chargeable to tax u/s 111A would be
subject to tax at the rates mentioned in the said sections.
4 Non applicability of The provisions of Section 115JC i.e. Alternate Minimum Tax shall
AMT not apply to a person who has exercised the option under this
section.

CONDITIONS TO BE FULFILLED FOR AVAILING THE CONCESSIONAL RATE OF TAX

Manner of computation of TI for S.115BAC

Without claiming
Without claiming without claiming any exemption or
Without claiming
Set - off of any additional deduction for
18 Deductions
loss depreciation allowances or
perquisites

The total income of the individual or undivided family shall be computed Without providing for
deduction under any of the following provisions
No Section Provision
1 10(5) Exemption in respect of Leave travel concession
2 10(13A) House Rent Allowance
3 10(14) Exemption in respect of other allowances (other than those as may be prescribed
for this purpose i.e. Travelling allowance, daily allowance, Conveyance
allowance and Transport allowance to blind or deaf and dumb or orthopedically
handicapped employee.)
4 10(17) Exemption in respect of payments to MPs & MLAs
5 10(32) Exemption in respect of Clubbed income of minor
6 10AA Exemption in respect of under - takings located in SEZ
7 16 Deductions from salaries – Standard Deduction, Entertainment allowance and
Employment Tax
8 24(b) Deduction in respect of Interest on borrowed capital in respect of the property
referred to in section 23(2)
9 32(1)(iia) Additional depreciation @20% of actual cost of new plant and machinery
acquired and installed by manufacturing and power sector undertakings.
10 32AD Deduction @15% of actual cost of new plant and machinery acquired and
installed by an assessee in a manufacturing undertaking located in the notified
backward areas of Andhra Pradesh, Telangana, Bihar and West Bengal. (Same is

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not admissible from AY 2021 - 22 onwards)
11 33AB Deduction @ 40% of profits and gains of business of growing and manufacturing
tea, coffee or rubber in India, to the extent deposited with NABARD in
accordance with scheme approved by the Tea/ Coffee/ Rubber Board.
12 33ABA DedN @ 20% of the profits of a business of prospecting for, or extraction or
production of, petroleum or natural gas or both in India, to the extent deposited
with SBI in an approved scheme or deposited in Site Restoration A/c
13 35(1)(ii)/ Deduction for payment to any research association, company, university etc. for
(iia)/(iii) undertaking scientific research or social science or statistical research.
14 35(2AA) Deduction of payment to a National Laboratory or University or IIT or approved
specified person for scientific research.
15 35AD Investment - linked tax deduction for specified Businesses.
16 35CCC Deduction of expenditure incurred on notified agricultural extension project.
17 57(iia) Deduction in respect of family pension.
18 80 - C to Deductions from gross total income under
80 U Chapter VI - A other than the provisions of Section 80CCD(2) or Section 80JJAA.

Manner of computation of TI for S.115BAC

Without claiming
Without claiming without claiming any exemption or
Without claiming
Set - off of any additional deduction for
18 Deductions
loss depreciation allowances or
perquisites

No Particulars
(ii) Without set off of any loss –
No Particulars
a Carried forward or depreciation from any earlier assessment year, if such loss or
depreciation is attributable to any of the deductions referred to in clause(i)
b Under the head "Income from house property" with any other head of
income;(Such loss and depreciation would be deemed to have been already
given effect to and no further deduction for such loss shall be allowed for any
subsequent year)
where there is depreciation allowance in respect of a block of assets which has not been
given full effect to prior to the assessment year beginning on 01 - 04 - 2021, corresponding
adjustment shall be made to the written down value of such block of assets as on 01 - 04 -
2020 in the prescribed manner, if such option is exercised for a previous year relevant to the
assessment year beginning on 01 - 04 – 2021
(iii) By claiming depreciation u/s 32 determined in the prescribed manner. However, additional
depreciation u/s 32(1)(iia) cannot be claimed.
(iv) Without any exemption or deduction for allowances or perquisite, by whatever name
called, provided under any other law for the time being in force (Exemption in respect of
free food and non - alcoholic beverage provided by such employer through paid voucher
where value does not exceed Rs. 50 per meal will not be available.)

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NON - COMPLIANCE OF CONDITIONS

Consequences thereof,
No Particulars
1 Where the person fails to satisfy the above conditions in any Previous year, the option shall
become invalid in respect of the assessment year relevant to that previous year and other
provisions of this Act shall apply, as if the option had not been exercised for the assessment
year relevant to that previous year
2 Besides this on violation of the above conditions, the option shall become invalid for
subsequent assessment years also and other provisions of this Act shall apply for those years
accordingly

OTHER PROVISIONS

No Particulars Explanation
1 Deduction u/s In case of a person, having a Unit in the International Financial Services
80LA Centre, as referred to in section 80LA(1A), which has exercised such
admissible option, the conditions shall be modified to the extent that the deduction
under section 80LA shall be available to such Unit subject to fulfillment of
the conditions contained in the said section.
2 Exercise of Nothing contained in this section shall apply unless option i, exercised in
option within the prescribed manner by the person,—
the No Particulars
prescribed 1 Having income from business or profession, on or before the due
time date specified under section 139(1) for
furnishing the returns of income for any previous year relevant to
the assessment year commencing on or
after 01 - 04 - 2021, and such option once exercised shall apply to
subsequent assessment years
2 Having income other than the income referred to in clause (i),
along with the return of income to be
furnished under section 139(1) for a previous year relevant to the
assessment year
However, the option under clause (i), once exercised for any previous year
can be withdrawn only once for a previous year other than the year in
which it was exercised and thereafter, the person shall never be eligible to
exercise option under this section, except where such person ceases to have
any income from business or profession in which case, option under clause
(ii) shall be available.

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SURCHARGE FOR INDIVIDUALS & HUF FOR BOTH
NORMAL RATE OR S. 115BAC OPTION

Total Income

>50L up to > 1 crore up to > 2 crore up to More than

< 50 L
1 crore 2 crore 5 crore 5 crore

Nil 10% 15% 25% 37%

Rate of Example Applicable rate of

No Particulars
surcharge Components of TI surcharge
1 Where the total income STCG u/s 111A Surcharge would be
(including income u/s Rs.30 lakhs; levied @ 10% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
10%
Rs.50 lakhs but does not Rs.25 lakhs; and income of Rs.95 lakhs
exceed Rs.1 crore Other income Rs.40
lakhs
2 Where the total income STCG u/s 111A Surcharge would be
(including income u/s Rs.60 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
15%
Rs.1 crore but does not Rs.65 lakhs; and income of Rs.1.25 crores
exceed Rs.2 crores Other income Rs.50
lakhs
3 Where the total income STCG u/s 111A Surcharge would be
(excluding income u/s Rs.54 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax on:
Rs.2 crores but does not Rs.55 lakhs; and STCG of Rs.54 lakhs
exceed Rs.5 crores Other income Rs.3 chargeable to tax u/s
The rate of surcharge on the crores 111A; and
25%
income - tax payable on the LTCG of Rs.55lakhs
Not
portion of income chargeable to tax u/s
exceeding
chargeable to tax u/s 111A 112A
15%
and 112A Surcharge @ 25% would
be leviable on income
tax computed on other
income of Rs.3 crores
included in total
income.
4 Where the total income STCG u/s 111A Surcharge would be
(excluding income u/s Rs.50 lakhs; levied @ 15% on income
37%
111A and 112A) exceeds LTCG u/s 112A tax on:
Not
Rs.5 crores Rs.65 lakhs; and STCG of Rs.50 lakhs
exceeding
The rate of surcharge on the Other income Rs.6 chargeable to tax u/s
15%
income - tax payable on the crores 111A; and
portion of income LTCG of Rs.65lakhs

132 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

chargeable to tax u/s 111A chargeable to tax u/s

and 112A 112A
Surcharge @ 37% is
leviable on income tax
computed on other
income of Rs.6 crores
included in total
income.
5 Where total income STCG u/s 111A Surcharge would be
(including income u/s Rs.60 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
15%
Rs.2 crore in cases not Rs.55 lakhs; and income of Rs.2.25 crores.
covered under (iii) and (iv) Other income Rs.1.1
above crore
REBATE U/S 87A FOR INDIVIDUALS
In case of resident individual whose total income does not exceed Rs.5,00,000, rebate shall be
allowed from Income tax @ 100% of such tax or Rs.12,500 whichever is less

QUESTIONS FOR PRACTICE

Illustration 1

Mr. Dinesh Karthik, a resident individual aged 45, furnishes the following information pertaining
to the year ended 31 - 3 - 2021:

No Particulars
1 He is a partner in Badrinath & Co. He has received the following amounts from the firm:
Particulars Amount
Interest on capital @ 15% Rs. 3,00,000
Salary as working partner (@1% of firm’s sales) Rs. 90,000
2 He is engaged in a business in which he manufactures wheat flour from wheat. The Profit
and Loss A/c pertaining to this business (summarized form) is as under:
To Rs By Rs
Salaries 1,20,000 Gross profit 12,50,000
Bonus Interest on Bank FDR (Net of
48,000 TDS Rs. 5,000) 45,000
Car expenses 50,000 Agricultural income 60,000
Machinery repairs 2,34,000 Pension from LIC Jeevan Dhara 24,000
Advance Tax
Depreciation:
Car 3,00,000
Machinery 1,25,000
Net profit 4,32,000
Total 13,79,000 Total 13,79,000

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No Particulars Amount
1 Opening WDV of assets are under: Rs.
Car 3,00,000
Machinery - Used during the year for 170 days 6,50,000
2 Additions to Machinery:
New Purchased on 23 - 9 – 2020 2,00,000
New Purchased on 12 - 11 – 2020 3,00,000
Old purchased on 12 - 4 – 2020 1,25,000

(All assets added during the year were put to use immediately after purchase) Of the total bonus
amount, Rs. 15,000 was paid on 11 - 10 - 2020. One fifth of the car expenses are towards estimated
personal use of the assessee

No Particulars
1 In March, 2018, he had sold a house at Chennai. Arrears of rent relating to this house
amounting to Rs. 75,000 was received in February, 2021
2 Details of his Savings and investments are as under:
No Particulars Amount
1 Life insurance premium for policy in the name of his major son
employed in LMN Ltd. at a salary of Rs. 6 lakhs p.a. - Sum assured Rs. 50,000
2,00,000
2 Contribution to Pension Fund on National Housing Bank - This was met
partially from out of premature withdrawal of deposit in Post Office
70,000
Time Deposit made on 12 - 3 - 2018. Principal component Rs. 55,000 and
interest Rs. 5,000
3 Medical insurance premium for his father aged 70 years, who is not
52,000
dependent on him

You are required to compute the total income of Mr. Dinesh Karthik and the tax payable by him.
Also indicate whether interest, if any, under section 234A and 234B are payable, assuming that the
return was filed on 28 - 9 - 2021. Computation of interest, if any, is NOT required.

134 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

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Solution:

Computation of total income and tax payable by Mr. Dinesh Karthik (amount in Rs.)

1. Income from house property

No Particulars Amt Amt

1 Arrears of rent received in respect of the Chennai house taxable u/s
25A 75,000
2 Less: 30% deduction u/s 25A (22,500) 52,500
3 IFHP 52,500

2. Profits and gains of business or profession

No Particulars Amount Amount

1 Net profit as per P&L A/c 4,32,000
2 Less: items credited to profit and loss account not to be treated as
business income:
Agricultural income - Exempt from tax (60,000)
Interest on Bank FDR - Net of TDS Rs. 5,000 (45,000)
Pension from LIC Jeevan Dhara - Income from other sources (24,000) (1,29,000)
3 Add” Items debited to profit and loss account to be
disallowed/considered separately:
Advance tax (not allowable as deduction u/s 40(a) 70,000
Car expense disallowed extent attributable to personal use - Rs. 10,000
50,000 x 1/5
Depreciation considered separately - Car Rs. 3,00,000 + Machinery 4,25,000
Rs. 1,25,000 5,05,000
Less: Depreciation on car - W.N - 1 (36,000)
Less: Depreciation on machinery - W.N - 2 (2,38,750) (2,74,750)
4 Income from wheat flour business 5,33,250
5 Salary as working partner in partnership firm (assumed fully
allowed in the hands of the firm u/s 40(b) of the Act) – Taxable as
profits and gains of business or profession u/s 28 90,000
6 Interest on Capital - As per section 28(v), interest on capital is
chargeable in the hands of the partner only to the extent allowable as
deduction in the firm’s hand i.e. @12%) (Rs. 3,00,000 x 12% / 15% 2,40,000 3,30,000
7 Profits and gains of business or profession 8,63,250

3. Income from other sources

No Particulars Amt Amt
1 Interest from bank FD - gross - Rs. 45,000 + Rs. 5,000) 50,000
2 Pre - mature withdrawal from Post Office Time Deposit A/c - W.N - 2 60,000
3 Pension from LIC Jeevan Dhara 24,000 1,34,000
4 Income from other sources 1,34,000

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Computation of Total Income
No Particulars Amount Amount
1 Income from house property 52,500
2 Profits and gains of business or profession 8,63,250
5 Income from other sources 1,34,000
6 Gross Total Income 10,49,750
7 Less Deductions under Chapter VI - A -
80C: Life insurance premium for policy in the name of major son not 20,000
dependent on the assesse, restricted to 10% of sum assured i.e. 10% of
Rs. 2,00,000
80C: Contribution to pension fund of NHB 70,000
80D: Medical insurance premium on life of parent, being a senior (1,40,000)
citizen - i.e. of age exceeding 60 years – Qualifies for deduction, even
though the father is not dependent on the assesse. However,
deduction cannot exceed Rs. 50,000 50,000
8 Total income 9,09,750

Computation of Tax Payable

No Particulars Amount Amount
1 Tax on total income inclusive of agricultural income of Rs. 60,000 1,06,450
2 Less: Tax on agricultural income + basic exemption limit - Rs. 60,000 +
Rs. 2,50,000 (3,000) 1,03,450
3 Add: HEC @4% 4,138
4 Sub total 1,07,588
5 Less: TDS on Bank FDR (5,000)
6 Less: Advance Tax (70,000) (75,000)
7 Net tax payable (rounded off) 32,590

No Particulars Explanation
1 Interests under Mr. Dinesh Karthik receives salary of Rs. 90,000 from the firm,
section 234A Badrinath & Co., which as given @1% of the firm’s sales. Therefore, the
turnover of the firm is Rs. 90 Lakh, being 90,000/1%. Since the
turnover of the firm does not exceed Rs. 1 crore, the firm is not subject
to tax audit. Therefore, his due date for filing of return would be 31 - 7
- 2021. Since the return was filed after the due date, hence interest is
payable under section 234A
2 Interests under Under section 208, obligation to pay advance lax arises in every case
section 234B where the advance tax payable is Rs. 10,000 or more. Interest under
section 234B is attracted for non - payment of advance tax or payment,
of advance tax of an amount less than 90% of the assessed tax.
Therefore, in this case, interest under section 234B would attracted on
the balance tax payable

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Working Notes:

1) Computation of depreciation allowable under the Income - tax Act,

No Particulars Amount Amount

1 Block I – Car:
15% ON Rs. 3,00,000 45,000
Less: 1/5th for personal use 9,000 36,000
2 Block II – Machinery:
WDV as on 1 - 4 - 2020 (given) 6,50,000
3 Add: Additions to machinery (used for 180 days or more)
Old purchased on 12 - 04 - 2020 1,25,000
New purchased on 23 - 09 - 2020 2,00,000 3,25,000
4 Add: Additions to machinery (used for less than 180 days) - New
purchased on 12 - 11 - 2020 3,00,000
5 WDV as on 31 - 3 – 2021 12,75,000
6 Less: Normal Depreciation - (15% of (Rs. 6,50,000 + Rs. 1,25,000+Rs.
2,00,000) + 7.5% of Rs. 3,00,000) (1,68,750)
7 Less: Additional depreciation (Note - A) ( 70,000) (2,38,750)
8 WDV as on 1 - 4 – 2021 10,36,250

Note - A:

Since assesse is engaged in the manufacture of wheat flour from wheat, hence, he is eligible for
additional depreciation on new machinery @20% of actual cost. Old machinery is not eligible for
additional depreciation. Hence, additional depreciation to be allowed = Rs. 2,00,000 x 20% + Rs.
3,00,000 x 10%, for half - year remaining additional depreciation of Rs. 30,000 shall be allowed in
financial year 2020 - 21.

2) The deduction under section 80C is allowable in respect of any sum deposited in a five year
time deposit in an account under Post Office Time Deposit Rules, 1981. If any amount is
withdrawn within 5 years from the date of deposit into that account, then it is liable to tax
under section 80C of the Act. When the contribution was made thereto, the same would have
been allowed as deduction u/s 80C of the Act in that year, hence, the premature withdrawal
(along with interest accrued thereon) shall be liable to tax in the current year.

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Illustration 2
Mr. Harish, aged 66, running business as a proprietor furnishes the particulars of his income for
the year ended 31.03.2021 as under:
No Particulars
A Net Profit of Rs. 3,65,500 from the wholesale business of textiles and fabrics arrived at after
charge of following expenses in the Profit & Loss Account:
 Personal travelling expenses of Rs. 12,750.
 Purchase of furniture items for shop on 13.6.2020 of Rs. 25,000 but charged in shop
expenses
B He owns a house with two floors constructed with the financial assistance of HDFC, out of
which ground floor is used by him for self - use and first floor was let out on rent for
Rs. 8,500 p.m. from April, 2020. The municipal tax paid for the whole house was of Rs. 2,500
and interest paid on housing loan for the construction was Rs. 52,000. Both the floors of the
house are identical
C He deposited insurance premium on the life of self of Rs.12,500, wife Rs.13,500, son and
daughter of Rs. 28,000, repaid housing loan of Rs. 50,000 and paid Rs. 55,000 by credit card
for health insurance of himself and his family
Compute Taxable Income and the amount of Tax Payable by Mr. Harsh on such income for the
Assessment Year 2021 - 22 assuming that he does not opt to pay tax under section 115BAC.

Answer
Computation of Total Income of Mr. Harsh for the A.Y.2021 - 22
No Particulars Amount Amount
(In Lacs) (In Lacs)
I. Income from House Property
Net profit as per the statement of Profit and Loss
Self - occupied portion (50%)
Annual Value under section 23(2) Nil
Less: Deduction under section 24(b) 26,000 (26,000)
Interest on housing loan - Rs. 52,000 × 50%
Let - out portion (50%) - Income of let out portion being rent of Rs. 8,500 p.m.
received for 12 months (Rent received has been taken as the GAV in the absence
of other information).
Gross Annual Value under section 23(1) (Rs. 8,500 × 12) 1,02,000
Less: 50% of municipal taxes paid allowable in respect of rented 1,250
out portion (i.e., 50% of Rs. 2,500)
Net Annual Value (NAV) 1,00,750
Less: Deduction under section 24
1. 30% of NAV under section 24(a) 30,225
2. Interest on housing loan under section 24(b) 26,000 44,525
Income from House Property – A 18,525

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II. Profits and Gains from Business or Profession

No Particulars Amount Amount
(In Lacs) (In Lacs)
Net profit as per profit and loss account of wholesale business of textiles and 3,65,500
fabrics
Add: Expenses charged in profit and loss account either not allowable or to be
considered separately -
1. Personal travelling expenses of proprietor 12,750
2. Purchase of furniture wrongly debited to shop expenses 25,000 37,750
Sub Total 4,03,250
Less: Allowable Expenses
1. Depreciation on furniture @ 10% on Rs. 25,000 2,500 2,500
Profit and Gains from business or profession – B 4,00,750
Gross Total Income - A + B 4,19,275
Less: Deductions u/s Chapter VI - A
1. Under Section 80C
Life Insurance Premium – Self 12,500
Life Insurance Premium – Wife 13,500
Life Insurance Premium – Son and Daughter 28,000
Housing Loan Repaid 50,000
2. Under Section 80A (Medical Insurance Premium) - 50,000 1,54,000
Mediclaim insurance premium of Rs. 55,000 - maximum
deductible is Rs. 50,000 where it covers a resident senior
citizen
Total Income 2,65,275

Illustration 3

Mr. David, a citizen aged 40 years, a Govt employee serving in the Ministry of External Affairs left
India for the first time on 31.03.2020 due to his transfer to High commission of Canada. He did not
visit India any time during the Previous Year 2020 - 21. He has received the following income for
the FY 2020 - 21:

No Particulars Amount
1 Salary (computed) 5,00,000
2 Foreign Allowance 4,00,000
3 Interest on Fixed Deposit from bank in India 1,00,000
4 Income from Agriculture in Nepal 2,00,000
5 Income from House Property in Nepal 2,50,000

Compute his Gross Total Income for Assessment Year 2021 - 22.

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AY 21- 22 DIRECT TAXATION
Answer
As per section 6(1), Mr. David is a non - resident for the A.Y. 2021 - 22, since he was not present
in India at any time during the previous year 2020 - 21.
As per section 5(2), a non - resident is chargeable to tax in India only in respect of following
incomes:

No Particulars
1 Income received or deemed to be received in India; and
2 Income accruing or arising or deemed to accrue or arise in India

In view of the above provisions, income from agriculture in Nepal and income from house
property in Nepal would not be chargeable to tax in the hands of David, assuming that the same
were received in Nepal.

Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered
outside India is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income is
taxable in the hands of Mr. David, even though he is a non - resident.

However, allowances or perquisites paid or allowed as such outside India by the Government to
a citizen of India for rendering service outside India is exempt under section 10(7). Hence,
foreign allowance of Rs. 4,00,000 is exempt under section 10(7) in the hands of Mr. David.

Gross Total Income of Mr. David for A.Y. 2021 - 22

No Particulars Rs.
1 Salaries (Computed) 5,00,000
2 Income from other sources (Interest on fixed deposit in India) 1,00,000
3 Gross Total Income 6,00,000

Illustration 4
Mr. Ram (aged 56) is Karta of his HUF. The HUF consists of himself, his wife and two sons viz.
Mr. C (aged 28) and Minor D (aged 16). The HUF is assessed to Income tax and has business
income from the year 2010 - 11 onwards. The business income of HUF for the year ended 31.3.2020
is Rs. 5,00,000 (computed). Mr. Ram is employed in a Private Company and his Salary income for
the same period is Rs. 6,10,000 (Computed).

You are requested to answer the following treating each of them as Independent Situations:
No Particulars
1 Mr. C gave cash gift of Rs. 1,00,000 to the HUF of Mr. Ram. What would be the total income
of HUF?
2 The HUF has one house property fetching rent of Rs. 10,000 per month and some movable
assets. There is a proposal to make a partial partition of HUF by allotting the house property
to Mr. C. Is it advisable to do a Partial Partition?
3 Minor D earned Rs. 70,000 by use of his special skill and talent. How would his income be
taxed?
4 A car owned personally by Mr. Ram was blended with HUF during the year. It was leased
out for a monthly rent of Rs. 10,000 from 1 - 10 - 2020. How would this income be taxed?

140 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

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Answer
No Particulars
1 Cash gift of Rs. 1 lakh by Mr. C, Ram’s major son, to the HUF of Mr. Ram would not be
taxable in the hands of the HUF, since gifts from a relative of the HUF does not fall within
the scope of income taxable under section 56(2)(x). Since Mr. C, being Mr. Ram’s son, is a
member of Ram’s HUF, he is a relative of the HUF. Hence the total income of HUF would be
Rs. 5 lakhs, being the business income computed.
Note - Salary income of Mr. Ram, the Karta of the HUF, who is employed in a private
company, would be taxed in his individual hands, since the remuneration earned by the
Karta on account of the personal qualifications and exertions and not on account of the
investment of the family funds cannot be treated as income of the HUF
2 Partial partition (after 31.12.1978) is not recognized and the HUF, which has been hitherto
assessed to tax, shall continue to be liable to be assessed as if no such partial partition has
taken place (Section 171(9)).
The rental income in this case would continue to be assessed in the hands of the HUF,
even after partial partition. Therefore, it is not advisable to do a partial partition
3 Income of Rs. 70,000 earned by Minor D by use of his special skill and talent would be
taxable in his individual hands. It will not be included in the hands of his parent by virtue
of the exception to section 64(1A) contained in the proviso to section 64(1A)
4 As per section 64(2), where a member of the HUF blends his self - acquired property for
inadequate consideration with the HUF, income derived there from is deemed to arise to
the transferor - member and not to the HUF. In this case, Mr. Ram has blended his
personal property (i.e., car) with the HUF.
Since there is no consideration in case of blending, the income from car computed in the
prescribed manner, (which can be as per the presumptive provisions or lease rental of Rs.
60,000 (Rs. 10,000 × 6 months) less depreciation) would be deemed as the income of Mr.
Ram

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CHAPTER - 10
ASSESSMENT OF AOP/BOI
Assessment of Various Entities

Assessment Assessment Assessment of

Assessment Assessment
of Individual of AOP / Co - Operative
of Firm of LLP
& HUF BOI Society

RESIDENTIAL STATUS – AOP / BOI

Assessment of AOP / BOI

Tax rate &

Residential Status S. 40(ba) S. 167B
Surcharge

DISTINCTION BETWEEN AOP & BOI

No AOP BOI
It is voluntarily created by 2 or more It is created by operation of law.
1
persons
Its members may consist of companies, Only individuals can be the members of body
2
firms, HUFs or individuals. of individuals.
In order to constitute an association, BOI merely received the income jointly and is
persons must join in for a common assessable in the like manner and to the same
3
purpose and common action and their extent as the beneficiaries.
object must be to produce income.
It is assessed in own capacity and not as a It is assessed as a representative assessee.
4
representative assessee.
Co - heirs, co - legatees or co - donee are Co - executors or co - trustees are examples of
5
examples of AOP BOI

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I - RESIDENTIAL STATUS

No Particulars Explanation
1 Resident Such person is resident in India if the control and management of its
affairs is situated wholly or partly in India
2 Non - Resident Such person is Non - resident in India if the control and management of
its affairs is situated wholly outside India

SUMMARY :-

Control & Management of

AOP / BOI

Wholly or partly in India Wholly outside India

Resident Non - resident

II - TAX RATE & SURCHARGE

Assessment of AOP / BOI

Tax rate &

Residential Status S. 40(ba) S. 167B
Surcharge

TAX RATES FOR AOP / BOI

No Total Income Rate of Tax

1 Upto Rs. 2,50,000 – Basic Exemption limit NIL
2 Above Rs. 2,50,000 upto Rs. 5,00,000 5%
3 Above Rs. 5,00,000 upto Rs. 10,00,000 20%
4 Above Rs. 10,00,000 30%

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SURCHARGE FOR AOP

Total Income

>50L up to > 1 crore up to > 2 crore up to More than

< 50 L
1 crore 2 crore 5 crore 5 crore

Nil 10% 15% 25% 37%

Rate of
Example
surcharge
No Particulars Components of Applicable rate of
on income
total income surcharge
- tax
1 Where the total income STCG u/s 111A Surcharge would be
(including income u/s Rs.30 lakhs; levied @ 10% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
10%
Rs.50 lakhs but does not Rs.25 lakhs; and income of Rs.95 lakhs
exceed Rs.1 crore Other income Rs.40
lakhs
2 Where the total income STCG u/s 111A Surcharge would be
(including income u/s Rs.60 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
15%
Rs.1 crore but does not Rs.65 lakhs; and income of Rs.1.25 crores
exceed Rs.2 crores Other income Rs.50
lakhs
3 Where the total income STCG u/s 111A Surcharge would be
(excluding income u/s Rs.54 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax on - STCG of Rs.54
Rs.2 crores but does not Rs.55 lakhs; and lakhs chargeable to tax
exceed Rs.5 crores Other income Rs.3 u/s 111A; and
25%
The rate of surcharge on the crores LTCG of Rs.55lakhs
Not
income - tax payable on the chargeable to tax u/s
exceeding
portion of income 112A - Surcharge @ 25%
15%
chargeable to tax u/s 111A would be leviable on
and 112A income tax computed on
other income of Rs.3
crores included in total
income.
4 Where the total income STCG u/s 111A Surcharge would be
(excluding income u/s Rs.50 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax on:
Rs.5 crores 37% Rs.65 lakhs; and STCG of Rs.50 lakhs
The rate of surcharge on the Not Other income Rs.6 chargeable to tax u/s
income - tax payable on the exceeding crores 111A; and
portion of income 15% LTCG of Rs.65lakhs
chargeable to tax u/s 111A chargeable to tax u/s
and 112A 112A
Surcharge @ 37% is

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 DIRECT TAXATION AY 21 - 22

leviable on income tax

computed on other
income of Rs.6 crores
included in total
income.
5 Where total income STCG u/s 111A Surcharge would be
(including income u/s Rs.60 lakhs; levied @ 15% on income
111A and 112A) exceeds LTCG u/s 112A tax computed on total
15%
Rs.2 crore in cases not Rs.55 lakhs; and income of Rs.2.25 crores.
covered under (iii) and (iv) Other income Rs.1.1
above crore

III - SECTION 40(ba)

Assessment of AOP / BOI

Tax rate &

Residential Status S. 40(ba) S. 167B
Surcharge

PROVISIONS

No Particulars Explanation
1 Section 40 (ba) In case of an AOP / BOI any payment of
 Interest ,
 Salary ,
 bonus ,
 Commission or
 remuneration
 made by such AOP / BOI to any of its member shall be disallowed in
the hands of AOP / BOI for computing income under the head PGBP

Explanation to S. 40(ba)

Explanation - 1 Explanation - 2 Explanation - 3

No Particulars Explanation
1 Explanation 01 Where the interest is paid by the AOP / BOI to any of its members who has
– Net Interest also paid interest to the AOP / BOI, the amount of interest to be disallowed
shall be
 Limited to the amount by which the payment of interest by the AOP /
BOI to the member exceeds the payment of interest by the member to
the AOP / BOI

2 Explanation 02 Where an individual is a member in an AOP / BOI on behalf or for the

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– Individual benefit of any other person;
as  Then the interest paid by the AOP / BOI to such individual or by such
representative individual to the AOP / BOI otherwise than as member in
capacity representative capacity shall not be taken in to account for the purpose
of disallowance
3 Explanation 03 Where an individual is a member in a AOP / BOI otherwise than as
– Individual member in a representative capacity, interest paid by the AOP / BOI to
not in such individual shall not be taken into account for the purposes of
representative disallowance,
capacity  If such interest is received by him on behalf of , or for the benefit of any
other person

Explanation 2:

No Illustration Answer
1 A HUF is a member of an AOP through its Karta Mr. X. Rs.25,000 will be disallowed u/s
AOP pays interest of Rs.15,000 to HUF on the capital of 40(ba). Rs.12,000 will be allowed
HUF. AOP also pays interest of Rs.10,000 on the loan u/s 36(1)(iii) subject to the
given by HUF. Mr. X has also received interest of Rs.12, provisions of section 40A(2)
000 from the AOP on the loan given by him out of his
self-acquired property

Explanation 3:

No Illustration Answer
1 Mr. X is a member in an AOP in his individual Rs.15,000 will be disallowed u/s 40(ba).
capacity. He is also a Karta of HUF. AOP pays Rs.17,000 will be allowed u/s 36(1)(iii)
interest of Rs.15,000 to Mr. X on his capital. subject to the provisions of section 40A(2)
AOP also pays interest of Rs.17,000 on the
loan given by HUF of which Mr. X is the karta.
The said interest is paid to Mr. X to be passed
on the HUF
2 A HUF through its karta. Mr. X is a member of The salary paid by the AOP to Mr. X will be
AOP/BOI. Mr. X is an engineer and is disallowed u/s 40(ba). If an individual is a
employed by the AOP/BOI. The AOP/BOI member in a representative capacity in an
pays a salary of Rs.5,000 per month to Mr. X in AOP/BOI and he receives remuneration
his individual capacity and it can be proved from the AOP/BOI in his individual
that the AOP/BOI cannot function without the capacity, then the same will be disallowed
services of Mr. X. Whether salary paid is u/s 40(ba). This is because Explanation 2 to
allowable? section 40(ba) is applicable only for interest
and not for remuneration

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IV - SECTION – 167B

Assessment of AOP / BOI

Tax rate &

Residential Status S. 40(ba) S. 167B
Surcharge

SECTION – 167B CHARGE OF TAX WHERE SHARES OF MEMBERS IN AOP / BOI UNKNOWN ETC

Section - 167B

S.167B(1) S.167B(2)

Individual shares Individual shares

are indeterminate & are determinate &
unknown known

No Particulars Explanation
1 Individual Where the individual share of the members of an AOP or BOI (other than
shares are company or a co – operative society or a registered society) in the whole
indeterminate or any part of the income of such association or body are indeterminate
or unknown – or unknown, tax shall be charged as under,
Section 167B (1) No Case Taxability
1 None of the members are Tax shall be charged on the total
taxable at the rate higher income of the association or body
than maximum marginal at the maximum marginal rate – i.e.
rate (MMR) 42.744% for AY 2021 – 22
2 Any of the members are Tax shall be charged on the entire
taxable at the rate higher total income of the association or
than MMR body at such higher rate.
2 Explanation The individual shares of the members of the AOP / BOI in the whole or
any part of the income of such association or body shall be deemed to be
indeterminate or unknown if such shares (in relation to the whole are any
part of such income) are indeterminate or unknown on the date of
formation of such association or body or at any time thereafter

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Individual shares are determinate or known – Section 167B (2)
No Particulars Explanation
1 Where the
individual No Case Taxability
shares or 1 Any member of an AOP has Total income of AOP / BOI, to the
members of an income taxable at higher extent it is relatable to the share(s)
AOP / BOI in rate than the maximum of such member(s) is taxable at such
the whole of the marginal rate higher rate
income of such 2 Total income of any Tax shall be charged on the total
association or member for the PY income of AOP / BOI t the
body are (excluding his share from Maximum marginal rate (i.e
determinate or such AOP / BOI) exceeds 42.744% for the AY 2021 - 22)
known the maximum amount of
not chargeable to tax (BEL)
3 Where none of the members The total income of such AOP / BOI
has total income (excluding shall be taxable at the normal rates
share income from AOP / applicable in case of an Individual
BOI) exceeding the
maximum amount not
chargeable to tax

TAXATION OF AOP/BOI - SUMMARY

Taxability Of AOP / BOI Section 167B

Members Share Not

Members Share Determinate
Determinate

Any All Members

Any Member No Member
Members Total Income
Taxable at Taxable at
Total Income does not
Higher Rate Higher Rate
Exceeds BEL exceed BEL

Entire Income Entire Income Any Member

No Member AOP Taxable
of AOP / BOI of AOP / BOI Taxable at
Taxable at at Individual
Taxable at Taxable at Higher Rate
Higher Rate Rate
Higher Rate MMR (i.e > MMR)

Share of the
Member
Income of
Taxable @
AOP Taxable
Higher Rate,
@ MMR
Balance at
MMR

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Notes: -
No Particulars
1 In computing the total income of the member his share of income from this AOP / BOI shall
be excluded
2 Loss of AOP / BOI shall be carried forward by AOP / BOI and shall not be allocated to the
members
3 LTCG of AOP / BOI shall be taxed under section 112 and section 112A @20% or 10% as the
case may be and shall not be taxable at the rates specified in section 167B
4 The benefit of slab of Rs.2,50,000 shall be available in case (1) referred in section 167B
5 STCG referred in section 111A shall be taxable at 15%

METHOD OF COMPUTING A MEMBER’S SHARE IN INCOME OF AOP / BOI –

SECTION – 67A

S.67A

S.67A(1) S.67A(2) S.67A(3)

Apportion ment of
Computation of TI
member's share Deduction from
in the hands of
under various member's share
Member
heads

No Particulars Explanation
1 Computation In computing the total income of an assessee who is a member of a AOP /
of TI in the BOI wherein the shares of the members are determinate and known (other
hands of than company or co – operative society or a registered society), whether
Member the net result of computation of the total income of such association or
body is a profit or loss, his share (whether a net profit or net loss) shall be
computed as follows, namely,
Computation of apportionable share of income of AOP/BOI:
No Particulars Amt
1 Total Income of such AOP/BOI XXX
2 Less: Interest, salary, bonus, commission or remuneration
by whatever name called, paid to any member in respect of
XXX
the previous year
3 Balance to be apportioned among the members in their
XXX
agrees profit sharing ratio
Computation of income of member of AOP/BOI:
No Particulars Amt
1 Share apportioned to each member in his profit sharing
XXX
ratio
2 Add: Interest, Salary, Bonus, Commission or remuneration
by whatever name called, (or incurred)paid to any member
XXX
in respect of the previous year
3 Member’s share in the income of the AOP/BOI XXX

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2 Apportionment The share of member in the income or loss of the association or body, as
of member’s computed above, shall, for the purpose of assessment, be apportioned
share under under the various heads of income in the same manner in which the
various heads – income or loss of the association or body has been determined under each
sec – 67A (2) head of income
3 Deduction Any interest paid by a member on capital borrowed by him for the
from member’s purposes of investment in the association or body shall, in computing his
share – section share chargeable under the head ‚PGBP‛ in respect of his share in the
– 67A (3) income of the association or body, be deducted from his share

TAXABILITY OF MEMBER’S SHARE IN THE INCOME OF AOP / BOI –

SECTION – 66, 86, 110
The member’s share in the total income of AOP / BOI shall be dealt with as follows,
Case Particulars Explanation
1 Where the AOP / BOI is The share of a member computed as per Section – 67A shall not
chargeable on its total be included I his total income
income at the maximum
marginal rate or at any
higher rate
2 Where the AOP / BOI is The taxability will be determined as under,
taxable at the normal No Particulars
rates applicable incase A Include the share income from the AOP / BOI in the
of Individual hands of the members and total income shall be
computed accordingly
B Compute the tax payable on the above total income
C Compute average rate of tax = (Tax on total income /
Total income) x 100
D Tax rebate for share income of AOP = Share income u/s
67A included in his total income x average rate of tax
E Tax payable = (Tax payable as per (b) above – Tax rebate
as per (d) )
Note
Where no income tax is chargeable on the total income of the
association or body, the share of member computed as aforesaid
shall be chargeable to tax as part of his total income and no
rebate shall be admissible

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OTHER PROVISIONS

No Particulars Explanation
1 Loss can be carry Under income – tax law, loss can be carried forward by the same
forward only by person who has incurred the loss. Since AOP is a separate person
AOP distinct from its member and there is no provisions under the income –
tax law that members of AOP can carry forward the loss of AOP in
their own assessment, hence loss suffered by AOP can be carried
forward by AOP and not by its members
2 Section – 86 Further, as a second proviso to section – 86, where no income tax is
contemplates chargeable on total income of AOP, member’s share in income of AOP
positive income, computed as per provisions of section – 67A shall be chargeable in their
not loss assessment. Thus, the above provision is applicable when member’s
share in positive and not when their share is loss

QUESTIONS FOR PRACTICE

Illustration 1
JK Associates is an Association of Persons (AOP) consisting of two members, J aged 40 years and
K aged 37 years. Shares of the members are: 60%(J) and 40%(K). Income of the AOP for the
Previous Year 2020 - 21 is Rs. 7 Lacs.
Compute Tax Liability of the AOP and the members in the following situations, assuming that J
and K do not opt to pay tax as per section 115BAC
No Particulars
1 J and K have their Income, other than Income from AOP, amounting to Rs. 1 Lac and Rs. 5.7
Lacs, respectively
2 J and K’s Income, other than Income from AOP, amount toRs.1.50Lac and Rs.2.30 Lacs,
respectively

Answer
Computation of tax AOPs is government by Section 167B of the Income - tax Act, 1961. Tax on
total Income of AOP is computed as follows
No Particulars
1 If Individual share of a member is known, and the total income of any member, excluding
his share from such AOPs, exceeds the basic exemption limit, then the AOPs will pay tax at
the maximum marginal rate
2 If Individual share of a member is known and no member has total income (excluding his
share from AOPs) exceeding the basic exemption limit, then the AOPs will pay tax at the
rates applicable to an individual
Section 86 provides for assessment of share in the hands of members of AOPs as follows
A member’s share in the total income of AOPs will be treated as follows
No Particulars
1 If an AOPs has paid tax at the maximum marginal rate or a higher rate, the member’s share
in the total income of AOPs will not be included in his total income and will be exempt
2 If the AOPs has paid tax at regular rates applicable to an Individual, the member’s share in
the income of AOPs will be included in his total income and he will be allowed rebate at the
average rate of tax in respect of such share

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Tax Liability of J K Associates, AOPs

No Particulars
1 As K’s income, other than that from the AOPs exceeds the basic exemption limit, the AOPs
shall pay tax at maximum marginal rate of 42.744% (i.e 30% plus 37% surcharge plus
health and education cess @ 4%). Thus, the tax payable by AOP = Rs. 7,00,000 x 42.744% =
Rs. 2,99,208
2 Since none of the members have income, other than income from the AOPs, exceeding the
basic exemption limit, the AOPs would be taxed at the rates applicable to an individual,
Therefore, the AOP’s tax liability = Rs. 52,500 + Rs. 2,100 = Rs. 54,600

Tax Liability of J and K – Case 1

No Particulars J K
1 Share of profit from AOP Exempt Exempt
2 Income from Other Sources 1,00,000 5,70,000
3 Total Income 1,00,000 5,70,000
4 Tax Liability Nil 26,500
5 Less : Rebate u/s 87A - Nil
6 Tax Payable Nil 26,500
7 Add: Health and education cess 1060
8 Total tax payable 27,560

Tax Liability of J and K – Case 2

No Particulars J K
1 Share of profit from AOP 4,20,000 2,80,000
2 Income from Other Sources 1,50,000 2,30,000
3 Total Income – (A) 5,70,000 5,10,000
4 Tax Liability 26,500 14,500
5 Add : Health & Education Cess @ 4% 1,060 580
6 Total Tax Payable – (B) 27,560 15,080
7 Average Rate of Tax - B/A x 100 4.835% 2.957%
8 Total Tax Liability 27,560 15,080
9 Less : Rebate under Section 86 read with Section 110 in respect of share
20,307 8,280
of profit from AOP (share in AOP x Average rate of tax)
10 Tax liability of Members 7,253 6,800
11 Total Tax Payable R/o 7,250 6,800

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Illustration 2
T and Q are individuals, aged 28 years and 30 years respectively, who constitute an Association of
Persons, sharing profit and losses in the ratio of 2:1. For the accounting year ended 31 st March,
2021, the Profit and Loss account of the Business was as under:
Figures in '000s
Particulars Amount Particulars Amount
Cost of Goods Sold 4,250.00 Sales 4,900.00
Remuneration to : Dividend from Indian Companies 25.00
T 130.00 Capital Gains - Long Term (Computed) 640.00
Q 170.00
Employees 256.00
Interest to:
T 48.30
Q 35.70
Other Expenses 111.70
GST-Penalty Due 39.00
Net Profit 524.30
TOTAL 5,565.00 TOTAL 5,565.00

Additional Information furnished

No Particulars
1 Other expenses included:
 wrist watches costing Rs.2,500each were given to 12dealers,who had exceeded the sales
quota prescribed under a sales promotion scheme;
 Employer’s contribution of Rs.6,000 to the PF for the month of November 2020, was paid
on 14th January, 2021.
 Rs. 30, 000 was paid in cash to an advertising agency for publicity
2 Outstanding GST penalty was paid on 15th October, 2021. The penalty was imposed by the
Proper Officer for non - filing of returns and statements by the due dates
3 T and Q had, for this year, income from other sources of Rs. 3,60,000 and Rs. 2,32,000
respectively
Required to:
No Particulars
1 Compute the total income of the AOP for the Assessment Year 2021 - 22; and
2 Discuss the tax implication for that year in the hands of the individual members

Answer:
Computation of Total Income of the AOP for A.Y 2021 - 22
No Particulars Amount
1 Profits & Gains of Business – Note 1 3,12,300
2 Long Term Capital Gain 6,40,000
3 Income from Other Sources - Dividend from Indian Companies 25,000
4 Total Income 9,77,300

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Note 1 : Computation of Profit and Gains of Business
No Particulars Amount Amount
Net Profit as per Profit and Loss Account 5,24,300
Add: Inadmissible Payments
1. Interest to Members T & Q (Rs. 48,300 + 35,700) 84,000
2. Advertising - Disallowed u/s 40A(3) – 100% of Rs. 30,000 being cash
30,000
payment
3. Remuneration to Members T & Q (Rs. 1,30,000 + 1,70,000) 3,00,000
4. GST penalty (see note 3 below) 39,000 4,53,000
Sub Total 9,77,300
Less: Income not taxable under this head
1. Dividend from Indian Company 25,000
2. Long Term Capital Gain 6,40,000 6,65,000
Profits and Gains of Business and Profession 3,12,300

Notes :
No Particulars
1 Since the employer’s contribution to PF has been paid during the previous year itself, it is
allowable as deduction
2 Penalty imposed for delay in filing GST return is not deductible since it is on account of
infraction of the law requiring filing of the return within the specified period – CIT v.
RatanchandBholanath (S.S) (1986) 160 ITR 500 (M.P)
Tax implication in the hands of Members T & Q for the A.Y 2021 - 22

Members of the AOPs have to pay tax on their total income taking into account savings/
investments etc.
Since one of the members has total income excluding share from AOP more than the basic
exemption limit, the AOPs will be chargeable to tax at the maximum marginal rate.
Since the AOPs is taxed at maximum marginal rate, the share income of members is not taxable in
their hands individually as per sec 86.

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CHAPTER - 11
ASSESSMENT OF CO - OPERATIVE SOCIETY
Assessment of Various Entities

Assessment Assessment Assessment of

Assessment Assessment
of Individual of AOP / Co - Operative
of Firm of LLP
& HUF BOI Society

I. RESIDENTIAL STATUS

Co - Operative Society

Residential Taxrate & Deduction under Principle of

Status Surcharge 80P Mutuality

No Particulars Explanation
1 Resident Such person is resident in India if the control and management of its
affairs is situated wholly or partly in India
2 Non - Resident Such person is Non - resident in India if the control and management of
its affairs is situated wholly outside India

SUMMARY: -

Control & Management of

Co - Operaive Society

Wholly or partly in
Wholly outside India
India

Resident Non - resident

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II – TAX RATE & SURCHARGE

Co - Operative Society

Residential Taxrate & Deduction under Principle of

Status Surcharge 80P Mutuality

Tax Rate for Co - Operative

Society

Alternate Tax
Normal Tax
Regime - S.
Regime
115BAD

The rates of tax applicable to Co – Operative societies are as follows,

No Total Income Rate of Tax
1 Up to Rs. 10,000 10%
2 Above Rs. 10,000 upto Rs. 20,000 20%
3 Above Rs. 20,000 30%

SURCHARGE

No Particulars
1 Surcharge leviable @ 12% if the total income exceeds 1 core
2 It may be noted that rates of tax discussed above are to be understood as ‚Normal Tax
Regime‛. In the case of Co - operative societies, Section 115 BAD provides the ‚Alternate Tax
Regime‛ where in the special rate of tax @ 22% has been prescribed. In order to avail
alternate tax regime, such co – operative societies shall fulfill certain conditions

Where the total income exceeds Rs. 1 crore, surcharge is payable at the rate of 12% of income tax
computed in accordance with the provisions of sub – Para (2) / (3) / (4) of Para 4.1 or section 111A
or section 112 or section 112A

Co - operative Society

If TI < Rs. 1 crore If TI > Rs. 1 crore

Nil 12%

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TAX ON INCOME OF CERTAIN RESIDENT COOPERATIVE SOCIETIES –

SECTION 115BAD

No Particulars Provisions
1 Applicability Co - operative Society
2 Rate of Tax 22%
3 Rate of surcharge 10%
4 Effective rate of tax 25.168%
(including
surcharge &cess)
5 Applicability of The rate of tax ( i .e., 25.168%) notwithstanding anything contained in
concessional rate of the Income - tax Act, but subject to the provisions of Chapter XII.
tax on total income
of cooperative
society
6 Note This implies that this rate would prevail in respect of all income, other
than income subject to special rates of tax under Chapter XII, for
which the special rates would continue to apply.
7 Example In case of co – operative society, long - term capital gains chargeable
to tax under section 112 and I12Aand short - term capital gains
chargeable to tax under section 111 A would be subject to tax at the
rates mentioned in the said sections. However, other income, like
short term capital gains (other than those covered under section111
A). income from house property and income from other sources
would be taxable @ 25.168%, as the case may be

CONDITIONS TO BE SATISFIED
The total income should be computed - Without providing for deduction under any of the
following provisions,
No Section Provision
1 10AA Exemption of profits and gains derived from export of articles or things or from
services by an assessee, being an entrepreneur from his Unit in SEZ.
2 32(1)(iia) Additional depreciation @ 20% of actual cost of new plant and machinery
acquired and installed by manufacturing and I power sector undertakings.
3 32AD Deduction it 15% of actual cost of new plant and machinery acquired and
installed by an assessee in a manufacturing undertaking located in the notified
backward areas of Andhra Pradesh, Telangana, Bihar and West Bengal. Same is
not admissible from AV 2021 - 22 onwards.
4 33AB Deduction @ 40% of profits and gains of business of growing and manufacturing
tea, coffee or rubber in India, to the extent deposited with NABARI) in
accordance with scheme approved by the Tea/ Coffee/ Rubber Board.
5 33ABA Deduction @ 20% of the profits of a business of prospecting for, or extraction or
production of, petroleum or natural gas or both in India, to the extent deposited
with SBI in an approved scheme or deposited in Site Restoration Account
6 35(1(ii) / Deduction for payment to any research association, company, university etc. for
(iia) / (iii) undertaking scientific research or social science or statistical research.
7 35(2AA) Deduction of payment to a National Laboratory University or IIT or
approved specified person for scientific research.

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8 35AD Investment - linked tax deduction for specified businesses.
9 35CCC Deduction of expenditure incurred on notified agricultural extension project.
10 80C to Deductions from gross total income under Chapter VI - A other than the
80U provisions of 80JJAA.
11 (ii) Without set - off of any loss carried forward from any earlier assessment year, if
such loss is attributable to any of the deductions listed in (i) above (Such loss
would be deemed to have been already given effect to and no further deduction
for such loss shall be allowed for any subsequent year
12 (iii) By claiming depreciation u/s 32 determined in the prescribed manner. However,
additional depreciation u/s 32(1) (iia) cannot be claimed.

Note -
A Co - Operative society exercising option for availing benefit of lower tax rate under section
115BAD shall not be allowed to claim set off of any brought forward loss on account of additional
depreciation for an Assessment Year for which the option has been exercised and for any
subsequent Assessment Year

OTHER PROVISIONS
No Particulars
1 Where the person fails to satisfy the above conditions in any previous year, the option shall
become invalid in respect of the assessment year relevant to that previous year and other
provisions of this Act shall apply, as if the option had not been exercised for the assessment
year relevant to that previous year.
Besides this on violation of the above conditions, the option shall become invalid for
subsequent assessment years also and other provisions of this Act shall apply for those years
accordingly.
2 Deduction u/s 80LA admissible: In case of a person, having a Unit in the International
Financial Services Centre, as referred to in section 80LA (1A), which has exercised such
option, the conditions shall be modified to the extent that the deduction under section 80LA
shall be available to such Unit subject to fulfillment of the conditions contained in the said
section.

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EXERCISE OF OPTION BY THE COOPERATIVE SOCIETY

WITHIN THE PRESCRIBED TIME

No Particulars
1 The beneficial provisions of this section would apply if option is exercised in the prescribed
manner on or before the due date u/s 139(1) for furnishing the return of income for any
previous year relevant to A.Y. 2021 - 22. Such option, once exercised, would apply to
subsequent assessment years. Further, once the option has been exercised for any previous
year, it cannot be subsequently withdrawn for the same or any other previous?

QUESTION FOR UNDERSTANDING

Illustration 1
Golden closet co – operative society provides the following details,
Assessment Year – 2019 - 20
No Particulars Amount
1 Business Loss 5,00,000
2 Payment made to IIT of Rs. 1,00,000 (deduction @ 150% u/s 35(2AA)(b) 1,50,000
3 Total business loss carry forward 6,50,000
4 Unabsorbed Additional depreciation 2,00,000
5 Unabsorbed normal Depreciation 3,00,000

Assessment Year – 2020 - 21

No Particulars Amount
1 Business Profit 2,00,000
2 Less: Set off b/f business loss of AY 2019 – 20 2,00,000
3 Business loss carry forward 4,50,000
4 Unabsorbed Additional depreciation carry forward 2,00,000
5 Unabsorbed Normal depreciation carry forward 3,00,000

Business profits for AY 2021 – 22 is Rs. 10,00,000 (after adjusting current year depreciation). All
other conditions u/s 115 BAD are assumed to be satisfied

Compute the total income & tax payable by the society under both the options available.

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AY 21- 22 DIRECT TAXATION
Answer

Computation of tax payable

Normal Sec.
No Particulars
Provision 115BAD
1 Business profits 10,00,000 10,00,000
2 Less:
3 Set off and carry forward business loss – Note - 1 4,50,000 4,50,000
4 Setoff of Unabsorbed Normal depreciation 3,00,000 3,00,000
5 Setoff of Unabsorbed Additional depreciation – Note – 2 2,00,000 Nil
6 Taxable total Income 50,000 2,50,000
7 Tax liability @ 30% - as per slab rates 12,000 -
8 Tax liability @ 22% u/s 115BAD - 55,000
9 Add: Surcharge @ 10% - Note – 3 - 5,500
10 Add: HEC @ 4% 480 2,420
11 Final Tax Payable 12,480 62920

Notes :-
No Particulars
1 In AY 2021 – 22, if the society exercise the option to pay tax as per section 115BAD(1), then it
will not be permissible to claim set off of losses which is attributable to the deduction u/s
35(2AA) in AY 2019 – 20. But it has been assumed that out of the losses set off in AY 2020 –
21 amounting to Rs. 2,00,000 – 1,50,000 relates to loss pertaining to deduction u/s 35(2AA)
and Rs. 50,000 relates to other business losses. Hence, Rs. 4,50,000 losses set off in AY 2021 –
22 is entirely relating to normal business losses and hence allowable under both the options
(i.e. the manner of adjustment of losses to lapse and to be carry forward shall be determined
by the assessee to the extent as mentioned above)
2 If option u/s 115BAD id exercised, any carry forward loss relating to unabsorbed additional
depreciation shall not be allowed to be set off. Hence, Rs. 2,00,000 loss relating to unabsorbed
additional depreciation shall lapse once the option chosen
3 Surcharge under normal provisions is applicable at the rate of 12% only if the income
exceeds Rs. 1 crore. But u/s 115BAD, Surcharge at the rate of 10% is always applicable
4 Since the society has unabsorbed additional depreciation, it is advisable to exercise the
option from AY 2022 – 2023, as the society will then be able to set off the same against
business profits for the AY 2021 – 22. (Because, the option u/s 115BAD can be exercised from
any AY )

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SECTION – 80P DEDUCTIONS

Co - Operative Society

Residential Taxrate & Deduction under Principle of

Status Surcharge 80P Mutuality

No Particulars
1 The deduction u/s 80P shall not be available to Co – Operative banks other than
 primary Agricultural credit society,
 Primary Co – operative agricultural and
 rural development bank
2 Where the gross total income of an assessee includes profits and gains of business or
profession, income from house property or income from other sources, then such sums is
deductible if the Cooperative Society is engaged in Certain Specific business activities
hereunder

7 Specified Business Activities :-

Collective Banking or
Cottage
Purchasing Processing Marketing disposal of cr. to its Fishing
Industry
labour members

No Particulars Description
1 Specific Profits and Gains of Co - operative societies is fully deductible if it is
Business engaged in certain specific business activities such as –
Activities – No Particulars
100% 1 Providing banking or credit facilities to its member; or
Deduction is 2 Cottage industry
allowed 3 Marketing of agricultural produce grown by its members; or
4 Purchase of agricultural implements, seeds, livestock or other
articles intended for agriculture for supply to its members; or
5 Processing of agricultural produce of its members without the aid
of power
6 Collective disposal of the labour to its members
7 Fishing or allied activities i.e catching, curing, processing,
preserving, storing, or marketing of fish or purchase of materials
&Equipments in connection therewith for the purpose of
supplying them to its members

2 Voting Business Income of co - operative societies engaged in collective disposal of

Rights the labour of its members; or fishing or allied activities is deductible if the
restricted to voting rights are restricted to members namely
members  who constitute the Labour force, or as the case may be,
(For Point F  persons who actually carry on fishing or other allied activities;
& G)  The Co - operative credit societies which provide financial assistance to
the society;
 the state government.

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3 Business Business income of primary co - operative society engaged in supplying
Income of milk, oil seeds, fruits or vegetables, raised or grown by its members to
Primary Co –  federal co - operative society engaged in the business of supplying
Operative similar products,
Society  Government, Government Company, local authority and statutory
corporation (being a company or corporation engaged in supplying the
above products to the Public) is fully deductible.
 State Govt
4 Investment 100% of the Profits , included in GTI are deductible in respect of any income
Income by way of Interest or dividends derived by the co - operative society from
its investment with any other cooperative society
5 Letting of 100% of the profits, included in GTI are deductible in respect of any income
Godowns derived by Co – operative society from the letting of godowns or
warehouses for storage, processing or facilitating the marketing of
commodities.
6 General For other Income referred to in 1 to 5 above , there is a general deduction
Deduction from income as under from the GTI
 Where such co – operative society is a consumer co – operative society
Rs.1,00,000
 In any Other case – Rs.50,000
7 Deduction Where the co - operative society is entitled for deduction u/s 80 - IA, the
u/s 80 – IA deduction under this section shall be allowed with reference to the gross
total income as reduced by the deduction allowable u/s 80 - IA.

80P SUMMARY :-

Deduction under 80P

Specific Deduction General Deduction

Consumer
Other Co -
Co -
IFHP PGBP IFOS operative
operative
society
society

Letting of
BI of Interest &
Godowns BI from 7
Primary Dividend
to either specified Rs.
Co - from INV Rs. 50,000
members business 1,00,000
operative in another
or non - activity
society CS
members

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QUESTIONS FOR PRACTICE

Illustration 1
Mahatama Gandhi Co - operative Society furnishes the following information:
No Particulars
1 Income from marketing of health oriented agricultural produce of its members – Rs 5000
2 Income from processing of agricultural produce of its members, without the aid of power –
Rs 3,00,000
3 Income from agency business – Rs 35,000
4 Income from processing of agricultural produce of its members with the aid of power – Rs
1,00,000
5 Income from other business activities – Rs 2,00,000
6 Rental income from shops /guest house let out – Rs 1,20,000
7 Interest from other co - operative societies Rs 65,000
8 Dividend from other co - operative societies - Rs 2,50,000
9 Income from letting out godowns, warehouse for storage of produce of its members Rs
2,00,000
10 Income from letting out godowns ware house for storage of produce of non - members –
Rs 1,00,000
11 Income from purchase and sale of seeds livestock intended for agricultural activities of its
members Rs 50,000
12 Income from purchase and sale of seeds livestock for non - members Rs 1,50,000
With the above information compute the total income

Answer:
Computation of total income of Mahatama Gandhi Cooperative Society
Total Deduction
Particulars Taxable Reason
No (Rs) u/s. 80P
1 Marketing of agricultural
5,000 5,000 Nil Fully Exempt
produce of members
2 Processing of agricultural
produce of its members 3,00,000 3,00,000 Nil Fully Exempt
without the aid of power
3 Income from agency Exempt up to a
business 35,000 35,000 Nil maximum limit of Rs
50,000
4 Income from processing
Exempt up to an overall
of agricultural produce of
1,00,000 15,000 85,000 maximum limit of Rs
its members, with the aid
50,000
of power
5 Income from other 2,00,000 NIL 2,00,000 Though exempt up to an
business activities overall maximum limit of
Rs 50,000 , the limit is
exhausted
6 Rental income from Fully taxable since Gross
shops/guest house let out 1,20,000 NIL 1,20,000 Total Income exceeds Rs
20,000
7 Interest income from
65,000 65,000 Nil Fully Exempt
other co - operative

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societies
8 Dividend from other co -
2,50,000 2,50,000 NIL Fully Exempt
operative societies
9 Income from letting out
of godowns, ware house
2,00,000 2,00,000 NIL Fully Exempt
for storage of produce of
members
10 Income from letting out
of godowns, warehouse
1,00,000 1,00,000 NIL Fully Exempt
for storage of produce of
non – members
11 Income from purchase
and sale of seeds,
livestock intended for 50,000 50,000 Nil Fully Exempt
agricultural activities of
its members
12 Income from purchase
and sale of seeds, live - 1,50,000 NIL 1,50,000 Not exempt
stock for non – members
Total Income 5,55,000

Illustration 2
Samode Food Processing Cooperative Society engaged in processing without the aid of power of
the agriculture produce of its members, in carrying out activities of marketing of agricultural
produce, in agency business and others, furnishes the following particulars of its income for the
year ended 31.03.2021:
No Particulars Amount
1 Income from processing of the produce of members 50,000
2 Income from marketing activities 30,000
3 Income from letting of building used as godowns 96,000
4 Dividend received from another co - operative society 45,000
5 Collective disposal of Labour of its members 25,000
6 Income from agency business 75,000
7 Interest on deposits from another cooperative society 15,000
Compute the income chargeable to tax for AY 2021 - 22.

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Solution:
Computation of Total Income of S Food Processing Cooperative Society
+/ - Particulars Amount Amount
Income from House Property
Income from letting godowns 96,000
Income from Business or Profession
1. Processing of Agricultural Produce 50,000
2. Marketing Activity 30,000
3. Agency Work 75,000
4. Collective disposal of Labour 25,000 1,80,000
Income from Other Sources
1. Dividend from other Co - operative Society 45,000
2. Interest on deposit from another Co - operative Society 15,000 60,000
Gross Total Income 3,36,000
Less: Deductions under section 80P
1. Processing of agri. produce of its members without the aid of 50,000
power
2. Marketing of agricultural produce 30,000
3. Collective disposal of labour 25,000
4. Dividend from other cooperative society 45,000
5. Interest from other cooperative society 15,000
6. Letting of godowns 96,000
7. General Deduction 50,000 3,11,000
Total Income 25,000

Illustration 3
Chennai Co - operative Society derives income during FY 2020 - 21 from the following sources:
No Particulars Amount
1. Income from processing with the aid of power Rs 20,000
2. Income from collective disposal of labour of its members Rs 30,000
3. Interest from another co - operative society Rs 15,000
4. Income from house property Rs 90,000
5. Income from other business Rs 60,000
6. Income by way of dividend from another co - operative society Rs 25,000

Determine its total income for the Assessment Year 2021 - 22.

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Solution:
Computation of Total Income of Chennai Cooperative Society
+/ - Particulars Amount Amount
Income from House Property
Income from house property - Assumed as computed 90,000
Income from Business or Profession
1. From processing with the aid of power 20,000
2. From collective disposal of labour 30,000
3. From other business 60,000 1,10,000
Income from Other Sources
1. Dividend from other Co - operative Society 25,000
2. Interest on deposit from another Co - operative Society 15,000 40,000
Gross Total Income 2,40,000
Less: Deductions under section 80P
1. Income from collective disposal of labour of its members 30,000
2. Interest from another co - operative society 15,000
3. Income by way of dividend from another co - operative society 25,000
4. General Deduction u/s 80P 50,000 1,20,000
Total Income 1,20,000

Illustration 4
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 31.3.2021:
No Particulars
1 Interest amounting to Rs. 1,00,000 from its members on loans advanced to them
2 Interest amounting to Rs. 1,50,000 on deposits with other co - operative societies
3 Rent amounting to Rs. 2,00,000 from letting out its godowns for storage of commodities

PQR Co - operative Bank seeks your advice in the matter of taxability of the above amounts and
the eligibility for deduction, if any, in respect thereof for the assessment year 2021 - 22.

Answer
The deduction under section 80P is not available in respect of co - operative bank. Assuming that it
is not a primary agricultural credit society or a primary co - operative agricultural and rural
development bank, the deduction under section 80P is not available

However, if PQR Co - operative Bank were to be assumed as a primary agricultural credit society
or a primary Co - operative agricultural and rural development bank, all the amounts shall be
deductible as per the provisions of section 80P.

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IV – PRINCIPLE OF MUTUALITY

Co - Operative Society

Residential Taxrate & Deduction under Principle of

Status Surcharge 80P Mutuality

Illustration 1
Transfer fees are received by a Cooperative Housing Society from its incoming and outgoing
members. Are such transfer fees liable to Tax in the hands of the Cooperative Society?
Answer
No Particulars
1 The issue under consideration is whether the transfer fees received by a co - operative
housing society from its incoming and outgoing members is taxable or exempt on the
principle of mutuality
2 On this issue, the High Court, in Sind Co - operative Housing Society v. ITO (2009) 317 ITR
47, observed that under the bye - laws of the society, charging of transfer fees had no
element of trading or commerciality. Both the incoming and outgoing members have to
contribute to the common fund of the assessee. The amount paid was to be exclusively used
for the benefit of the members as a class
3 The High Court, therefore, held that transfer fees received by a co - operative housing
society, whether from outgoing or from incoming members, is not liable to tax on account of
the principle of mutuality, since the predominant activity of such co - operative society is
maintenance of property of the society and there is no taint of commerciality, trade or
business
4 Further, section 28(iii), which provides that income derived by a trade, professional or
similar association from specific services performed for its members shall be treated as
business income, can have no application since the co - operative housing society is not a
trade or professional association
5 Applying the rationale of the above ruling, transfer fees received by a co - operative housing
society from its incoming and outgoing members would not be liable to tax in the hands of
the co - operative society

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Illustration 2
The Assessee, Pandey Co - operative Housing Society, is a registered co - operative housing
society, formed with the objective of maintaining the property owned by it, to affect repairs and
maintenance of the common property of the members, and to confer to the members, the usual
rights and privileges. For the assessment year 2021 - 22, the Assessee has received Rs. 3 Lacs as
transfer fees from the transferor members and like amount from the transferees, who at the time of
transfer, were not members of the society. Discuss the eligibility to tax the aforesaid receipts in the
hands of the Assessee.

Answer
Transfer fees received by a co - operative housing society, whether from outgoing or from
incoming members, are not liable to tax on the ground of principle of mutuality where the
predominant activity of such co - operative society is maintenance of property of the society. It
was so held by the Bombay High Court in Sind Co - operative Housing Society v. ITO (2009) 317
ITR 47.
Further, section 28(iii), which provides that income derived by a trade, professional or similar
association from specific services performed for its members shall be treated as business income,
can have no application since the co - operative housing society is not a trade or professional
association.
Therefore, Rs. 3 lacs received as transfer fees by Pandey Co - operative Housing Society from its
transferor members and its transferees, is not chargeable to tax.

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CHAPTER - 12
ASSESSMENT OF PARTNERSHIP FIRM
Assessment of Various Entities

Assessment Assessment Assessment of

Assessment Assessment
of Individual of AOP / Co - Operative
of P. Firm of LLP
& HUF BOI Society

I - RESIDENTIAL STATUS

Partnership Firm

Special Set off &

Residential Tax rate & Section - Carry forwrd
Povisions to
Status Surcharge 40(b) of loss -
Firm
S.78(1)

No Particulars Explanation
1 Resident Such person is resident in India if the control and management of its
affairs is situated wholly or partly in India
2 Non - Resident Such person is Non - resident in India if the control and management of
its affairs is situated wholly outside India

SUMMARY: -

Control & Management of

Partnership Firm

Wholly or partly in India Wholly outside India

Resident Non - resident

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II - TAX RATE & SURCHARGE

Partnership Firm

Special Set off &

Residential Tax rate & Section - Carry forwrd
Povisions to
Status Surcharge 40(b) of loss -
Firm
S.78(1)

Surcharge if total income

No Particulars Tax rate Upto > 1 crore upto > 10 crore
1 Crore 10crore
1 Partnership Firms 30% Nil 12% 12%

III - SPECIAL PROVISIONS TO PARTNERSHIP FIRM

Partnership Firm

Special Set off &

Residential Tax rate & Section - Carry forwrd
Povisions to
Status Surcharge 40(b) of loss -
Firm
S.78(1)

SECTION REFERENCE

Section Particulars
184 Assessment as a firm
185 Assessment when section – 184 not complied with
187 Change in constitution of firm
188 Succession of one firm by another firm
188A Joint & several liability of partners for tax payable by firm
189 Firm dissolved or business discontinued

SECTION – 184 – ASSESSMENT AS A FIRM

A firm shall be assessed as a firm for the purpose of the Act if,

No Particulars
1 The partnership is evidenced by an instrument, and
2 The individual shares of the partners are specified in the instrument

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SECTION – 185 – ASSESSMENT WHEN SECTION – 184 NOT COMPLIED WITH

Notwithstanding anything contained in any other provisions of this Act, where a firm does not
comply with the provisions of section – 184 for the AY, the firm shall be so assessed that no
deduction by way of any payment of interest, salary, bonus, commission or remuneration by
whatever name called, made by such firm to any partner of such firm shall be allowed in
computing income chargeable under the head ‚PGBP‛ and such interest, salary, bonus,
commission or remuneration shall not be chargeable to income – tax u/s 28(v) in the hands of the
partners

CAN SALARY AND INTEREST PAID TO PARTNERS BE DISALLOWED EVEN IF CONDITIONS OF

40 (b) ARE SATISFIED
In the following cases, the salary and interest paid by a firm to its partners shall be disallowed
even if the conditions of section 40 (b) are satisfied.
No Particulars Explanations
1 Where Section 184 If there is a failure on part of the firm as referred to in section 144, then
(5) applies salary and interest paid by the firm to its partners shall be disallowed.
Such salary and interest shall not be taxable in hands of the partners.
2 Where Section 185 Where a firm does not comply with the technical requirements of
applies section 184, then the salary and interest paid by the firm to its partners
shall be disallowed. Such salary and interest shall not be taxable in
hands of partner.

SECTION – 187 – CHANGE INCONSTITUTION OF FIRM

Where the time of making an assessment u/s 143 or 144 or 147 or 153A it is found that change has
occurred in constitution of the firm, the assessment shall be made on the firm as constituted at the
time of making the assessment.

Illustration:
In the partnership firm M/s ABCD, Mr. A, Mr. B, Mr. C and Mr. D were partners during the
previous year ended 31.03.2021. Mr. D retires on 30.04.2021. Therefore, if the Assessing Officer
makes an assessment under section 143(3) on the firm for the previous year ended 31.03.2021 on
31.12.2021, he shall make the assessment on the reconstituted firm M/s ABC. However as per
section 188A, all the partners namely Mr. A, Mr. B, Mr. C and Mr. D shall be liable for the taxes,
interest and penalty of the firm for Assessment Year 2021 - 22.

SECTION – 188 – SUCCESSION OF ONE FIRM BY ANOTHER FIRM

Where a firm carrying on a business or profession is succeeded by another firm, and the case is not
one covered by section – 187, separate assessment shall be made on the predecessor firm and the
successor firm. The predecessor firm shall be assessed in respect of the income of the PY in which
the succession took place upto the date of succession. The successor firm shall be assessed in
respect of the income the income of the PY after the date of succession.

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Illustration:
No Particulars
1 From the Firm M / s ABC, Mr. C retires on 30.06.2020  Section 187 shall apply. Assessment
for previous year 31.03.2021 shall be made on the reconstituted firm M/s AB. However, the
liabilities of the partners shall be governed by section 188A
2 From the firm M / s ABC, Mr. A, Mr. B and Mr. C retire on 30.06.2020 and Mr. D, Mr. E and
Mr. F are admitted  Section 188 shall apply. Separate assessment shall be made on M / s
ABC for the period 01.04.2020 to 30.06.2020 and on M / s DEF for the period 01.07.2020 to
31.03.2021
3
M / s ABC becomes M / s DBC on 30.06.2020
M / s DBC becomes M / s DEC on 30.09.2020
M / s DEC becomes M / s DEF on 31.12.2020.
This is a case of change in constitution of the firm and section 187 shall apply. Assessment
for the previous year ended 31.03.2021 shall be made on the reconstituted firm M / s DEF.
However, the liabilities of the partners shall be governed by section 188A
4 In firm M / s ABC, Mr. B dies on 30.06.2020 and the partnership deed is silent about the
death of the partner  This will result in dissolution of firm and section 187 shall not apply.
Section 189 shall apply
5 In firm M / s ABC, Mr. B dies on 30.06.2020 and the partnership deed provides that the firm
shall continue on the death of any partners  This is a change in the constitution of the firm
and section 187 shall apply. The assessment for previous year ended 31.03.2021 shall be
made on firm M / s AC. However, the liabilities of the partners / legal heirs shall be
governed by section 188A
6 From firm M / s AB, Mr. A retires  This is a case of dissolution of firm to which section 189
shall apply
7 Firm M/s ABC is converted into a private limited Co.  This is a case of dissolution of firm
to which sec – 189 shall apply

SECTION – 188A – JOINT & SEVERAL LIABILITY OF PARTNERS FOR TAX PAYABLE BY FIRM

No Particulars Explanation
1 Jointly and Every person who was, during the PY, a partner of a firm, and the legal
severally representative of any such person whom is deceased, shall be jointly and
liable severally liable along with the firm for the amount of tax, penalty or other
sum payable by the firm for the AY to which such PY is relevant
2 Example – 1 A partnership firm consisted of partners A, B, C & D during the previous year
ended on 31st March, 2015. Partner D retired on 2nd April, 2015. The cases of
the firm for assessment years 2015 - 16 to 2019 - 20 are reopened under section
147 on 1.1.2021. Now, the taxes, penalty and interest for assessment years
2015 - 16 and 2016 - 17 can be recovered either from the firm or from A or B or
C or D or from any of them jointly. The taxes, penalty and interest of
assessment years 2017 - 18 to 2019 - 20 can be recovered either from the firm
or from A or B or C or any of them jointly
3 Example – 2 Mr. A was a partner in the firm M / s XYZ only for a month in the previous
year 31st March 2021. Mr. A along with other partners and the firm is jointly
and severally liable for the taxes, interest and penalty of the firm for the
previous year 31st March 2021. If Assessing Officer is unable to recover the
taxes, interest and penalty from the firm for the said year, then he can recover
the taxes, penalty and interest of the firm for the said year from Mr. A

SECTION 189 - FIRM DISSOLVED OR BUSINESS DISCONTINUED

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 DIRECT TAXATION AY 21 - 22

No Particulars
1  Where any business or profession carried on by the firm has been discontinued or where
a firm is dissolved, the Assessing Officer shall make an assessment of the total income of
the firm as if no such discontinuance or dissolution had taken place.
 All the provisions of the Income Tax Act including the provisions relating to the levy of
penalty shall apply to such assessment.
2 Every person who was at the time of such discontinuance or dissolution a partner of the
firm, and the legal representative of any such person who is deceased, shall be jointly and
severally liable for the amount of tax, penalty or any other sum payable under the Act.
3 Where such discontinuance or dissolution takes place after any proceedings in respect of an
assessment year have commenced, the proceedings may be continued against the person
referred in point no.2 above from the stage at which the proceeding stood at the time of such
discontinuance or dissolution and all the provisions of Income Tax Act shall apply.

Illustration:
A partnership firm formed on 1.4.2009 consisted of partners P, Q, R & S upto 31 st March, 2013.
Partner P retired on 15th April, 2013 and Mr. X was taken in as a partner on that date. Mr. Q retired
on 15th May, 2017. Mr. R retired on 31st December 2019 and on that date Mr. Y was taken in as
partner. The firm is dissolved on 4th January 2021.

No Particulars
1 Now, Mr. P, Q, R, and S are jointly and severally liable for the taxes, interest and penalty of
the firm from assessment year 2010 - 11 to assessment year 2014 - 15
2 Mr. X is also jointly and severally along with Mr. P, Q, R & S liable for the taxes, interest and
penalty of the firm for assessment year 2014 - 15
3 Mr. X, Q, R & S are jointly and severally liable for the taxes, interest and penalty of the firm
for assessment years 2015 - 16 to 2018 – 19
4 Mr. X, R & S are jointly severally liable for the taxes, interest and penalty of the firm for
assessment years 2019-20 and 2020 – 21
5 Mr. Y is also liable jointly and severally with Mr. X, R & S for the taxes, interest and penalty
of the firm for Assessment Year 2021 - 22. (Provisions of section 188A)
6 Mr. X, Y & S are the partners at the time of dissolution and therefore they are jointly and
severally liable for the taxes, interest and penalty of firm from assessment year 2010 - 11 to
assessment year 2021 - 22 as per the provision of section 189. They are liable along with
the persons referred to in section 188A

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IV - SECTION – 40(b)

Partnership Firm

Special Set off &

Residential Tax rate & Section - Carry forwrd
Povisions to
Status Surcharge 40(b) of loss -
Firm
S.78(1)

SECTION 40(b) – PAYMENT OF INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION MADE

BY FIRM TO ITS PARTNERS
Interest and remuneration paid to the partners by a firm are not deductible. However, the interest
and remuneration paid to partners by a firm are deductible if all the following conditions are
satisfied.
No Particulars
1 Payment of salary, bonus, commission or remuneration, by whatever name called
(hereinafter referred as remuneration) is to a working partner. If it is paid to a non –
working partner, the same shall be disallowed.

Explanation:
Working Partner means an individual who is actively engaged in conducting the affairs of
the business or profession of the firm of which he is a partner.
2 The payment of remuneration to a working partner and payment of interest to any partner
should be authorised by and should be in accordance with the terms of the partnership
deed.
3 The payment of remuneration and interest should relate to a period falling after the date of
partnership deed. That means, the partnership deed should not provide for payment of
remuneration and interest from retrospective effect (i.e., any earlier period prior to the date
of partnership deed).

QUESTIONS FOR UNDERSTANDING

Illustration 1
The partners entered into a partnership agreement on 1.4.2020 and no salary was provided in the
deed. On 31.1.2021, the partners entered into an agreement to amend the above deed with
retrospective effect from 1.4.2020 to provide a salary of Rs. 3,000 each per month to each partner.

Solution
No Particulars
1 Salary paid to partners for the period 01.04.2020 to 31.01.2021 shall not be allowed as a
deduction to the firm.
2 Salary paid to partners for the period 01.02.2021 to 31.03.2021 shall be allowed as a
deduction to the firm, subject to the limit specified under section 40(b).

Illustration 2
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A & B enters into partnership on 1.4.2020. The partnership deed provides salary of Rs. 3000 per
month to A and Rs. 4000 per month to B. On 1.7.2020, an agreement is entered to amend the above
deed retrospectively from 1.4.2020 and provide salary of Rs. 6000 per month to A and Rs. 7000 per
month to B.

Answer
No Particulars
1 For the period 01.04.2020 to 30.06.2020, salary paid to A & B shall be allowed as a
deduction to the firm to the tune of Rs. 3,000 per month to A and Rs. 4000 per month to
B. Thereafter, the enhanced salary paid shall be allowed as deduction. But, the above
deduction shall be limited to the amount specified under section 40(b).
2 The payment of interest to a partner should not exceed the amount calculated at the rate
of 12% per annum simple interest (any amount in excess will be disallowed).

LIMIT FOR INTEREST & REMUNARATION

No Particulars
40(b)(iv) The payment of interest to a partner should not exceed the amount calculated at the
rate of 12% per annum simple interest (any amount in excess will be disallowed).
40(b)(v) The payment of remuneration should not exceed the following amounts (Any amount
in excess will be disallowed).
No Particulars Particulars
a On the first Rs 3,00,000 of book Rs 1,50,000 or at the rate of 90% of the
profit or in case of a loss book profit, whichever is more
b On the balance of book profits At the rate of 60%

Explanation
Book Profit means the net profit as shown in the profit and loss account for the relevant
previous year, computed in the manner laid down in sections 28 to 44D as increased
by the aggregate of the remuneration paid or payable to all partners of the firm if such
amount has been deducted while computing the net profit.

EXPLANATION TO 40(b)

Explanation to S. 40(b)

Explanation 1to S. 40(b) Explanation 2 to S. 40(b)

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SUMMARY :-

INTEREST & REMUNERATION TO PARTNERS OF FIRM

- Sec 40(b)

Interest on Partner’s capital Remuneration to Partners

Conditions: Conditions:

Payment should be authorized by Payment should be authorized by

deed deed

Max rate of interest allowable is 12% Payment should be to a working

SI P.A partner

It should be for the period falling It should be for the period falling
after the date of partnership deed after the date of partnership deed

Book profit means after interest on capital but before remuneration to partners.
EXPLANATION 1 TO SECTION 40 (b)
Where an individual is a partner in a firm on behalf of or for the benefit, of any other person
(partner in a representative capacity), then
No Particulars
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 Sec 40(b)
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 section 40(b)

Question for understanding :-

Illustration 1
Mr. X is a partner in a firm on behalf of his HUF, i.e. partner in a representative capacity. Mr. X has
given a loan to the firm out of his self-acquired funds and the firm pays interest of Rs. 10,000 to
Mr. X. The firm also pays interest of Rs. 15,000 to Mr. X on the capital of HUF.
In this case section 40(b) will not be applicable to the interest payment of Rs. 10,000. Rs. 10,000
interest is allowable under section 36(1)(iii) subject to section 40A(2). The interest payment of Rs.
15,000 is however subjected to the provisions of section 40(b).

176 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

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EXPLANATION 2 TO SECTION 40 (b)

Where an individual is partner in a firm otherwise than as partner in a representative capacity,
interest paid by the firm to such individual shall not be taken into account for the purposes of
section 40(b), if such interest is received by him on behalf or for the benefit of any other person.

Question for Understanding :-

Illustration
Mr. X is a partner in a firm in his individual capacity. He is also the karta of a HUF. The firm pays
interest of Rs. 10,000 to Mr. X on the loan given by HUF to the firm. The firm also pays Rs. 15,000
to Mr. X on his capital in the firm.
In this case, section 40(b) will not be applicable to the interest of Rs. 10,000. The said interest is
deductible under section 36(1)(iii) subject to the provisions of section 40A(2). The interest payment
of Rs. 15,000 will however be subjected to the provisions of section 40(b).

CONNECTED PROVISIONS

No Particulars Explanation
1 Section 28(v) - profits Any interest, salary, bonus, commission or remuneration due to or
and gains of business received by a partner of a firm from such firm shall be assessable
or profession under the head PGBP.
Provided that where any interest, salary, bonus, commission or
remuneration has not been allowed to be deducted u/s 40(b), the
amount not so allowed to be deducted shall not be added to the
income of the partners
2 Section 10(2a) - share In case of a partner of a firm, his share in the total income of the firm
from partnership shall not be included in the total income of the partner.
firm is exempt from Key notes:
tax The share of partner in the total income of the firm shall be
computed as under:

Total income of the firm X Share in the profits of the firm as per
the partnership deed
Profits of the firm as per partnership deed

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QUESTIONS FOR UNDERSTANDING

Illustration 1
ABC is a partnership Firm carrying on business, in which A, B and C are Partners sharing profits
and losses equally. In respect of Assessment Year 2021 - 22, it furnishes the following particulars–
No Particulars
1 Loss as per P & L A/c after debiting Remuneration to Partners and Interest on their Capital is
Rs 2,50,000
2 Remuneration to partners A - 90, 000, B - 60, 000, and C - 30, 000 Total Rs 1,80,000
3 Interest paid on Capital

Partner Capital as on 01. 04. 2020 Interest

A Rs 1,00,000 Rs 20,000
B Rs 1,00,000 Rs 20,000
C Rs 1,00,000 Rs 20,000
Compute the Income of the Firm and of the Partners assuming that the Partners have no other
income.

Answer
Computation of Partner's Income under the head Profits and Gains of Business/profession
No Particulars Rs.
1 Net Loss as per Profit and Loss Account (2,50,000)
2 Add: Partners Remuneration 1,80,000
3 Add: Interest on Capital 60,000
4 Net Loss before Interest and Remuneration (10,000)
5 Less Allowable Interest on Capital at 12% (36,000)
6 Book Profits (46,000)
7 Less Remuneration allowable u/s 40(b) (1,50,000)
8 Loss of the Firm (1,96,000)

Computation of Firm's Income under the head Profits and Gains of Business/profession
No Particulars A B C
1 Interest on Capital (amount deducted in computing Firm's
12,000 12,000 12,000
Income)
2 Add Remuneration to Partners Rs 1,50,000 apportioned as (9 :
75,000 50,000 25,000
6 : 3)
3 Taxable Income from partnership Firm 87,000 62,000 37,000
4 Share of Loss from Firm (Rs 1,96,000 in the ratio of 1 : 1 : 1) (65,334) (65,333) (65,333)

Note:
This cannot be clubbed / set - off with Interest on Capital, etc. since the Share Income from a Firm is
exempt u/s 10 (2A).

178 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

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Illustration 2
The partnership Deed of a firm does not specify the Remuneration payable to each Individual
working partner but lays down the manner of fixing the remuneration as follows -
In case the Book profits of the Firm are up to Rs 3 Lakhs, the Partners would be entitled to
Remuneration upto 1. 50 Lakhs or 90% of Book profits, whichever is more. In respect of balance
Book Profits, it is 60%. ‚Book profits" shall be computed as defined in Section 40 (b) of the Income
Tax Act. In case there is a Loss in a particular year, the partners shall not be entitled to any
Remuneration. Remuneration Payable to the working partners should be credited to the respective
accounts at the time of closing of the Accounting Year and the working partners shall be entitled
to equal remuneration.
Can the Firm claim deduction in respect of remuneration paid to the working partners?
Answer
No Particulars
1 As per section 40(b), payment of remuneration to a working partner which is authorized by
and is accordance with the terms of the partnership deed is allowable as a deduction to the
extent it does not exceed the limits specified is section 40(b)(v)
2 The issue under consideration is whether, in a case where the partnership deed does not
specify the amount of remuneration payable to each partner but lays down the manner of
fixing the remuneration, can payment of such remuneration be allowed as deduction.
3 The CBDT had, vide circular no.739 dated 25.03.1996, clarified that no deduction u/s 40(b)(v)
will be admissible unless the partnership deed either specifies the amount of
remuneration payable to each individual working partner or lays down the manner of
quantifying such remuneration
4 Conclusion: Therefore, in this case, since the partnership deed lays down the manner of
quantifying the remuneration payable to working partners, the firm is entitled to claim
deduction of remuneration paid to working partners, subject to the limits specified in sec
40(b)(v)

Illustration 3
A partnership Firm consisting of three partners X, Y and Z is engaged in the business of
manufacturing and selling toys. Turnover of the Business for the year ended 31st March 2021,
amounts to Rs 55 lakhs. Bad Debts written off in the books are Rs. 75,000. Interest at 12% is
provided to Partner, Z on his capital of Rs 6 lakhs as authorized by the partnership Deed. The Firm
had Business Loss of Rs 50,000and Unabsorbed Depreciation of Rs 1,50,000 carried forward from
Assessment Year 2020 - 21. The firm did not pay tax under presumptive tax system in assessment
year 2020-21 as conditions of section 44AD were not fulfilled for AY 2020-21. The Firm opts for
presumptive taxation u/s 44AD for Assessment Year 2021 - 22.
No Particulars
1 Compute the Income of the Firm chargeable under" Profits and Gains of Business or
profession"
2 What would be the Liability for Interest u/s 234B & 234C, if the Firm has not paid any
Advance Tax?

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Answer
Computation of Income of the firm chargeable under the head “PGBP”
+/ - Particulars Rs
Presumptive Income under section 44AD (55,00,000 × 8%) 4,40,000
-A Partnership firm falls within the definition of ‚Eligible Assessee‛ under
section 44AD. The threshold limit of turnover for applicability of
presumptive taxation scheme under section 44AD is Rs. 2 crore. In this case,
since the turnover of the business of the firm is Rs. 55 lakh, it falls within the
definition of ‚Eligible Business‛ and therefore the firm is eligible to opt for
presumptive taxation under section 44AD. 8% of the total turnover would be
deemed to be the business income of the firm.
Less: Interest u/s 40(b) - The salary and interest paid to partners shall not be Nil
allowed from presumptive income.
Book Profit (Profits from Business or Profession for the Current Year) 4,40,000
Less: Set off of Brought Forward Loss u/s 72 - Further, business loss of previous 50,000
year 2018 - 19can be set off against current year business income as per
section 72.
Total Income 3,90,000

Notes:
No Particulars
1 As per section 44AD(2), all deductions allowable under section 30 to 38 shall be deemed to
have been allowed in full and no further deduction shall be allowed. Accordingly, no
deduction shall be allowed for bad debts since the same is deductible under section 36(1)(vii)
and unabsorbed depreciation since the same is deductible under section 32(2)
2 As per Section 44AD, the provisions of advance tax will apply to an eligible assessee in so far
as they relate to the eligible business. Therefore, an assessee opting for presumptive taxation
scheme under section 44AD is required to pay advance tax. However, the assessee opting for
section 44AD is not required to pay advance tax in multiple instalments, but they are
required to pay the whole amount of advance tax on or before 15th March of the previous
year. Therefore, in this case, the firm is required to make advance tax payments.
Accordingly, there would be liability for interest under section 234B and 234C in case of
delay of payment of advance tax

Illustration 4
Work out the Taxable Income for A.Y. 2021 - 22 of a Partnership Firm engaged in Retail Trade
from the following particulars
No Particulars
1 Net profit of Rs 3,65,000 arrived at after debit of Interest on Capital of Partners of Rs 4,80,000
2 Total Capital of Partners on which Interest paid as debited in Profit and Loss A/c was Rs
10,00,000

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Answer:
Computation of Taxable Income of Partnership firm for the AY 2021 - 22
+/ - Particulars Rs
Net Profit 3,65,000
Add: Interest on capitals of partners 4,80,000
Sub Total 8,45,000
Less: Allowable interest as per section 40(b) -12% of Rs. 10,00,000 1,20,000
Taxable Income 7,25,000

Illustration 5
No Particulars
1 A firm has paid Rs.7, 50,000 as remuneration to its partners for the P.Y. 2020 - 21, in
accordance with its partnership deed, and it has a book profit of Rs.10 lakh. What is the
remuneration allowable as deduction?
2 Rao& Jain, a partnership firm consisting of two partners, reports a net profit
of Rs. 7, 00,000 before deduction of the following items:
a) Salary of Rs. 20,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).
b) Depreciation on plant and machinery under section 32 (computed) Rs.1, 50,000.
c) Interest on capital at 15% per annum (as per the deed of partnership). The amount of
capital eligible for interest Rs.5, 00,000.
Compute:
a) Book - profit of the firm under section 40(b) of the Income - tax Act, 1961.
b)Allowable working partner salary for the Assessment Year 2021 - 22as per section 40(b)

Answer :

No Particulars
1 The allowable remuneration calculated as per the limits specified in S. 40(b)(v) would be –

No Particulars Rs.
1 On first Rs.3 lakhs of book profit ( 3,00,000 x 90%) 2,70,000
2 On balance Rs.7 lakhs of book profit ( Rs.7,00,000 x 60%) 4,20,000
3 Sub total 6,90,000
The excess amount of Rs.60,000 (i.e., Rs.7,50,000 – Rs.6,90,000) would be disallowed as per
sec 40(b)(v)
2
No Particulars
a 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

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Computation of book profit of the firm u/s 40(b)

No Particulars Rs. Rs.

Net profit ( before deduction of depreciation, salary 7,00,000
1
and interest)
2 Less: Depreciation u/s 32 1,50,000
Interest @ 12%p.a ( being the maximum allowable as 60,000 2,10,000
3
per section 40 (b)) (Rs.5,00,000 x 12%)
4 Book profit 4,90,000

Salary actually paid to working partners = Rs.20,000 x 2 x 12 = Rs.4,80,000.

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 Rs.3,00,000 of book Rs.1,50,000 or 90% of book profit,

profit or in case of loss whichever is more
On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners salary for the AY 2021 - 22
b
No Particulars Rs.
On the first Rs.3,00,000 of book profit ( Rs.1,50,000 or 2,70,000
1
90% of Rs.3,00,000 whichever is more)
On the balance of book profit ( 60% of (Rs.4,90,000 – 1,14,000
2
Rs.3,00,000))
3 Maximum allowable partner’s salary 3,84,000
in this case would be:

Hence, allowable working partner’s salary for the AY 2021 - 22 as per the
provisions of section 40(b)(v) is Rs.3,84,000

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V - SET OFF & CARRY FORWARD OF LOSS - SECTION 78(1)

Partnership Firm

Special Set off &

Residential Tax rate & Section - Carry forwrd
Povisions to
Status Surcharge 40(b) of loss -
Firm
S.78(1)

Carry forward and Set Off of Losses in case of change in Constitution of Firm
Where a change has occurred in the constitution of a firm, then nothing shall entitle the firm to
have carried forward and set off 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.

ANALYSIS OF SECTION 78(1): -

Section 78(1) provides that where a change in constitution of firm takes place on account of
retirement of partner or death of the partner then, the firm shall not carry forward and set off the
following brought forward losses:
No Particulars Rs.
1 Share of the retired / deceased partner in the brought forward losses of the firm X
2 Less: Share of the retired/deceased partner in the current year profit Y
3 Sub total X–Y
4 (X-Y) cannot be carried forward by the firm or its partners

QUESTION FOR UNDERSTANDING

Illustration 1
A firm furnishes you the following data for the previous year ended 31.03.2021:
No Particulars Amount
1 PGBP before setting off brought forward depreciation and brought forward
8,00,000
losses
2 Brought forward losses of Assessment Year 2015 – 16 3,00,000
3 Brought forward Depreciation of Assessment Year 2015 – 16 1,00,000

There were four partners A, B, C and D sharing profits and losses equally. On 30th June, 2020, the
partner A had retired from the firm. Compute the total income of the firm.

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AY 21- 22 DIRECT TAXATION
Answer:
By virtue of Section 78(1), the firm shall not carry forward and set off the following loss:
No Particulars Amount
1 Share of retired partner in brought forward losses 75,000
2 Less: Share of the retired partner in the current profits (2,00,000 x 3 / 12) 50,000
3 Total 25,000

Therefore, Rs 25,000 cannot be carried forward and set off by the firm. It may be noted that
section 78 (1) is not applicable for brought forward depreciation. Now, the income of the firm for
Assessment Year 2021 – 22 is as under:
No Particulars Amount
1 Current Year PGBP 8,00,000
2 Less: Brought Forward Losses (3,00,000 – 25,000) 2,75,000
3 Less: Brought Forward Depreciation 1,00,000
4 Total 4,25,000

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 DIRECT TAXATION AY 21 - 22

CHAPTER – 12A
QUESTIONS FOR OWN PRACTICE
Illustration 1
X, Y, and HUF of Z (represented by Z) are partners with equal shares in profits and losses of a
firm, ABC, which is engaged in the production of TV serials and telefilms. In the previous year
2019 - 20, one partner A retired, but his dues have been settled in the previous year 2020 - 21.

The earlier partnership deed did not authorize payment of remuneration or interest to partners.
Partnership deed was revised by the Partners on 1st June 2020, to authorize payment of
remuneration of 1 lakh per month to each working partner and simple interest at 15% per annum
on partner’s capital. X, Y and Z are actively associated with the affairs of the firm.
The profit & Loss A/c of the Firm for the year ended 31st March 2021, shows Net Profit of
10 lakhs after debiting / crediting of the following:
No Particulars
1 Interest amounting to Rs 5 lakhs was paid to partners on the balance standing to their capital
accounts from 01.06.2020 to 31.03.2021
2 Remuneration to the partners including partner in representative capacity Rs 30 lakh
3 Interest amounting to 2 lakh paid to Z on loan provided by him in his individual capacity at
16% interest
4 Royalty of Rs 5 lakh paid to partner X, who is professional script writer, for use of his scripts
as per an agreement between the firm and X. The same is authorized by partnership deed.
5 Two separate payments of Rs. 18,000 and Rs. 15,000 made in cash on February 1, 2021 to P, a
hairdresser against his bill for services rendered in January, 2021 and two payments of
Rs.19,000 and Rs. 10,000 made in cash on 1st Feb & 2nd Feb respectively to Q, assistant
cameraman against her bill for services provided in January, 2021
6 Amount of Rs 5 lakh provided in the books on 31st March, 2021 as liability for remuneration
to S, a film artist and a non - resident. Tax deducted at source u/s 195 from the amount so
credited was paid on 3rdJune 2021
7 Amount of 6 lakh provided as Gratuity for the year on the basis of actuarial valuation.
Gratuity actually paid to one retired employee during the year is 1.50 lakh
8 Interest of Rs 1.20 lakh received on Income tax refund u/s 244(1A) in respect of the
Assessment Year 2017– 18

The Firm has also provided the following additional information

a) The amount due to A, the ex - partner, was Rs 15 lakh, which was settled on 30th September
2020, by transferring a plot of land purchased one year back for Rs 10 lakh. The difference of
Rs 5 lakh was credited to partners' capital accounts in their profit sharing ratio. The fair market
value of the plot on date of transfer was Rs. 16 lakh.

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Compute the Total Income of the firm for the Assessment Year 2021 - 22 stating the reasons for
treatment of each item.
Answer
Computation of Total Income of ABC for the AY 2021 – 22
No Particulars Note Amount
1 Income from PGBP 1 19,82,800
2 Income from CG 2 6,00,000
3 IFOS 3 1,20,000
4 Gross total Income 27,02,800
5 Deductions under Chapter VI -A Nil
6 Total Income 4 27,02,800

Notes :-
1. Income from PGBP
+/ - Particulars Amount Amount
I. Profit and Gains from Business or Profession
Net profit as per profit and Loss A/c 10,00,000
Add: Items debited to Profit & Loss Account but not allowable as deduction
1. Interest to partners in excess of 12% 3,00,000
As per section 40(b), simple interest at 12% p.a to partners
relating to the period after the date of partnership deed is
allowable. Excess interest @ 3% paid from 1st June 2020 to 31st
march 2021 is to be disallowed. Excess interest of 3% being
Rs.15, 00,000 x 3/15 = Rs.300,000
2. Remuneration to partners 30,00,000
3. Disallowance u/s 40A(3) for a aggregate cash payment 52,000
exceeding Rs.10,000 in a single day - Section 40A(3) provides for
disallowance of any expenditure in respect of which the actual
payment exceeding Rs.10,000 is made otherwise than by an
account payee cheque, account payee bank draft or use of ECS
through bank account or through such other electronic mode as
may be prescribed in a single day to a person. Hence the
payments of Rs.18,000 and Rs.15000 in cash on 1.2.2021 to
hairdresser shall be disallowed, since the aggregate payment of
Rs.33,000 exceeds the limit of Rs.10,000 - The payment of bill of
the assistant cameraman of Rs.19,000 is also liable for
disallowance u/s 40A(3) since the aggregate payment in cash on
a single day has exceeded Rs.10,000
4. Royalty to partner X 5,00,000
Limits specified u/s 40(b)(v) are applicable in case of payment of
salary, bonus, commission, or remuneration, by whatever name
called paid to working partner. Any remuneration, by whatever
name called paid to working partner, is subject to limits laid
down in section 40(b)(v). Hence, royalty has to be added back
for computing book profits.
5. Provision towards Gratuity 4,50,000 43,02,000
As per sec 40A(7), any provision made for payment of gratuity
to employees on their retirement or termination for any reason
is disallowed. But, gratuity of Rs.1.5 lakhs paid to retired
186 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED
 DIRECT TAXATION AY 21 - 22

employees is allowable as deduction. Hence the balance

provision of Rs.4.5 lakhs (i.e., Rs.6 lakhs –Rs.1.5 lakhs) is to be
disallowed
Sub Total 53,02,000
Less: Items credited to statement of profit and loss, but not
includible in business income
1. Interest on Income Tax Refund 1,20,000 1,20,000
-It is chargeable to tax under the head Income from Other
Sources.
Book Profit 51,82,000
Less: Allowable Deduction
1. Allowable Remuneration u/s 40(b)(v)
No Particulars Amount
1 First Rs. 3,00,000 @ 90% 2,70,000
2 Balance 48,82,000 @ 60% 29,29,200
3 Total Allowable Remuneration 31,99,200
31,99,200
2. Remuneration actually paid or payable (Rs.1,00,000 x 10 months 35,00,000 31,99,200
x 3 partners) + (Royalty Rs.5 lakhs)
(1) or (2) whichever is less, is deductible
Profit and Loss of Business or Profession 19,82,800

2. Income from Capital Gains

+/ - Particulars Amount Amount
Short-term capital gain on transfer of land 16,00,000
- Distribution of a capital asset by a firm to its partner on
dissolution or otherwise attracts capital gain tax liability as
per the provisions of section 45(4). Therefore distribution of
a plot of land on retirement of a partner would attract
section45(4)
- R. 16 lakhs being the fair market value of the plot on the
date of transfer, is deemed to be the full value of
consideration. Therefore, the short term capital gain would
be Rs. 6 lakhs
Less: Cost of Acquisition 10,00,000
Short Term Capital Gains 6,00,000 6,00,000

3. IFOS
+/ - Particulars Amount Amount
1. Interest on It Refund 1,20,000 1,20,000

4. Total Income
No Particulars Amount
1 Gross total Income 27,02,800
2 Deductions under Chapter VI – A Nil
3 Total Income 27,02,800

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Notes:
No Particulars
1 Even though Z is a partner in a representative capacity, he is still a partner. Therefore,
remuneration to Z should also be subject to the prescribed limits in sec 40(b).
2 As per explanation 1 to section 40(b), where an individual is a partner in a firm in
representative capacity, the provisions of sec 40(b) shall not apply to any interest payable by
the firm to such individual in his personal capacity. Hence assuming that such provisions
do not get attracted in this case, such interest shall be allowed as deduction in full even
though the interest rate is more than 12% p.a.
3 As per section 40(a)(i), any sum payable to a non-resident shall not be allowed as deduction,
if tax has not been deducted at source or after deduction, has not been paid on or before due
date. Tax deducted from the amount of remuneration credited to payee’s account on 31st
March 2021 has to be deposited latest by 31st July/ 31st Oct 2021. The firm has paid the tax on
3rd June 2021 and hence remuneration shall be allowed. Since the same is already debited to
profit and loss account, no further adjustment is made.

Illustration 2
Net profit as per P & L A/c of 200 lakhs of "Simran Enterprises" having a Partnership Firm
status engaged in running Hotel Business for the year ended 31 - 03 - 2021 arrived at after
charge of the following
No Particulars
1 Depreciation on the Hotel Building having WDV on 01 - 04 - 2020 of Rs 600 lakhs was
charged of treating the same as Plant and Machinery
2 Expenses of Rs 2,00,000 incurred for the purpose of promoting Family planning among its
employees
3 Payment of Rs 1,00,000 for an advertisement published in the souvenir released on 26th
January by a political party approved by the Election Commission
4 Compensation of Rs 2,00,000 paid to the suppliers of the automatic kitchen appliances
because of termination of the contract
5 Wine and Liquor imported in the year 2018 - 19 for Rs 30 lakhs and were available in the
stocks on 01 - 04 - 2020 of having value of 10 lakhs were confiscated by the Government
Authority and thus were written off
6 Expenses of Rs 30 lakhs incurred on the replacement of carpets in the lounge, dining hall and
at the reception desk areas

The firm has also provided the following additional information and the details relating to the
expenses charged in the P & L Account:

No Particulars
1 Amount of Rs 2.8 lakhs equal to US $ 8, 000 was remitted and paid to a travel agent of USA
as commission for the booking of travellers from USA. Tax at source was not deducted out
of such payment
2 Amount of Rs 30, 000 each was paid in cash to four suppliers of vegetable and milk products
on 11 - 7 – 2020 due to suspension of the banking operations because of all India strike of
Bank Employees
3 Amount of Rs 6 lakhs was written off in F. Y. 2018 - 19 as Bad Debt. However, with constant
follow up and efforts an amount of Rs 3 Lakhs got recovered on 18 - 3 - 2021 out of the total
written off amount which was credited to the ''Bad Debts Reserve" account

188 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Compute the Total Income of the Firm for A. Y. 2021 - 22 and also give reasons in brief for the
treatment given to each of the items.

Answer
Computation of Total Income of M/s Simran Enterprises for the AY 2021 - 22

+/ - Particulars Amount Amount

I. Profit and Gains from Business or Profession
Net profit as per profit and Loss A/c 2,00,00,000
Add: Items debited to Profit & Loss Account but not allowable as deduction
1. Excess depreciation on Building (i.e 15% - 10%) on Rs. 600 lacs 30,00,000
- Hotel building does not constitute plant and therefore,
depreciation chargeable thereon is 10%. However, depreciation
has been charged in the profit and loss account at the rate
applicable to plant and machinery i.e @ 15%. Accordingly, the
excess depreciation charged in the profit and loss account @ 5%
(15% - 10%) has to be added back.
2. Expenses on promoting family planning amongst the 2,00,000
employees - Expenses on promoting family planning amongst
employees is allowable under section 36(1)(ix) only to a
company assessee. In this case, since the assessee is a firm, such
expenses are not allowable and therefore, the same has to be
added back.
3. Advertisement in souvenir of a political party - Advertisement 1,00,000
of any nature given in a magazine/souvenir published by a
political party is not allowable as per section 37(2B). However,
the same is allowed under section 80GGC.
4. Compensation paid to a supplier of Kitchen appliances - Nil
Compensation paid for breach of a contract for supply of a
capital asset is in the nature of revenue expenditure. The same
is paid for breach of contract.
5. Rs. 2,80,000 disallowed u/s 40(a)(i) since TDS not deducted 2,80,000
6. Disallowance u/s 40A(3) 1,20,000 37,00,000
The cash payments totalling Rs.1,20,000 made on the day when
bank employees were on strike is not an exception under Rule
6DD. Therefore, disallowance u/s 40A(3) is attracted.
7. Sub total 2,37,00,000
8. Recovery of bad debts credited in reserve but chargeable 3,00,000 3,00,000
under section 41(4)
-The recovery of a debt, which was earlier written off and
allowed as deduction under section 36(1)(vii), is chargeable to
tax under section 41(4) in the year of such recovery.
Accordingly, such amount has to be added to income despite
the fact that the same was credited by the firm in a reserve
account.
Gross Total Income 2,40,00,000
Less: Deduction under section 80GGC 1,00,000
Total Income 2,39,00,000

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AY 21- 22 DIRECT TAXATION
Notes:
No Particulars
1 Loss of stock in trade has to be considered as a trading loss. Explanation to S. 37(1) is not
relevant here since it is not a case of business expenditure but one of business loss. Business
loss is allowable on ordinary commercial principles. -Dr. T.A Qureshi v. CIT (SC)
Therefore, since wine and liquor formed part of stock in trade of the firm, confiscation of the
same has to be allowed as a business loss. Since the same has been charged to profit and loss
account, no further adjustment is required
2 The expenditure incurred on replacement of carpets by a hotel is an expenditure incurred for
the purpose of business and is hence, revenue expenditure allowable as deduction under
section 37(1). Since the same has already been debited to profit and loss account, no further
adjustment is required
3 The cash payments totalling Rs. 1,20,000 made on the day when bank employees were on
strike is an exception u/rule 6DD. Therefore, disallowance u/s 40A(3) is not attracted

Illustration 3
M/s HIG, a firm, consisting of three partners namely, H, I and G, carried on the business of
purchase and sale of television sets in wholesale and manufacture and sale of pens under a deed of
partnership executed on 01.04.2014. H, I, G were partners in their individual capacity.
The deed of partnership provided for payment of salary amounting to Rs 1,25,000 each to H and
G, who were the working partners. A new deed of partnership was executed on 01.10.2020 which
apart from providing for payment of salary to the two working partners as mentioned in the Deed
of Partnership executed on 01.04.2010, for the first time provided for payment of simple interest @
12% per annum on the balances standing to the credit of the capital accounts of Partners from
01.04.2020.
The Firm was dissolved on 31.03.2021 and the capital assets of the firm were distributed among
the Partners on 20.04.2021. The Net Profit of the Firm for the year ending 31.03.2021 after payment
of Salary to the Working Partners and debit / credit of the following items to the P & L A/c was Rs
1,50,000:

No Particulars
1 Interest amounting to Rs 1,00,000 paid to the partners on the balances standing to the credit
of their capital accounts from 01.04.2020 to 31.03.2021
2 Interest amounting to Rs 50,000 paid to the partners on the balances standing to the credit of
their current accounts from 01.04.2020 to 31.03.2021
3 Interest amounting to Rs 20,000 paid to the HUF of Partner H @ 18%p. A
4 Payment of Rs. 25,000 for purchase of television sets (stock in trade) made by crossed cheque
on 01. 11. 2020
5 Rs.30,000 being value of gold Jewellery received as gift from a manufacturer for achieving
sales target
6 Depreciation amounting to Rs.15,000 on Motor car bought and used exclusively for business
purposes, but registered in the name of partner ‘H’
7 Depreciation u/s 32(1)(ii) is Rs. 37,500 of new machinery bought and installed for
manufacture of pens or 01.11.2020 at a cost of Rs. 5,00,000
8 Interest amounting to Rs 25,000 received from bank on Fixed Deposits made out of surplus
funds

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The firm furnishes the following information relating to it

No Particulars
1 Closing stock was valued at Rs 60,000 as per the method of lower of cost or NRV
consistently followed by it. The net realizable value of Closing Stock - in - Trade was Rs
65,000
2 Brought forward Business Loss relating to the Assessment Year 2020 - 21 was Rs 50, 000
3 FMV of Capital Assets as on 31.03.2021 was Rs 20, 00,000 and the cost of their acquisition
was Rs. 15,00,000
Compute the Total Income of M/s HIG for the Assessment Year 2021 - 22.
You are required to furnish explanations for the treatment of the various items given above.
Answer:
Computation of Total Income of M/s HIG for the AY 2021 – 22
No Particulars Note Amount
1 Income from PGBP 1 1,55,000
2 IFOS 2 25,000
3 Gross total Income 1,80,000
4 Deductions under Chapter VI -A -
5 Total Income 1,80,000

Notes :-
1. Income from PGBP
+/ - Particulars Amount Amount
I. Profit and Gains from Business or Profession
Net profit as per profit and Loss A/c 1,50,000
Add: Items debited to Profit & Loss Account but not allowable as deduction
1. Interest to Partners on Capital Account for the period from 50,000
01.04.2020 to 30.09.2020 disallowed (Total interest Rs.1,00,000
but deduction limited to 6 months only hence 50% thereof is
deductible and the balance is added)
-Interest to partners authorised by the partnership deed will be
allowed as deduction only for the period beginning with the date
of the partnership deed and not for any earlier period as per
section 40(b)(iv). Therefore, interest paid to the partners on the
balances standing to the credit of their capital accounts from
1.10.2020 alone is eligible for deduction, since the partnership
deed was executed only on 1.10.2020. Interest for the period prior
to 1.10.2020 is not allowed.
2. Interest to partners on current accounts from 1.4.2020to 50,000
31.3.2021– not authorized by the deed, hence disallowed
-The partnership deed of 1.10.2020 provides for payment of
interest on balances in capital accounts of partners only. As such,
the interest paid on the balances standing to the credit of the
current accounts of partners is not allowable under section 40(b).
The Kerala High Court has, in Novel Distributing Enterprises v.
DCIT (2001) 251 ITR 704 (Ker), on identical facts, held that
interest paid to the partners on their current account balances is

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 191

AY 21- 22 DIRECT TAXATION
not allowable.
3. 100% of Rs.25,000 paid towards purchase of television sets 25,000
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 electronic
mode as may be prescribed (being stock in trade, hence
disallowed.
-Section 40A(3) provides for disallowances @ 100% of the
expenditure incurred 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 electronic mode as may be prescribed. Since the firm
has made payment of ` 25,000 towards purchase of television
sets by a crossed cheque and not by an account payee cheque,
100% of such expenditure would be disallowed.
4. Difference on account of valuation of closing stock - in - trade 5,000
at NRV (Rs.65,000 less Rs. 60,000)
-As per Para 24 of ICDS II: Valuation of Inventories, closing stock
has to be valued at net realizable value in the case of a dissolved
firm. As such, the closing stock - in - trade of the firm has to be
valued at the net realizable value of Rs. 65,000. Since it has been
valued at Rs. 60,000, being the cost, the balance Rs. 5,000 has to be
added.
5. Salary paid to working partners considered separately 2,50,000 3,80,000
Sub Total 5,30,000
Less: Allowed Expenditure
1. Additional Depreciation on new machinery (Rs. 5,00,000 x 20%) 50,000
= Rs. 1,00,000. Only 50% is allowable as deduction.
-The firm is entitled to additional depreciation @ 20% under
section 32(1)(iia) in respect of the new machinery installed for
manufacture of pens. Since the new machinery is put to use for
less than 180 days during the relevant previous year, the
additional depreciation is restricted to 50% of the prescribed rate
of 20% i.e. it is restricted to 10%. The balance additional
depreciation can be claimed in the immediately succeeding
financial year.
2. Interest received from bank on fixed deposits considered 25,000
separately
3. Salary to working partners 2,50,000

Particulars Amount
As per limit in section 40(b) 3,63,000
-On First Rs. 3,00,000 @ 90% = 2,70,000
On the balance of Rs. 1,55,000 @ 60% = 93,000
Salary actually paid 2,50,000
Deduction allowed being (i) or (ii) 2,50,000
whichever is less
4. Business loss relating to Assessment Year 2020 - 21setoff 50,000 3,75,000

192 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Income from Business 1,55,000

2. IFOS
No Particulars Amount
1. Interest received from bank on fixed deposits 25,000
-Interest received from bank on fixed deposits made out of surplus funds is
assessable under the head 'Income from other sources'. Hence, it is not taken
into account for the purpose of computing book - profit.
Total Income 1,80,000

Working Notes
No Particulars
1 Gold Jewellery valued at Rs. 30,000 received as gift from a manufacturer for achieving sales
target is taxable under section 28(iv), being a benefit arising from business. Since it has
already been credited to profit and loss account, no further adjustment is required
2 Depreciation on motor car bought and used exclusively for the purposes of business is
allowable though not registered in the name of the firm in view of the ratio of the decision of
the Supreme Court in Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775
3 Net profit shown in the profit and loss account computed in the manner laid down in
Chapter IV - D as increased by the aggregate amount of the remuneration paid or payable to
all the partners constitutes book profit as per Explanation 3 to section 40(b). Carry forward
and set off of business loss is covered under Chapter - VI. Hence, brought forward business
loss relating to the assessment year 2020 - 21 is not considered for calculation of book - profit
4 Section 45(4) is not applicable to the firm for the assessment year 2021 - 22, though the
dissolution of the firm took place on 31.3.2021, as there was no transfer by way of
distribution of capital assets during the relevant previous year. The distribution of the
capital assets took place on 20.4.2021. The capital gains will, therefore, be assessable in the
assessment year 2022 - 23

Illustration 4
Vijay Agencies, a partnership firm constituted by three partners with equal shares was dissolved
on 1 - 04 - 2020 after a search. The tax liability of the firm outstanding to be paid was determined at
Rs. 15 Lacs. Out of three partners, one was declared insolvent on 18 - 03 - 2021 by the Court. The
Assessing Officer, for recovering the demand, attached the Bank Accounts of other two partners
and could recover an amount of Rs. 6 Lacs from the account of one such partner.

You are asked by the partners of the dissolved firm the following questions:
No Particulars
1 About the liability of each of them to pay outstanding demand
2 Whether the action of Assessing Officer to attach the Bank Account of partners to recover the
tax demand of the dissolved firm is justified?

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 193

AY 21- 22 DIRECT TAXATION
Answer
No Particulars
1 As per section 189(3), every person who was at the time of dissolution, a partner of the firm,
shall be jointly and severally liable for the amount of tax, penalty or other sum payable and
all the provisions of the Act relating to assessment of such tax or imposition of such penalty
or other sum, shall apply.
2 Therefore, the three partners (till one was declared as insolvent by the Court) are jointly and
severally liable for making the payment of outstanding dues of Rs. 15 Lakhs. After
insolvency of one partner, the other two partners are jointly and severally liable to pay such
demand.
3 Accordingly, the action of the Assessing Officer to attach the bank accounts of the partners
for recovery of outstanding demand is correct and the amount of ` 6 lakhs recovered by
attachment of the bank account of one of the partners is also in order

Illustration 5
Victory Poly fibres, a partnership firm, has earned a gross total income of Rs. 300 lacs for the year
ended 31 - 03 - 2021. The firm has not undertaken any international transaction or specified
domestic transaction during the said year.

The above includes a profit of Rs. 220 lacs from an undertaking having a turnover of Rs.80 crores.
This is the fifth year and deduction under section 80 - IA of the Income - tax Act, 1961 is available
to the extent of Rs.200 lacs.

There are some grey areas in the taxation workings and hence, the assessee is contemplating to file
the return of income on 7 - 12 - 2021, after seeking clarifications from tax experts.

Advise the assessee - firm by working out the total income and tax payable, where the return is
filed on 31 - 10 - 2021 or when the same is filed on 7 - 12 - 2021.

What is the practical solution as regards obtaining clarifications, which might or might not have an
impact on the total income? You may ignore interest under section 234A, 234B, 234C and 234F
while making the computation in support of your advice.

Answer
As per section 80AC, while computing the total income of an assessee of a previous year
(P.Y.2020 - 21, in this case) relevant to any assessment year (A.Y.2021 - 22, in this case), any
deduction is admissible, inter alia, under section 80 - IA, such deduction shall not be allowed
unless it furnishes a return of income for such assessment year on or before the ‘due date’
specified in section139(1).

Since the turnover of the partnership firm has exceeded the prescribed threshold limit in the
previous year 2020 - 21, it would be subject to audit under section 44AB, in which case the ‘due
date’ of filing its return of income for A.Y.2020 - 21 would be 31st October, 2021as per section
139(1).

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 DIRECT TAXATION AY 21 - 22

Computation of Total Income and tax liability of M/s Victory Poly fibres for AY 2021 - 22
Amount
+/ - Particulars
(In Lacs)
I. Where the firm files its return of income on 30st October, 2021:
Gross Total Income 300
Less: Deductions under section 80–IA 200
Total Income 100
Tax Liability @ 30% 30
Add: Health and Education Cess @ 4% 1.2
Regular Income Tax Payable 31.20

Computation of Alternate Minimum Tax payable -Section 115JC

Amount
+/ - Particulars
(In Lacs)
Total Income 100
Add: Deduction under section 80–IA 200
Adjusted Total Income 300
Alternate Minimum Tax (AMT) @ 18.5% on Rs, 300 lacs 55.50
Add: Surcharge @ 12% (Since Total Income > 1 Crore) 6.66
Sub Total 62.16
Add: Health and Education Cess @ 4% 2.49
Total Tax Payable (AMT) 64.65

Since the regular income - tax payable by the firm is less than the alternate minimum tax payable,
the adjusted total income shall be deemed to be the total income of the firm for P.Y.2020 - 21 and it
shall be liable to pay income - tax on such total income @ 18.5% -Section 115JC(1). Therefore, the
tax payable for the A.Y.2021 - 22 would be Rs. 64.65 lacs.
Tax Credit for Alternate Minimum Tax -Section 115JD
Amount
+/ - Particulars
(In Lacs)
Total Tax payable for AY 2021 - 22 (Alternate Minimum Tax) 64.65
Less: Regular Income Tax Payable 31.20
To be carried forward for set - off against regular income - tax payable (upto a 33.45
maximum of fifteen assessment years).

Where the firm files its return of income on 7th December 2020:
Where the firm files its return on 7 - 12 - 2021, it would be a belated return under section 139(4).
Consequently, as per section 80AC, deduction under section 80 - IA would not be available. In
such circumstances, the gross total income of Rs. 300 lacs would be the total income of the firm.
Amount
+/ - Particulars
(In Lacs)
Income Tax @ 30% of Rs. 300 lacs 90.000
Add: Surcharge @ 12% (Since Total Income > 1 Crore) 10.800
Sub Total 100.800
Add: Health and Education Cess @ 4% 4.032
Total Tax Liability 104.832

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CHAPTER - 14
ASSESSMENT OF LLP

Assessment of Various Entities

Assessment Assessment Assessment of

Assessment Assessment
of Individual of AOP / Co - Operative
of P. Firm of LLP
& HUF BOI Society

I - RESIDENTIAL STATUS

LLP

Residential Tax rate & Assessment of

Status Surcharge LLP

No Particulars Explanation
1 Resident Such person is resident in India if the control and management of its
affairs is situated wholly or partly in India
2 Non - Resident Such person is Non - resident in India if the control and management of
its affairs is situated wholly outside India

SUMMARY: -

Control & Management of LLP

Wholly or partly in India Wholly outside India

Resident Non - resident

196 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

II - TAX RATE & SURCHARGE

LLP

Residential Tax rate & Assessment of

Status Surcharge LLP

Surcharge if total income

No Particulars Tax rate Upto > 1 crore upto > 10 crore
1 Crore 10crore
1 LLP 30% Nil 12% 12%

QUESTIONS FOR PRACTICE

Illustration 1
PQR LLP, a Limited Liability Partnership set up a unit in Special Economic Zone (SEZ) in the
financial year 2016 - 17 for production of washing machines. The unit fulfils all the conditions of
section 10AA of the Income - tax Act, 1961. During the financial year 2019 - 20, it has also set up a
warehousing facility in a district of Tamil Nadu for storage of agricultural produce. It fulfils all the
conditions of section 35AD. Capital expenditure in respect of warehouse amounted to Rs. 75 lakhs
(including cost of land Rs. 10 lakhs). The warehouse became operational with effect from 1st April,
2020 and the expenditure of Rs. 75 lakhs was capitalized in the books on that date.

The Relevant details for the Financial Year 2020 - 21 is as follows:

No Particulars Amount
1 Profit of unit located in SEZ 40,00,000
2 Export sales of above unit 80,00,000
3 Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before considering deduction
4 1,05,00,000
under Section 35AD).
Compute Income Tax (including AMT under Section 115JC) payable by PQR LLP for Assessment
Year 2021 - 22.

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 197

AY 21- 22 DIRECT TAXATION
Answer
Computation of Total Income& Tax liability of PQR LLP for AY 2021 - 22
(Under the regular provisions of the Income tax Act, 1961)
+/ - Particulars Amount Amount
Profit and Gains from Business or Profession
Net profit as per profit and Loss A/c 40,00,000
Less: Deduction under section 10AA 32,00,000
- Deduction u/s 10AA in respect of Unit in SEZ = Profit of the
unit of SEZ x (Export Turnover of the Unit in SEZ/Total
Turnover of the unit in SEZ ; 40,00,000 x (80,00,000/1,00,00,000) =
Rs. 32,00,000.
Business Income of SEZ unit chargeable to tax 8,00,000 8,00,000
Profit from Operation of Warehousing facility 1,05,00,000
Less: Deduction under section 35AD 65,00,000
- Deduction @ 100% of the capital expenditure is available
under section 35AD for A.Y.2021 - 22 in respect of specified
business of setting up and operating a warehousing facility for
storage of agricultural produce which commences operation on
or after 01.04.2012.

Further, the expenditure incurred, wholly and exclusively, for

the purposes of such specified business, shall be allowed as
deduction during the previous year in which he commences
operations of his specified business if the expenditure is
incurred prior to the commencement of its operations and the
amount is capitalized in the books of account of the assessee
on the date of commencement of its operations.

Deduction under section 35AD would, however, not be

available on expenditure incurred on acquisition of land.

In this case, since the capital expenditure of Rs. 65 lakhs (i.e., Rs.
75 lakhs – Rs.10 lakhs, being expenditure on acquisition of land)
has been incurred in the F.Y.2019 - 20 and capitalized in the
books of account on 1.4.2020, being the date when the
warehouse became operational,

Rs. 65,00,000, being 100% of Rs. 65 lakhs would qualify for

deduction under section 35AD.
Business Income of Warehousing facility chargeable to tax 40,00,000 40,00,000
Total Income 48,00,000
Computation of Tax Liability (Under the Normal/Regular Provisions)
Tax @ 30% on Rs. 48,00,000 14,40,000
Add: Health and Education Cess @ 4% 57,600
Total Tax Liability 14,97,600

198 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

Computation of Adjusted Total Income of PQR LLP for levy of AMT

+/ - Particulars Amount Amount
Total Income (As computed above) 48,00,000
Add: Deduction under section 10AA 32,00,000
Sub Total 80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32 6,50,000 58,50,000
- On Building @ 10% of Rs. 65 lakhs
Adjusted Total Income 1,38,50,000
Alternate Minimum Tax @ 18.5% 25,62,250
Add: Surcharge @ 12% (Since Adjusted Total Income > 1 Crore) 3,07,470
Sub Total 28,69,720
Add: Health and Education Cess @ 4% 1,14,789
Total Tax Liability 29,84,509
Tax Liability under section 115JC (Rounded off) 29,84,510

Since the regular income - tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @ 18.5% thereof plus
surcharge @ 12% and cess @ 4%. Therefore, the tax liability is Rs. 29,84,510.
AMT Credit to be carried forward under section 115JD
+/ - Particulars Amount
Tax liability under section 115JC 29,84,510
Less: Tax Liability under the regular provisions of the Income Tax Act, 1961 14,97,600
MAT Credit Carried Forward 14,86,910

Illustration 2
PQR LLP has a profit of Rs 500 Lakhs after charging Interest on capital for P amounting to Rs 10
lakhs calculated 15% p.a. as per agreement, but before considering remuneration to Partners. What
is the maximum admissible amount of remuneration to partners, assuming all partners are
Working Partners & Remuneration is authorized by the LLP Instrument?

Answer
Computation of Income under the head profits and Gains of Business or Profession
No Particulars Rs
1 Net Profit as per Profit and Loss Account 5,00,00,000
2 Add: Interest in excess of 12% (Rs 10,00,000 × 3/15) 2,00,000
3 Book Profit 5,02,00,000
4 Maximum Permissible Remuneration u/s 40(b)
(Rs 3,00,000 × 90% + Rs 4,99,00,000 × 60%) 3,02,10,000

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AY 21- 22 DIRECT TAXATION
Illustration 3
MNO Corporation LLP, is carrying on two businesses, viz. Textile Manufacture and operation of
cold chain Facility. It gives you the following information for the year ended 31st March 2021.
Net profit as per Profit & Loss Account
No Particulars Amount
1 From Textile Manufacture Rs 10,25,000
2 From Operation of Cold Chain Facility Rs 20,50,000

The Following items are debited to Profit and Loss Account:

No Particulars
1 Interest on capital payable to partners @ 15% on Total Capital of 100 lakhs
2 Working partner salary Rs 36 lakhs (i.e. 1 lakh each per month for 3 partners)
3 Depreciation on Textile Factory Building Rs 5 lakhs
4 Depreciation on plant & Machineries of Textile Business Rs 35 lakhs
5 Key man Insurance policy premium paid Rs 1,55,000

Other Information:
Eligible Depreciation u/s32 for the Previous Year 2020 - 21 are -
No Particulars
1 On plant & Machineries of Textile Business Rs 27 lakhs
2 On Factory Building relating to Textile Business Rs 4 lakhs
The Assessee set up and operating a cold chain Facility since 1st April 2019. It incurred Capital
Expenditure towards Construction of Cold Chain Facility during the period from 1st June 2017 to
31st March 2019 as under:
No Particulars
1 Cost of Land (acquired on 1st June 2017) Rs 30 lakhs
2 Cost of Construction of Building and Machineries installed till 31st March 2019 Rs 50 lakhs
The Income of the Firm for the Previous Year 2019 - 20 (Assessment Year 2020 - 21) is given below:
No Particulars
1 Income from Textile Manufacture Rs 12 lakhs
2 Income from Cold Chain Facility Rs 60 lakhs (before deduction u/s 35 AD)

The firm originally had 4 partners and one partner retired on 31.03.2020. The partnership
agreement authorises payment of salary and interest on capital which are debited to profit and
loss account.
You are requested to compute the total income of the firm for the assessment year 2021 - 22.
Note: Ignore Alternate Minimum Tax under Section 115JC.

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 DIRECT TAXATION AY 21 - 22

Answer
Computation of Total Income of MNO Corporation LLP for the AY 2021 - 22
+/ - Particulars Amount Amount
Profit and Gains from Business or Profession
Net profit as per profit and Loss A/c - Rs. 10,25,000 + Rs. 20,50,000 30,75,000
Add: Item debited to profit and loss account but not allowable as deduction / to be
considered separately
1. Interest on capital payable to partners in excess of 12% 3,00,000
disallowed under section 40(b) - Rs. 100 lakh x 3%
2. Working partners salary (to be considered separately) 36,00,000
3. Depreciation as per books of account (Rs. 5 lakhs + Rs. 35 lakhs) 40,00,000
relating to textile business.
4. Key man Insurance premium paid (allowable as deduction, Nil 79,00,000
since it is incurred wholly and exclusively for the purpose of
business) - Circular by CBDT
Sub Total 1,09,75,000
Less: Allowable Expenditure
1. Depreciation under section 32 of the Income Tax Act, 1961 31,00,000 31,00,000
(relating to textile business) - Rs. 27 lakhs + Rs. 4 lakhs
2. Book profit 78,75,000
3. Remuneration to working partners - Subject to limit specified in 36,00,000 67,00,000
section 40(b)
No Particulars Condition Amount
1 On first Rs. 3,00,000 of 90% of Book 2,70,000
Book Profit Profit
2 On the balance of Book 60% of bal. 45,45,000
Profit Rs. 75,75,000 - Book Profit
78,75,000 – 3,00,000
3 Allowable Remuneration 48,15,000
Restricted to amount of remuneration actually paid
Income under the head Profits and Gains of Business or Profession 42,75,000
Less: Set off of bought forward loss of specified business under section 73A 7,50,000
- See Notes 1 to 4 below
Total Income 35,25,000

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Notes:
No Particulars
1 Computation of loss of specified business of setting up and operating a cold chain
facility for the previous year 2019 - 20relevant to Assessment year 2020 - 21
Particulars Amount
Income from cold chain facility - before deduction under section 35AD 40,00,000
Less : Deduction under section 35AD - See Notes 2 & 3 50,00,000
Loss of specified business for Previous Year 2018 - 19 10,00,000
Loss to be carried forward as per section 73A read with section 78(1) 7,50,000
- (Rs. 10,00,000 x ¾) to be set off against profits of any specified business in
subsequent year (See Note 4 Below)

2 Cost of Land is not eligible for deduction u/s 35AD. It is assumed that the Cost of
Construction of Building and Machineries is capitalized in the books on the date of
Commencement of Operations
3 The specified business of setting up and operating a cold chain facility would be eligible
for deduction @ 100% of the capital expenditure for AY 2020 - 21
4 Expenditure of capital nature would, however, not include any expenditure incurred on
acquisition of land - Section 35AD. Therefore, in this case, only cost of Rs. 50 lakhs on
construction of building and machinery installed would qualify for deduction under
section 35AD, assuming that such expenditure has been capitalized in the books of account
as on 01.04.2019–(being the date of commencement of operations), since the same was
incurred prior to commencement of business
5 Section 78(1) does not permit carry forward of losses pertaining to the share of a retired or
deceased partner. Therefore, in this case, since one of the four partners have retired on
31.03.2020, his share of loss (Rs. 2,50,000), being 1/4th of Rs. 10 lakhs) for the previous year
2019 - 20 (AY 2021 - 22) cannot be carried forward to the PY 2020 - 21 (AY 2021 - 22)
6 Loss of Rs. 7,50,000 of the specified business can be set off against the income of specified
business. As per the facts of the case, the income from specified business is more than Rs.
7,50,000 and hence, loss has been set off

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CHAPTER - 15
TAXATION OF BUSINESS TRUST
Taxation of Special Entities

Taxation of
Taxation of Taxation of Tax Regime for
Securitisation
Business Trust Investment Fund IFSC
Trust

TAXATION OF BUSINESS TRUST

Business Trust

Introduction to Special Incomes to Exemptions & TDS

Business Trust Business Trust Provisions

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CHAPTER - 16
INTRODUCTION TO BUSINESS TRUST

Business Trust

Introduction to Special Incomes to Exemptions & TDS

Business Trust Business Trust Provisions

BUSINESS TRUST

Business Trust

REIT INVIT

Developmental
Unit holders Business Trust SPV
Properties

OVERVIEW

In order to increase investment in infrastructure and real estate sector, SEBI has notified Real
Estate Investment Trust Regulations and Infrastructure Investment Trust Regulations
providing a framework for registration and regulation of In VITs and REIT
REIT / INVIT is an investment vehicle created for making investments in real estate properties
either directly or through Special Purpose Vehicle (SPV).

No Particulars Explanation
1 SEBI The SEBI had made regulations relating to two new categories of investment
Guidelines vehicles namely, the Real Estate Investment Trust (REIT) & Infrastructure
Investment Trust (INVIT). The income - investment model of such REITs and
Invits (referred to as business trusts) has the following distinctive elements:

No Particulars
1 The trust would raise capital by way of issue of units (to be listed on a
recognized stock exchange) and can also raise debts directly both
from resident as well as non - resident investors
2 The income bearing assets would be held by the trust by acquiring
controlling or other specific interest in an Indian company (SPV) from
the sponsor’

2 Taxation The Income tax is amended to put in place a specific taxation regime for

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 DIRECT TAXATION AY 21 - 22

provisions - providing the way the income in the hands of such trusts is to be taxed and
Section the taxability of the income distributed by such business trusts in the hands of
2(13A) the unit holders of such trusts. Such regime has the following main features:
“Business trust” means a trust registered as –
No Particulars
1 An Infrastructure investment trust (Invit) or
2 A Real estate investment trust(REIT)
The units of which are required to be registered listed on a RSE in
accordance with the regulations made under SEBI Act, 1992 (omitted by
Finance Act 2020, w.e.f. 1.04.2021ie. AY 2021 - 22)
3 Objective of Representations have been received stating the private unlisted Invit
Amendment should be given the same status as public listed Invits with regards to the
tax treatment provided under the Act, SEBI (Infrastructure Investment
Trusts) (Amendment) (Regulations) 2019 vid e NN SEBI / LAD – NRO GN /
2019 / 10 has, interalia, done away with the mandatory listing requirement
for Invits. In light of this the definition of Business trust under this Act, is
required to be aligned with the amended SEBI regulations.
Therefore, S. 2(13A) of the Act to modify the definition of “Business Trust”
so as to do away with the requirements of the units of business trust to be
listed on a RSE

THE WORKING OF BUSINESS TRUSTS IS AS FOLLOWS

No Particulars
1 The trust would raise capital by way of issue of units (to be listed on a RSE) and also can
raise debts directly from resident as well as non – resident Investors
2 The income bearing assets would be held by the trust by acquiring controlling or other
specific interest in an Indian Company (SPV) from the sponsor

Business Trust (REITs or InVITs )

Issue Unit of REIT /

Issue unit or Bonds of InVIT for consideration
REITs / In VIT for cash to other than Cash to
sponsors

Public Buy controlling state from

shareholders & promoters of SPV
(Resident as well as holding Real Estate Properties &
non- resident) Infrasturcture facilities

Cash received can be Give loan to SPV Also invest some

invested in Real Estate holding Real Estate permissible amount
Properties & Infrastructure Properties & in shares , FDRs and
facility yielding income Infrastructure facilities other assets

Notes :-

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AY 21- 22 DIRECT TAXATION
No Particulars
1 Units of business trust are to be compulsorily listed on stock exchange in India.
(Amendment by Finance Act, 2020)
2 For units of business trust, the holding period should be more than 36 months qualify as
long term gains
3 Securities Transactions Tax (STT) in leviable when the units of business trust are sold on
stock exchange

CHARGING SECTION

S. 115UA

S. 115UA (1) S. 115UA(2) S. 115UA(3) S. 115UA(4)

No Section Explanation
1 Income of investor Notwithstanding anything contained in any other provisions of
through business trust this Act, any income distributed by a business trust to its unit
to be taxable in same holders shall be deemed to be of the same nature and in the same
manner as taxable in proportion in the hands of the unit holder as it had been received
hands of business trust by, or accrued to, the business trust.
- 115UA(1)
2 Business trusts to be Subject to the provisions of section 111A, 112 and 112A, the total
taxed at MMR - income of a business trust shall be charged to tax at the Maximum
115UA((2) Marginal Rate (MMR).
3 Income of nature If in any previous year, the distributed income or any part thereof,
referred u/s 10(23FC) / received by a unit holder from the business trust is of the nature
10(23FCA) to be taxed referred to in sec. 10(23FC) or 10(23FCA) then, such distributed
in hands of investor - income or part thereof shall be deemed to be income of such unit
115UA(3) holder and shall be charged to tax as income of the previous year.

However, dividend received from SPV distributed to unit

holders shall not be taxable in the hands of unit holders if SPV
has not opted for section – 115BAA
4 Prescribed statements Any person responsible for making payment of the income
to be furnished - distributed on behalf of a business trust to a unit holder shall
115UA(4) furnish a statement to the unit holder and the prescribed authority,
within such time and in such form and manner as may be
prescribed, giving the details of the nature of the income paid
during the previous year and such other details as may be
prescribed.

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SUMMARY: -

S. 115UA

Taxability in the hands of Taxability in the hands of

Investors business Trust

115UA(3) - Interest
from SPV or
115UA (4) -
115 UA (1) - Same Rental Income
115UA(2) - Other Prescribed
nature & in same from assets
Incomes will be statement to be
propotion to directly owned by
taxaed at MMR furnished by
Investor REIT will be
Businerss Trust
taxable in the
hands of Investors

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CHAPTER - 17
SPECIAL INCOMES TO REIT / INVIT

REIT / INVIT

Introduction to Special Incomes to Exemptions & TDS

REIT / INVIT REIT / INVIT Provisions

INCOME OF BUSINESS TRUST

Income of Business Trust

Rental
Dividend Income
Interest Income Other
Income from Capital Gains from
from SPV Income
SPV Directly
owned DP

TOPICS TO BE DISCUSSED

No Particulars
1 Interest income of business trust from SPV
2 Interest payments to Non – resident lenders on ECBs by the business trust
3 Dividend received by the business trust from SPV
4 Capital gain on disposal of Assets by the business trust
5 Rental Income arising to REIT from real estate property directly held by it
6 Income of business trust other than Interest & Dividend from SPV & CG subject to tax u/s
112 / 111A
7 Transfer of Listed units of Business Trust by Unit Holders
8 Exchange of Shares in SPV by Sponsor for units of business Trust

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I - INTEREST

Interest

Interest recived by BT Interest paid by BT to

from SPV Unit holders

INTEREST INCOME OF BUSINESS TRUST FROM SPV

Tax Implications in the hands of the Business Trust & Unit holders and TDS implications in
the hands of the SPV & Business Trust
Pass - through status for Interest received by Business Trust from SPV.
No Section Tax and TDS Implications
1 10(23FC) Interest income is not taxable in the hands of the Business Trust; and
2 194A(3)(xi) SPV is not required to deduct Tax at source on Interest paid to Business Trust.
Tax consequences on distribution of such Income by the Business Trust to the
Unit – holders
3 115UA(3) The distributed income or any part thereof, received by a unit holder from the
REIT, which is in the nature of interest received or receivable from a SPV is
deemed as income of unit holder.
4 115A(1)(iiac) Interest income taxable in the hands of the unit holders –
No Particulars
1 @ 5% in case of Unit holders, being Non - Corporate Non - residents or
Foreign Companies and
2 At normal rates of tax, in case of Resident unit holders

5 194LBA Business Trust to deduct Tax at source on Interest component of Income

distributed to unit holders at the time of payment or credit of income to the
account of the unit holder, whichever is earlier:
No Particulars
1 @ 5% in case of Unit holders, being Non - Corporate Non - residents or
Foreign Companies and
2 @ 10% in case of Resident unit holders. (7.5% if credit of income is
during the period 14/5/2020 to 31/3/2021

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SUMMARY: -

Interest Received by BT from SPV

Taxability
TDS Tax Rate
Exemptions in the
Compliences Applicable
hands of

Exmpted in
Unit No TDS for
the hands Non -
holders u/s SPV u/s TDS Resident
of BT u/s resident
115UA(3) 194A Compliance
10(23FC)
for BT u/s
194LBA@ the
rate of 5% or
10% as the - S. 115A
Normal
case may be
Ratwes of - Tax rate @
Tax 5%

INTEREST PAYMENTS TO NR - LENDERS ON ECBS BY THE BUSINESS TRUST

Interest

Interest recived by BT Interest paid by BT to

from SPV Unit holders

No Section Tax and TDS Implications

1 TDS An Indian company or a business trust paying interest income to a non-
implications in resident, not being a company, or to a foreign company is liable to deduct
the hands of TDS @ 5% (such interest would attract tax in the hands of the non-
Business Trust resident lenders @ 5% as per section 115A)
- S. 194LC
2 The above Interest in respect of money borrowed by the Indian company or the
Concessional Business Trust in Foreign currency from a source outside India –
rate of TDS @ No Particulars
5% is applicable a Under a Loan agreement at any time on or after 1.7.2012 but
to before 30.6.2023
b By issuing of Long - term infrastructure bonds between 1.7.2012
to 1.10.2014
c By issuing long term bond including Long - term infrastructure
bonds between 1.10.2014 and 30.6.2023
d By way of issue of rupee denominated bond on or before
30.6.2023

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3 Exception However, tax is required to be deducted @4% in respect of monies

borrowed by it from a source outside India by way of issue of any-long
term bond or rupee denominated bond between 1.4.2020 and 30.6.2023,
which is listed only in a recognized stock exchange located in any IFSC
(such interest would attract tax in the hands of the non-resident lenders @
4% as per section 115A)

II - DIVIDEND RECEIVED BY THE BUSINESS TRUST FROM SPV

Tax implications in the hands of the SPVs, Business Trust and Unit holders and TDS
implications in the hands of the SPV & business trust
No Section Tax and TDS Implications
1 Pass through  Dividend received or receivable from a special purpose vehicle, by
status for the business trust would be exempt in its hands;
dividend received  Consequently, SPV is not required to deduct tax at source on interest
by business trust paid to business trust
from SPV:
- 10(23FC)(b)
2 Tax consequences The distributed income or any part thereof, received by a unit holder
on distribution of from the REIT, which is in the nature of dividend received or receivable
such income by from a SPV, which has exercised option u/s 115BAA, is deemed as
the business trust income of unit holder.
to the unit
holders:
- 115UA(3)
3 10(23FD) Dividend income taxable in the hands of the unit holders-
No Particulars
115(1)(a)(iiac) 1 @ 10% in case of unit holders, being non-corporate non-residents
or foreign companies; and
2 At normal rates of tax, in case of resident unit holders
However, TDS provisions will not apply on distribution of dividend
income (Receivable by a business trust from a SPV) to unit holders from
SPV has not exercised the option u/s 115BAA
4 194LBA Business trust to deduct tax at source on dividend component of income
distributed to unit holders
No Particulars
1 @ 10% in case of unit-holders, being non-corporate non-residents
or foreign companies; and
2 @ 10% (@ 7.5% Applicable from 14.5.2020 to 31.3.2021)
However, in a case where SPV has not exercised option u/s 115BAA, no
tax is required to be deducted at source by the business trust on
dividend income distributed by it to the unitholders

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SUMMARY:-

Dividend Received by BT from SPV

Taxability in Tax Rate

Exemptions TDS Compliences
the hands of Applicable

Exmpted in TDS Compliance

Unit holders
the hands of for BT u/s Non -
u/s Resident
BT u/s 194LBA@ the rate resident
115UA(3)
10(23FC) of 10%

Normal Rates - S. 115A

of Tax - Tax rate @ 10%

ANALYSIS OF DIVIDEND RECEIVED

Dividend recieved from

SPV Company other than SPV

SPV exercises option

SPV does not
to pay tax under
exercises the option
special regime u/s
u/s 115BAA
115BAA

Such Dividend is Such Dividend is Such dividend shall be tax

Exempt in the hands Exempt in the hands able in the hands of
of Business trust - of Business trust - Business trust shall pay tax
S. 10(23FC) S. 10(23FC) at MMR. Such dividend is
exempt in the hands of unit
holders

Such dividend Such dividend shall

however, shall be be exempt in the
taxable in the hands hands of unit
o f unit holders - holders as well -
115UA(3) S. 10(23FD)

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III - CAPITAL GAINS ON DISPOSAL OF ASSETS BY BUSINESS TRUST

Tax implications in the hands of the Business Trust and Unit holders
No Section Tax and TDS Implications
1 115UA(2) Capital Gains is chargeable at the applicable rates in the hands of the Business
Trust:
 In case of Long term Capital Gains, the provisions of Section 112 would
apply,
 In case of Short term Capital Gains on sale of listed shares, the provisions of
Section 111A would apply;
 Short term Capital Gains other than the gains subject to tax under Section
111A would be subject to Maximum marginal rate.
2 10(23FD) If such Capital Gains are further distributed to unit - holders, the component
attributable to Capital Gains would be exempt in the hands of the unit holders.

SUMMARY: -

Capital Gain for BT

Taxability in the Tax Rate

Exemptions TDS Compliences
hands of Applicable

Exempted in the
No TDS * Tax Rates As
hands of UH u/s BT u/s 115UA(2)
Compliances below
10(23FD)

Tax Rates for Capital

Gain

Capital Gains from Sale of Capital Gains from sale of

properties shares

LTCG STCG LTCG STCG

Taxable at
Taxable at 20% Taxable at 10%
Taxable at MMR Concessional rate of
u/s 112 u/s 112A
15% u/s 111A

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IV - RENTAL INCOME ARISING TO REIT FROM REAL ESTATE PROPERTY DIRECTLY HELD BY IT
No Section Tax and TDS Implications
1 Rental Income of Any income of a Business Trust, being a REIT, by way of Renting or
REIT from directly Leasing or letting out any Real Estate Asset owned directly by such
owned Real Estate Business Trust is exempt in the hands of the Business Trust
Asset – S. 10(23FCA)
2 Distributed income The distributed income or any part thereof, received by a unit holder
received by unit from the REIT, which is in the nature of Income by way of Renting
holder – S. 115UA(3) or Leasing or letting out any Real Estate Asset owned directly by
such REIT is deemed as income of unit holder.
3 Distribution by REIT
to unit holders of No Particulars
rental income from 1 TDS @ 10% in case of distribution to a resident unit holder
Real Estate Assets (@7.5% in respect of payment made during the period
directly owned by it between 14.5.2020 to 31.3.2021)
- S. 194LBA 2 TDS at rates in force in case of distribution to a Non -
Resident unit holder
4 Rental Income Where the income by way of rent is credited or paid to a Business
received or credited Trust, being a REIT, in respect of any Real Estate Asset, owned
to a REIT – S. 194 – I directly by such Business Trust, tax is not deductible at source

SUMMARY: -

Rental Income to BT

Taxability in TDS Tax Rate

Exemptions
the hands of Compliences Applicable

Exmpted
Unit No TDS TDS
in the
holders compliances Compliance Non -
hands of Resident
u/s for DP u/s for BT u/s resident
BT u/s
115UA(3) 194 I 194LBA@
10(23FCA)
the rate of
10% or
Rate in Normal
Rate in
force Rates of
force
Tax

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V - INCOME OF BUSINESS TRUST (OTHER THAN INTEREST AND DIVIDEND FROM SPV,
RENTAL INCOME FROM REAL ESTATE PROPERTY)
No Section Tax and TDS Implications
1  Long –term capital gains chargeable to tax u/s 112 – 20%
115UA(2)  Short term capital gains chargeable to tax u/s 111A – 15%
 Any other income of the trust is chargeable to tax at the maximum marginal
rate (ie., @42.744%)
2 10(23)FD The above income distributed to unit holders would be exempt in their hands.

SUMMARY: -

Other Income to BT

Taxability in the Tax Rate

Exemptions TDS Compliences
hands of Applicable

Exmpted in the
No TDS
hands of UH u/s BT u/s 115UA(2) Taxed at MMR
compliances
10(23FD)

REIT - SUMMARISED PROVISIONS

No Taxability in the hands

Income Taxability in the hands of Business Trust
of Unit Holder
1 Rental Income Exempt u/s 10(23FCA)
from letting out Liable to deduct tax on such distributed income
of real estate u/s 194LBA-
asset owned  TDS @ 10% in case of distribution to a
directly by resident unit holder (@7.5% in respect of Taxable u/s 115UA(3)
such business payment made during the period between
trust 14.5.2020 to 31.3.2021)
 TDS at rates in force in case of distribution
to a Non - Resident unit holder
2 Interest Exempt u/s 10(23FC)
received or Liable to deduct tax on such distributed income
receivable from u/s 194 LBA –
SPV  TDS @ 10% in case of distribution to a
resident unit holder (@7.5% in respect of
Taxable u/s 115UA(3)
payment made during the period between
14.5.2020 to 31.3.2021)
 5% in case of unitholders, being a non-
corporate non – Residents or foreign
companies
3 Dividend Exempt u/s 10(23FC) Taxable u/s 115UA(3)
received by Liable to deduct tax on such distributed income in case where SPV has
business trust u/s 194 LBA in case where SPV has exercised exercised option u/s

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AY 21- 22 DIRECT TAXATION
from SPV option u/s 115BAA – 115BAA. However, in
 @ 10% in case of a resident unit holder case where SPV has not
(@7.5% in respect of payment made during exercised option u/s
the period between 14.5.2020 to 31.3.2021) 115BAA, dividend
 10% in case of unitholders, being a non- income would be
corporate non – Residents or foreign exempt in the hands of
companies the unit-holders.
4 Capital gains LTCG - Taxed u/s 112
on disposal of STCG - If covered u/s 111A: 15% else - MMR -
Exempt u/s 10(23FD)
assets by Sec 115UA(2)
business trust
5 Any other Taxed @ MMR - Section 115 UA(2)
Exempt u/s 10(23FD)
income

TRANSFER OF LISTED UNITS OF BUSINESS TRUST BY UNIT HOLDERS

No Section Tax and TDS Implications

1 2(42A) Tax Implications in the hands of unit holders :
 STT leviable on trading of Listed units on a Recognized Stock Exchange
 The period of holding of units of Business Trust to qualify as "Long Term,
Capital Assets" is more than 36 Months.
2 112A Long - term Capital Gains up to Rs 1 Lakh would be exempt in the hands of the
unit - holders; Long term capital gain exceeding Rs 1 lakh would be taxable@
10% plus surcharge, if applicable, and health and education Cess @ 4%
3 111A Short - term Capital Gains would be subject to concessional rate of tax @ 15%
(plus surcharge, if applicable, and Cess @ 4%)

SUMMARY :-

Transfer of Listed Units

of BT by Unit Holders

STCG covered u/s LTCG covered u/s

111A 112A

Taxed at 10% in
Taxed at 15% excess of Rs.
1,00,000

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EXCHANGE OF SHARES IN SPV BY SPONSOR FOR UNITS OF BUSINESS TRUST

No Section Tax and TDS Implications
1 Tax Implications in the hands of the Sponsor:
47(xvii) Such exchange is not treated as a transfer. Hence Taxability of Capital Gains on
such transfer deferred to the time of disposal of units by the sponsor.

Being shares of To a BT in
Transfer of CA
SPV exchange of units

2 112A &  The sponsor would get the same tax treatment on offloading of units under
111A an Initial Offer on Listing of units as it would have been available had he
offloaded the underlying shareholding through an IPO.
 STT shall be levied on sale of such units of Business Trust which are
acquired in lieu of shares of SPV, under an initial offer at the time of listing
of units of Business Trust in the like manner as in the case of sale of
unlisted Equity Shares under an IPO.
 The benefit of concessional tax regime of Tax @15% on STCG and @ 10% on
LTCG exceeding Rs 1 Lakh under Section 112A shall be available to the
sponsor on sale of units received in lieu of Shares of SPV subject to levy of
STT.
3 49(2AC) For computing Capital Gains in the hands of the sponsor, cost of acquisition of
units would be deemed to be the cost of acquisition of shares to the sponsor;
4 2(42A) For computing Capital Gains in the hands of the sponsor, the period of
holding of units to include the period of holding of shares for determining
whether the Capital Gains is Long - Term or Short - Term.

SUMMARY :-

Transfer of Units of BT by UH
(Acquired in exchange)

COA POH

Cost of the shares of POH from shares of

SPV as per S. 49(2AC) SPV as per S. 2(42A)

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CHAPTER - 18
EXEMPTIONS & TDS PROVISIONS
REIT / INVIT

Introduction Special Exemptions &

to REIT / Incomes to TDS
INVIT REIT / INVIT Provisions

No Particulars Explanation
1 Exemptions of Any income of business trust by way of:
certain Incomes of No Particulars
Business Trust- a Interest from Special Purpose Vehicle (SPV)
S. 10 (23FC) b Dividend from Special Purpose Vehicle (SPV)
Shall be exempt from tax.
 REIT Explanation:
 INVIT For the purposes of this clause, the expression ‚special purpose
vehicle‛ means an Indian company in which the business trust holds
controlling interest
2 Exemption of Any income of a business trust, BEING A REAL ESTATE
rental Income of INVESTMENT TRUST, by way of renting or leasing or letting out any
Real Estate real estate asset owned directly by such business trust shall be exempt
Investment Trust - from tax.
S. 10(23FCA) Note:
 REIT Rental income of Infrastructure Investment Trust is not exempt
 INVIT
3 Exemption of Any distributed income, referred to in section 115UA, received by a
Income of unit unit holder from the business trust, not being that proportion of the
holder of Business income, which is of the same nature as the income referred to in section
Trust - 10(23FC) or section 10(23FCA), shall be exempt from tax.
S. 10(23FD) However, if SPV has exercised the option under section 115BAA,
then dividend from SPV shall be taxable in hands of unit holders of
the business trust. If SPV has not opted for section 115BAA, then
dividend from SPV shall not be taxable in hands of unit holder

SUMMARY :-

Exemptions

In the hands of BT In the hands of UH

S. 10(23FCA) - Only
S. 10(23FC) - For BT S. 10(23FD)
for REIT

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CAPITAL GAINS

No Particulars Explanation
1 Exemption of There will be no capital gains on any transfer of a capital asset, being share
capital gain in of a special purpose vehicle to a business trust in exchange of units allotted
hands of by that trust to the transferor.
shareholders of Explanation – For the purposes of this clause, the expression ‚special
SPV - purpose vehicle‛ means an Indian company in which the business trust
S. 47(xvii) holds controlling interest.
2 Cost of Where the capital asset, being a unit of a business trust, became the
acquisition of property of the assesse in consideration of a transfer as referred to in
units in hands section 47(xvii), with the cost of acquisition of the asset shall be deemed to
of shareholders be the cost of acquisition to him of the share referred to in the said clause
of SPV -
S. 49(2AC)
3 Period of For computing the period of holding, in the case of a capital asset, being a
holding - unit of a business trust, allotted pursuant to transfer of share or shares as
Section 2(42A) referred to in section 47(xvii), there shall be included the period for which
the share or shares were held by the assessee

TAX RATES

No Particulars Explanation
1 Tax on short- Where the total income of an assesse includes any income chargeable
term capital under the head ‚Capital Gains‛ arising from the transfer of a short - term
gains in certain capital asset, being an
cases - S.111A  equity share in a company or a
 unit of an equity oriented fund or
 unit of a business trust and-
No Particulars
1 The transaction of sale of such equity share or unit is entered into
on or after 1.10.2004 and
2 Such transaction is chargeable to securities transaction tax

the tax payable by the assesse on the total income shall be the aggregate of
No Particulars
1 the amount of income-tax calculated on such short-term capital
gains at the rate of 15%; and
2 the amount of income-tax payable on the balance amount of the
total income as if such balance amount were the total income of the
assessee

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AY 21- 22 DIRECT TAXATION
2 Tax on long-
term capital No Particulars
gains in certain 1 Notwithstanding anything contained in section 112, the tax payable
cases by an assesse on his total income shall be determined in accordance
(added by with the provisions of sub-section (2), if
finance No Particulars
act,2018) – 1 The total income includes any income chargeable under the
S. 112A head ‚capital gains”
2 The capital gains arise from the transfer of a 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
3 Securities transaction tax has, -
 In a case where the long term capital asset is in the
nature of an equity share in a company, been paid on
acquisition and transfer of such capital asset; or
 In a case where the long term capital asset is in the
nature of a unit of an equity oriented fund or a unit of
a business trust, been paid on transfer of such capital
asset

2 The tax payable by the assesse on the total income referred to in

sub-section (1) shall be aggregate of –
No Particulars
1 The amount of income-tax calculated on such long-term
capital gains exceeding one lakh rupees at the rate of
10%; and
2 The amount of income-tax payable on the total income as
reduced by the amount of long-term capital gains referred
to in sub-section (1) as if the total income so reduced were
the total income of the assessee

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TDS

No Particulars Explanation
1 TDS on interest No TDS shall be deducted when SPV pays interest referred to in section
- section 194A 10(23FC) to business trust.
2 TDS on rent - No deduction of tax at source shall be made under this section where the
section 194-I income by way of rent is credited or paid to a business trust, being a real
estate investment trust, in respect of any real estate asset, referred to in
section 10(23FCA), owned directly by such business trust
3 Tax deduction
at source - Sub
Particulars
S. 194LBA section
1 Where any distributed income referred to in section 115UA,
being of the nature referred to in section 10(23FC) or section
10(23FCA),
 is payable by a business trust to its unit holder being a
resident,
 the person responsible for making the payment shall at the
time of credit of such payment to the account of the payee
or at the time of payment thereof
 in cash or by the issue of a cheque or draft or by any other
mode, whichever is earlier,
 deduct income-tax thereon at the rate of 10% (the rate shall
be 7.5% where the payment is to be made or credited
during the period 14TH May,2020 to 31st March, 2021)
Note: -
such interest, dividend and rent shall be taxable in the
hands of resident at the normal tax rates applicable to him)

2 Where any distributed income referred to in section 115UA,

being of the nature referred to in section 10(23FC),
 Is payable by a business trust to its unit holder, being a non
- resident or a foreign company,
 The person responsible for making the payment shall at the
time of credit of such payment to the account of the payee
or at the time of payment thereof in cash or by the issue of a
cheque or draft or by any other mode, whichever is earlier,
 Deduct income-tax thereon at the rate of 5% in case of
interest from SPV and 10% in case of dividend from SPV.
Note:
Such interest is taxable in the hands of non-resident or foreign
company @5% and dividend@20% under section115A)
2A Nothing contained in (1) &(2) above shall apply in respect of
income of nature referred to in 10(23FC)(b) if the SPV has not
exercised the option under section115BAA.
 Accordingly, where the SPV has not exercised the option
u/s 115BAA, then the dividend from SPV is exempt in
hands of business trust as well as unit holder.
 If business trust distributes the dividend received from SPV
which has not exercised the option u/s 115BAA, then no
CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 221
AY 21- 22 DIRECT TAXATION
TDS shall be deducted since the dividend is exempt in
hands of unit holders.
 This shall apply in both cases, i.e., where such dividend is
distributed to residents as well as non-residents including a
foreign company.
3 Where any distributed income referred to in section 115UA,
being of the nature referred to in section 10(23FCA),
 Is payable by a business trust to its unit holder, being a
non-resident, or a foreign company, the person responsible
for making the payment shall at the time of credit of such
payment to the account of the payee or at the time of
payment thereof in cash or by the issue of a cheque or draft
by any other mode, whichever is earlier,
 Deduct income-tax thereon at the rates in force.
Note:
Such rental income is taxable in hands of non-resident/foreign
company at the normal rates and TDS shall be deducted at
normal tax rates as per section 195.
.

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QUESTIONS FOR PRACTICE

Illustration 1
KDS Realty Trust, a business trust registered under SEBI (Real Estate Investment Trusts)
Regulations, 2014 provides the following particulars of its income for the PY 2020 - 21
No Particulars
1 Rental income Rs. 3 crores, from the directly owned real estate assets
2 Short term capital gain Rs. 1. 5 crores, on sale of listed shares of Brahma Ltd, an Indian
company in which KDS Realty Trust holds controlling interest through holding 60% of the
shareholding of Brahma Ltd
3 Short term capital gain Rs. 2 crores, on sale of developmental properties
4 Interest Rs. 1 crore, received from investments in unlisted debentures of real estate
companies
5 Dividend Rs, 3.5crores from. Brahma Ltd

Other Information
KDS Realty Trust has distributed Rs. 10 crore to its unit holders in the previous year 2020 – 21 by
30.4.2020
Discuss the tax implications (including TDS implications) based on the above income earned by
KDS Realty Trust, both in the hands of KDS Realty Trust and its unit holders in the previous year
2020 - 21.

Answer
Notes on tax implication in the hands of KDS Realty Trust and its unit holder
Tax treatment in the hands of
No Particulars
KDS Realty Trust (REIT) Unit Holders
1. Rental Income of Any income of business trust, being a The distributed income or
Rs. 3 Crores of REIT, by way of renting or leasing or any part thereof, received by
REIT from letting out any real estate asset owned a unit holder from the REIT,
directly owned directly by such business trust is which is in the nature of
real estate assets. exempt in its hands as per section income by way of renting or
10(23FCA). Consequently, the rental leasing or letting out any real
income is exempt in the hands of REIT estate asset owned directly
by such REIT is deemed
As per section 194LBA, REIT has to income of the unit holder as
deduct tax @ 10% in case of distribution per section 115UA(3).
of such rental income component to a Therefore, such income is
resident unit holder and at rates in taxable in their hands. The
force in case of distribution to a non - component of rental income
resident unit holder. received from REIT in the
hands of each unit holder
would be determined in the
proportion of 3/11 by virtue
of section 115UA(1).

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2. Short Term As per section 115UA(2), the total Any distributed income
capital gains of income of a business trust shall be referred to in section 115UA,
Rs. 1.5 crore on chargeable to tax at the maximum to the extent it does not
sale of listed marginal rate, subject to the provisions comprise of interest referred
shares of Brahma of sections 111A, 112 and 112A. to in section 10(23FC) and
Ltd. rental income referred to in
Accordingly, KDS Realty Trust is liable
section 10(23FCA), received
to tax @ 15% under section 111A in
by unit holders is exempt in
respect of short - term capital gains on
their hands under section
sale of listed shares of special purpose
10(23FD). Hence, the short -
vehicle i.e Brahma Ltd.
term capital gain component
No tax is deductible at source on the of income will not be taxable
short term capital gain component of in the hands of the unit
income distributed by the REIT to the holders.
unit holders.
3. Short Term Further, the short term capital gain of There would be no tax
capital gains of Rs. 2 crore on sale of developmental liability on the short term
Rs. 2 crore on sale properties is taxable at Maximum capital gain component of
of developmental Marginal Rate, in the hands of the KDS income distributed to unit
properties Realty Trust as per section 115UA(2). holders by virtue of the
exemption contained in
No tax is deductible at source on the
section 10(23FD).
short term capital gain component of
the income distributed by the REIT to
the unit holders.
4. Interest of Rs. 1 Interest income received in respect of No tax liability on interest
crore received in investment in unlisted debentures of component of income
respect of real estate companies is taxable at the distributed to unit holders in
investment in Maximum Marginal Rate, in the hands their hands by virtue of
unlisted of the KDS Realty Trust as per section section 10(23FD).
debentures of 115UA(2). No tax is deductible at
real estate source on the interest component of the
companies income is distributed to the unit holders
by the REIT.
5. Dividend income There would be no tax liability in the No tax liability on the
of Rs. 3.50 crore hands of the business trust as the dividend component of
from Brahma Ltd. dividend income is exempt in the hands income distributed to unit
of business trust under section holders in their hands by
10(23FC). Brahma ltd shall not deduct virtue of section 10(23FD) if
TDS on dividend paid to KDS reality Brahma ltd does not opt for
trust. section115BAA. However,
where Brahma ltd opts to pay
No tax is deductible at source on the
tax as per sec 115BAA the
dividend component of the income
dividend component shall be
distributed to the unit holders by the
taxable-
REIT if Brahma ltd has not opted for
 @20% in case the unit
section 115BAA. However, where
holder is a non-resident
Brahma ltd opts to pay tax as per
 @slab rate in case the unit
section 115BAA, tax is to be deducted
holder is a resident.
by KDS trust @10% on such component
distributed to resident as well as NR

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 DIRECT TAXATION AY 21 - 22

Illustration 2
A Business Trust, Registered under SEBI (Real Estate Investment Trusts) Regulations, 2014, gives
particulars of its Income for the P.Y.2020 - 21:
No Particulars Amount
1 Interest Income from Beta Ltd. 4 Crore
2 Dividend Income from Beta Ltd. 2 Crore
3 STCG on Sale of Listed Shares of Beta Ltd. 1.5 Crore
4 STCG on Sale of Developmental Properties 1 Crore
5 Interest received from Investments in unlisted Debentures of Real Estate Com. 10 Lakhs
6 Rental Income from directly owned Real Estate Assets 2.50 Crore

Beta Ltd. is an Indian Company in which the Business Trust holds 70% of shareholding.
Discuss the Tax consequences of the above income earned by the Business Trust in the hands of
the Business Trust and the unit holders, assuming that the business trust has distributed Rs. 10
Crore to the unit holders in the P.Y.2020-21. Assume that the above income has been distributed
from June 2020 to March 2021 and Beta ltd does not opt to pay tax u/s 115BAA

Answer
Tax consequences in the hands of the business trust and its unit holders
No Particulars Explanation
1 Interest income There would be no tax liability in the hands of business trust due to pass
of Rs. 4 crore - through status enjoyed by it under sub - clause (a) of section 10(23FC) in
from Beta Ltd respect of interest income from Beta Ltd., being the special purpose
vehicle. Therefore, Beta Ltd. is not required to deduct tax at source on
interest payment to the business trust. The distributed income or any part
thereof, received by a unit holder from the REIT, which is in the nature
of interest income received or receivable from a SPV is deemed income of
the unit holder as per section 115UA(3)
The business trust has to deduct tax at source under section 194LBA –
No Particulars
1 @ 7.5%, on interest component of income distributed to resident
unit holders; and
2 @ 5%, on interest component of income distributed to non -
corporate non - resident and foreign companies unit holders
The interest component of income received from the business trust in the
hands of each unit - holder would be determined in the proportion of
4/11.1, by virtue of section 115UA (1)
2 Dividend The dividend distributed by the SPV to the business trust is exempt by
income of Rs. 2 virtue of section 10(23FC), Any distributed income referred to in section
crore from Beta 115UA, which is in the nature of dividend income received or receivable
Ltd. from SPV, in a case where SPV has exercised the option u/s 115BAA, is
taxable in the hands of unit holders by virtue of section 10(23FD).
However, since Beta ltd being a SPV does not opt for section 115BAA,
dividend component is exempt in the hands of the unit holders.
Consequently, business trust is not required to deduct tax at source on
the dividend component distributed to the unit holders.

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3 Short - term As per section 115UA(2), the business trust is liable to pay tax @ 15%
capital gains of under section 111A in respect of short - term capital gains on sale of
Rs. 1.50 crore on listed shares of special purpose vehicle. There would, however, be no tax
sale of listed liability on the capital gain component of income distributed to unit
shares of Beta holders, by virtue of the exemption contained in section 10(23FD)
Ltd.
4 Short - term It is taxable at maximum marginal rate of 42.744% in the hands of the
capital gains of business trust as per section 115UA(2). There would be no tax liability in
Rs. 1 crore on the hands of the unit holders on the capital gain component of income
sale of distributed to them, by virtue of the exemption contained in section
developmental 10(23FD)
properties
5 Interest of Rs. Such interest is taxable @ 42.744%, being the maximum marginal rate, in
10 lakh received the hands of the business trust, as per section 115UA(2). However, there
in respect of would be no tax liability in the hands of the unit holders on the interest
investment in component of income distributed to them, by virtue of section 10(23FD)
unlisted
debentures of
real estate
companies
6 Rental income Any income of a business trust, being a REIT, by way of renting or
of Rs. 2.50 crore leasing or letting out any real estate asset owned directly by such
from directly business trust is exempt in the hands of the trust as per section
owned real 10(23FCA).
estate assets Where the income by way of rent is credited or paid to a business trust,
being a REIT, in respect of any real estate asset held directly by such
REIT, no tax is deductible at source under section 194 - I.
The distributed income or any part thereof, received by a unit holder
from the REIT, which is in the nature of income by way of renting or
leasing or letting out any real estate asset owned directly by such REIT
is deemed income of the unit holder as per section 115UA(3). The
business trust has to deduct tax at source @ 7.5% under section 194LBA in
case of distribution to a resident unit holder and at rates in force in case
of distribution to a non - resident unit holder.
The rental income component received from the business trust in the
hands of each unit - holder would be determined in the proportion of
2.5/11.1, by virtue of section 115UA(1)

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 DIRECT TAXATION AY 21 - 22

CHAPTER - 19
ASSESSMENT OF INVESTMENT FUND
Taxation of Special Entities

Taxation of
Taxation of Taxation of Tax Regime for
Securitisation
Business Trust Investment Fund IFSC
Trust

TAXATION OF INVESTMENT F UND - OVERVIEW

Taxation of IF

Provisions
Charging for Set - off & Return of
Exemptions TDS
Section Carry Income
forward

Unit holders Investment Fund Various Investments

CHARGING SECTION - 115UB

Charging section -
115UB

Taxability in the Taxability in the

Procedural Funds
hands of UH hands of IF

I - TAXABILITY IN THE HANDS OF UNIT HOLDER

Charging section -
115UB

Taxability in the Taxability in the

Procedural Funds
hands of UH hands of IF

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No Section Explanation
1 Tax liability of the Any income accruing or arising to, or received by, a person, being a
unit holders - unit holder of an investment fund, out of investments made in the
S. 115UB(1) investment fund shall be chargeable to income - tax in the same manner
as if it were the income accruing or arising to, or received by, such
person had the investments, made by the investment fund, been made
directly by him.
Note:
Income in the hands of the non - resident investor from off shore
investments routed through Category I or Category II AIFs, being a
deemed direct investment outside India by the non - resident
investor, is not taxable in India under sec. 5(2) of the Act – Circular
No. 14 / 2019, dated 3 - 7 - 2019.
2 Nature of income The income paid or credited by the investment fund shall be deemed to
in the hands of be of the same nature and in the same proportion in the hands of the
unit – holder – unit holder as if it had been received by, or had accrued or arisen to, the
S. 115UB(3) investment fund during the PY

II - TAXABILITY IN THE HANDS OF INVESTMENT FUND

Charging section -
115UB

Taxability in the Taxability in the

Procedural Funds
hands of UH hands of IF

No Particulars Explanation
1 Tax rates of The total income of the investment fund is chargeable to tax as follows:
investment fund –
S. 115UB(4) Investment fund Rate of tax
A company or a firm Rate or rates specified in the Finance Act
of the relevant year
Other than a company Maximum marginal rate i.e. 42.744%
or a firm

2 Non - Income paid by an investment fund to its unit holders would not be
applicability of subject to DDT under chapter XII - D or tax on distributed income
DDT – under chapter XII - E.
S. 115UB(5)

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 DIRECT TAXATION AY 21 - 22

III - PROCEDURL ASPECTS

Charging section -
115UB

Taxability in the Taxability in the

Procedural Funds
hands of UH hands of IF

No Particulars Explanation
1 Income to be taxed If the income accruing or arising to, or received by, an investment fund,
on due basis - during a previous year is not paid or credited to the unit - holders, it
S. 115UB(6) shall be deemed to have been credited to the account of the unit -
holder on the last day of the previous year in the same proportion in
which such person would have been entitled to receive the income had
it been paid in the previous year.
2 Prescribed The person responsible for crediting or making payment of the income
statements to be on behalf of an investment fund and the investment fund are required
furnished - to furnish, within the prescribed time, to the person who is liable to tax
S. 115UB(7) in respect of such income and to the prescribed income - tax authority a
statement in the prescribed form and verified in the prescribed manner.
Such statement should give details of the nature of the income paid or
credited during the previous year and such other relevant details as
may be prescribed.
3 Income taxed in It has been clarified that any income which has been included in the
the year of accrual total income of the unit holder of an investment fund in a previous
not taxable again year, on account of it having accrued or arisen in the said previous
in the year of year, would not be included in his total income in the previous year in
payment - which such income is actually paid to him by the investment fund.
Explanation 2
below section
115UB

Meaning of certain items – Explanation 1

No Term Meaning
1 Investment Any fund established or incorporated in India in the form of a trust or a
fund company or a limited liability partnership or a body corporate which has been
granted a certificate of registration as a Category I or a Category II Alternative
Investment Fund and is regulated under the SEBI (Alternative Investment
Fund) Regulations, 2012, made under the SEBI Act, 1992.
2 Trust A trust established under the Indian Trusts Act, 1882or under any other law
for the time being in force.
3 Unit Beneficial interest of an investor in the investment fund or a scheme of the
investment fund and shall include shares or partnership interests.

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II - EXEMPTIONS

Taxation of IF

Provisions
Charging for Set - off & Return of
Exemptions TDS
Section Carry Income
forward

EXEMPTIONS

Exemptions

S. 10(23FBA) S. 10(23FBB)

No Particulars Explanation
1 Exemption of income The scheme provides for exemption of income, other than income
of investment fund chargeable under the head ‚Profits and Gains of Business or
other than income Profession‛, in the hands of investment fund. The income in the
under the head profits nature of profits and gains of business or profession shall be
and gains from taxable in the hands of the investment fund.
business and
profession
- S. 10(23FBA)
2 Exemption to unit Income accruing or arising to, or received by, a unit holder of an
holder of income investment fund, being that proportion of income which is of the
under the head PGBP same nature as income chargeable under the head ‚PGBP‛ at
of investment fund investment fund level, shall be exempt under section 10(23FBB).
- S. 10(23FBB)

Income of Investment Fund

Other than Business

Business Income
Income

Exempted in the Exempt in the

Taxable in the Taxable in the
hands of UH u/s hands of IF u/s
hands of IF hands of UH
10(23FBB) 10(23FBA)

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 DIRECT TAXATION AY 21 - 22

III - TDS

Taxation of IF

Provisions
Charging for Set - off & Return of
Exemptions TDS
Section Carry Income
forward

No Particulars Explanation
1 TDS in respect of Investment fund to deduct tax at source on any income (other than the
income of units of proportion of income which is of the same nature as income chargeable
investment fund under the head ‚profits and gains from business and profession‛ which
to unit holders is taxable at investment fund level) payable by the investment fund to a
- S. 194LBB unit holder.
No Particulars
1 @ 10% in case of payable to a resident unit holder (7.5%
Applicable from 14/5/2020 to 31/3/2021)
2 At rates in force in case of payable to a non - corporate non -
resident or foreign company unit holder

2 Income to NR In case of income payable to a non - corporate non - resident or foreign

company unit holder, no deduction is to be made in respect of any
income that is not chargeable to tax under the Act
3 Time of deduction Such tax has to be deducted at the time of credit of such income to the
account of the payee or at the time of payment, whichever is earlier
4 Suspense Account For this purpose, any such income credited to any account, whether
called ‚suspense account‛ or by any other name, in the books of
account of the person liable to pay such income, such crediting shall be
deemed to be the credit of such income to the account of the payee, and
the provisions of sec. 194LBB shall apply accordingly
5 No TDS on the TDS provisions would not be attracted in respect of the income
income received received by the investment fund. This would be provided by issue of
by the investment appropriate notification under section 197A (1F) subsequently
fund - Section
197A (1F)

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IV – SETOFF & CARRY FORWARD

Taxation of IF

Provisions
Charging for Set - off & Return of
Exemptions TDS
Section Carry Income
forward

PASS THROUGH STATUS FOR LOSS

No Particulars Explanation
1 Pass - through If in any year there is a loss under any head of income at the fund level
status for current and such loss cannot be or is not wholly set - off against income under
year losses any other head of income of the said PY, then out of such losses,
No Particulars
1 The loss arising to the Investment Fund under the head
‚PGBP‛ shall not be allowed to be passed through to the
investors but has to be carried over at fund level to be set off
against income of the next year in accordance with the
provisions of Chapter VI
2 Loss other than loss under the head ‚PGBP‛ would not be
allowed be passed through to the investors if such loss has
arisen in respect of a unit which has not been held by the unit
holder for a period of at least 12 months – Section 115UB(2)

Note:
By implication, losses other than those referred to in 1 and 2 above,
which cannot be wholly set - off against current year income, would be
passed on to the unit holders to be carry forward and set - off in their
individual hands in accordance with the provisions of Chapter VI.

Losses of Investment Fund

Business Loss Other than Business Loss

Loss arisen from Unit not Loss arisen from Unit held
Shall not be allowed to Pass
held by UH for a period by UH for a period atleast
through
atleast 12M 12M

Loss cannot be passed Loss can be passed

through through

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 DIRECT TAXATION AY 21 - 22

No Particulars Explanation
1 Pass - through Losses, other than loss under the head ‚PGBP‛, if any, accumulated at
status for losses the level of investment fund as on 31 - 03 - 2019, shall be
accumulated as on
31 – 03 - 2019 No Particulars
1 Deemed to be the loss of a unit holder who held the unit as on
31 - 03 - 2019 in respect of the investment made by him in the
investment fund in the same manner as it were the loss
incurred by him had he made such investments directly and
2 Shall be allowed to be passed through to the investors for the
remaining period calculated from the year in which the loss
has occurred for the first time taking that year as the first year
and set off against their income in accordance with the
provisions of Chapter VI

Further, such accumulated losses shall not be available to the

investment fund on or after 01 - 04 - 2019
2 Note Even Capital loss on sale of units held for less than 12 months,
accumulated as on 31.03.2019, would be allowed to be carry forward
and set – off by the unit holders

SUMMARY

The following table gives a summary of the above provisions:

No Particulars Investment Fund Unit holder

1 Income under the head Taxable Exempt
‚PGBP‛ of the Investment
Fund
2 Income, other than PGBP Exempt Taxable, as if he had
Tax to be deducted on such income directly made the
distributed to unit holders investment.
 @ 10%(7.5% for period from
14/5/20 to 31/3/21)in case of
resident payee and
 at rates in force in case of non -
resident payee
3 Loss under the head ‚PGBP‛ To be carried forward for set - off as Not passed on to
incurred by the investment per chapter VI at the fund level. investors
fund
4 Loss (other than loss referred The act is silent relating to the Not allowed to be
to in (iii) and above where permissibility or otherwise of carry carried forward by the
such loss has arisen in forward of these losses in the hands unit - holder. He
respect of unit which has not of investment funds. cannot set - off such
been held by the unit holder losses against his
for a period of atleast 12 income.
months.

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5 Losses (other than losses Not allowed to be carried forward Unit - holder can carry
referred to in (iii) and (iv) for set - off by the Investment Fund. forward and set - off
above) remaining after set - such losses against his
off against current year income as per Chapter
income VI

Note :-
No Particulars
1 The loss other than business loss, if any, accumulated at the level of investment fund as on
31st March, 2019, would be deemed to be the loss of a unit holder who held the unit on 31st
March, 2019 in respect of the investments made by him in the investment fund in the same
manner as it were the loss incurred by him he had made such investments directly. Such loss
can be carried forward by the unit holder for the remaining period calculated from the year
in which the loss had occurred for the first time taking that year as the first year.
Accordingly, he can set – off such loss in accordance with the provisions of Chapter VI
2 The loss so deemed in the hands of unit holders shall not be available to the investment fund
on or after 1.4.2019

V – FILING RETURN OF INCOME

Taxation of IF

Provisions
Charging for Set - off & Return of
Exemptions TDS
Section Carry Income
forward

No Particulars Explanation
1 Mandatory filing of Every investment fund has to compulsorily file its return of income or
return of income - loss u/s 139(4F), if it is not required to do so under any other
S. 139(4F) provision of section 139. The provisions of the Act would apply as if
such return of income or loss were a return required to be furnished
u/s 139(1).

QUESTIONS FOR PRACTICE

Illustration 1
The following are the particulars of Income of three Investment Funds for PY 2020 - 21
No Particulars A B C D
1 Business Income - 2 Lakhs (2 Lakhs) 5 lakhs
2 Capital Gains 16 Lakhs 14 Lakhs (6 Lakhs) 20 lakhs
3 Income from Other Sources 4 Lakhs 4 Lakhs 8 Lakhs (2 lakhs)

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 DIRECT TAXATION AY 21 - 22

Compute the Total income of the Investment Funds and Unit - holders for AY 2021 - 22, assuming
that
No Particulars
1 Each Investment Fund has 20 unit holders each having one unit held by them for a period
exceeding 12 months and
2 Income from Investment in the Investment fund is the only income of the unit - holder

If Investment Fund C has the following income components for A.Y.2022 - 23, what would be the
Total Income of the fund and the unit holder for that year?
No Particulars
1 Business Income Rs. 2 Lakh
2 Capital Gains Rs. 9 Lakh
3 Income from other source Rs. 8 Lakh

Answer
Computation of Total Income of the Investment Fund for A.Y 2021 - 22
No Particulars A B C D
1 Business Income Nil 2,00,000 Nil 3,00,000
2 Total Income Nil 2,00,000 Nil 3,00,000

Computation of TI of Unit Holder of the following Investment Fund for A.Y 2021 - 22
No Particulars A B C D
1 Capital Gains 80,000 70,000 - 1,00,000
2 Income from Other Sources 20,000 20,000 30,000 -
3 Total Income 1,00,000 90,000 30,000 1,00,000

Notes
No Particulars
1 The Total income of Investment Fund B would be chargeable to tax @ 30% if the fund is a
firm and 30% / 25%, as the case may, if the fund is a company and at the maximum marginal
rate, in any other case
2 In case of Investment Fund D, the loss from other sources Rs.2 lakhs is set-off against
business income of Rs.5 lakhs
3 In case of Investment Fund C, the business loss Rs. 2 Lakhs is set - off against income from
other sources of Rs. 8 Lakhs. Loss of Rs. 6 Lakhs under the head Capital gains cannot be set –
off against income under any other head. The same can be carried forward by the unit
holder for set - off in the subsequent years since, the units are held for a period of 12 months
or more
4 For A.Y.2022 - 23, the brought forward capital loss of Rs. 30,000 - Rs. 6 lakh / 20 can be set -
off against capital gains of Rs. 45,000 - Rs. 9 lakh / 20 by the unit - holder, Since, the period of
holding of units is 12 months or more. Business income of Rs. 2 lakh would be taxable in the
hands of the Investment Fund. Income from other sources of Rs. 40,000 (Rs. 8 lakh / 20)
would be taxable in the hands of the unit – holders

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 235

AY 21- 22 DIRECT TAXATION

CHAPTER - 20
TAXATION OF SECURITIZATION TRUST
Taxation of Special Entities

Taxation of
Taxation of Taxation of Tax Regime for
Securitisation
Business Trust Investment Fund IFSC
Trust

OVERVIEW

Meaning of Securitization Trust -Clause (d) of Explanation below Section 115TCA:

“Securitization of Trust‛ means a Trust being a –

No Form Regulation
SEBI (Public offer and listing of Securitized Debt
1 A Special purpose Distinct entity
Instrument) Regulation,2008
The guidelines on Securitization of standard Assets
2 A Special purpose vehicle
issued by RBI
A Trust setup by Securitization Securitization and Reconstruction of Financial Assets
3 Company or a Reconstruction and Enforcement of Security Interest Act, 2002
Company (SARFAESI Act) (or) the RBI directions/guidelines.

Meaning of certain Terms :-

No Term Meaning
Means a Person who is holder of any Securitized debt instrument or
A Investor
Securities or Security receipt issued by the Securitization Trust

Means debt Securities issued by a Special Purpose Vehicle as referred to in

B Securities
the guidelines on Securitization of Standard assets issued by RBI

ST

In the hands of ST In the hands of UH TDS

236 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

IN THE HANDS OF SECURITISATION TRUST

No Section Tax or TDS Implications

1 Exemption of income The income of Securitization Trust from the activity of
of Securitization trust Securitization shall continue to be exempt under Section 10(23DA).
from the activity of
Securitization -
S. 10(23DA)

IN THE HANDS OF UNIT HOLDERS

115TCA

(1) (2) (3) (4) (5)

Charging Deemed Submit If taxed as accrual basis

2 Items
Section Credit Statement then not taxed on receipt

Income from Securitization

In the hands of ST In the hands of UH

Exempted u/s
Taxable u/s 115TCA
10(23DA)

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AY 21- 22 DIRECT TAXATION
No Section Tax or TDS Implications
1 Taxability of income It provides that the income accruing or arising to, or received by, a
from Securitization person, being an Investor from the Securitization Trust, out of
trust in the hands of investments made in the Securitization Trust, shall be taxable in
the investor - the hands of investor in the same manner and to the same extent as
S. 115TCA(1) if the Investor had made investment directly in the underlying
Assets and not through the Trust.
2 Nature of income The income paid or credited by the Securitization Trust shall be
paid or credited by deemed to be of the same nature and in the same proportion in the
Securitization Trust hands of the investor of the Securitization Trust, as if it had been
in the hands of the received by, or had accrued and arisen to, the Securitization Trust
investor - during the Previous Year.
S. 115TCA(2)
3 Deemed credit to If the income accruing or arising to, or received by, the
Investor - Securitization Trust, during a Previous Year has not been paid or
S. 115TCA(3) credited to the investor, the same shall be deemed to have been
credited to the account of the said person on the last day of the
Previous Year in the same proportion in which such person would
have been entitled to receive the income had it been paid in the
Previous Year.
4 Statement specifying The Securitization trust shall provide breakup regarding nature
the details of nature and proportion of its income and such other relevant details to the
of Income to be investors and also to the prescribed Income - Tax Authority in the
furnished to investor prescribed form and verified in the prescribed manner, within the
and prescribed prescribed period.
Income - Tax
Authority -
S. 115TCA(4)
5 Rule 12CC Rule 12CC inserted to prescribe the period for furnishing the
statement containing the details of nature of Income paid or
credited to the investor by the Securitization Trust and to the
prescribed Income - Tax Authority under Section 115TCA(4) -
Notification No.107/2016, dated 28 - 11 – 2016
6 TL for issue of Rule 12CC to provide that the statement of income distributed by a
statement to ITA Securitization Trust to its investor has to be furnished to the
Principal Commissioner or the Commissioner of Income - Tax
within whose jurisdiction the principal office of the Securitization
Trust is situated, by 30th November of the Financial Year
following the Previous Year during which such income is
distributed.
7 TL for issue of Further, the statement of income distributed also has to be
statement to UH furnished to the investor by 30th June of the Financial Year
following the Previous Year during which the income is
distributed.
8 Income taxed in the Where income has been included in the total income of the
year of accrual not investor in a Previous Year, on account of it having accrued or
taxable again in the arisen in the said Previous Year, the same shall not be included in
year of payment - the total income of such person in the Previous Year in which such
S. 115TCA(5) income is actually paid to him by the Securitization Trust.

238 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

TDS PROVISIONS

No Section Tax or TDS Implications

1 Deduction of tax at Tax deduction at source under Section 194LBC shall be effected by
source in respect of the Securitization Trust at the time of payment or credit of income
income payable to to the account of the Investor, whichever is earlier.
investor - Rate of
Rate of
S. 194LBC TDS
TDS
(applicable
No Payee (applicable
from
from 1.4.20
14.5.20 to
to 13.5.20)
13.3.21
Resident Individual and 18.75%
1 25%
HUFs
Resident payees, other than 22.5%
2 30%
Individuals and HUF
Non - Corporate Non -
Rate in Rates in
3 resident and Foreign
Force force
Companies
Where any income as aforesaid is credited into any account in the
BOA of the person liable to pay such income, such crediting is
deemed to be credit of such income to the account of the payee and
tax has to be deducted at source. The account to which such
income is credited may be called ‚Suspense Account‛ or by any
other name.
2 Application for low The facility for the Investors to obtain low or nil deduction of Tax
or nil deduction of certificate would be available; the Investor can make an
Tax at source - application to the Assessing Officer, and he can, on an application
S.197 made by the Assessee in this behalf, issue a certificate under
Section 197 in this behalf for no deduction of Income - Tax or
deduction of Income - Tax at a lower rate.

TDS PROVISIONS

Section reference

BT IF ST

CS - TDS - TDS - CS - TDS -

CS - 115UB
115UA 194LBA 194LBB 115TCA 194LBC

CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED 239

AY 21- 22 DIRECT TAXATION

CHAPTER - 21
TAX REGIME FOR IFSC
Taxation of Special Entities

Taxation of
Taxation of Taxation of Tax Regime for
Securitisation
Business Trust Investment Fund IFSC
Trust

In order to encourage the growth of International Financial Services Centers (IFCSs) into a world
class financial services hub, it is necessary to ensure a competitive tax regime to International
Financial Services Centre. Accordingly, the following incentives have been provided to units
setup in the IFSC under the Income - Tax Act 1961 -
No Section Meaning Incentives to IFSCs
1 Levy of STT and CTT Exemption from Levy of STT and CTT
The provisions of Chapter VII of Provisions of Chapter VII of the Finance
the Finance (No.2) Act, 2004 (No.2) Act, 2004 providing for levy of STT,
provides for levy of Securities not to apply to Taxable securities transactions
Transaction Tax (STT) on entered into by any person on a Recognised
transactions in taxable securities. Stock Exchange located in IFSC where the
The provisions of Chapter VII of consideration for such transaction is paid or
the Finance Act, 2013 provides payable in Foreign currency, thereby
for levy of Commodities exempting such transactions from STT with
- Transaction Tax (CTT) on effect from 1st June, 2016.
transactions in Taxable The provisions of Chapter VII of the Finance
Commodities. Act, 2013 providing for levy of CTT, not to
apply to Taxable commodities transactions
entered into by any person on a Recognised
association located in unit of IFSC where the
consideration for such transaction is paid or
payable in Foreign currency, thereby
exempting such transaction from CTT with
effect from 1st June, 2016.
2 Exemption of LTCG up to Rs 1 Exemption of LTCG up to Rs 1 Lakh and
Lakh and taxability @ 10% on taxability @ 10% on LTCG exceeding
LTCG exceeding Rs 1 Lakhs Rs 1 Lakhs even if STTs is not Paid
only if STTs is Paid Section 112A(3) exempts tax on Long - Term
Exemption of income by way of Capital Gains up to Rs 1 lakh and subjects
Long Term Capital Gains of Rs 1 LTCG exceeding Rs 1 Lakhs @ 10% in respect
lakh arising from transfer of of income arising from transaction
112A
listed Equity shares or listed undertaken in Foreign currency on a
units of an equity oriented fund Recognised stock exchange located in an
or Business Trust provided International Financial Services Centre even
securities Transaction Tax is paid when Securities Transaction Tax is not paid
at the time of sale and at the time in respect of such transaction.
of acquisition in certain cases.
LTCG in excess of Rs 1 Lakh is
240 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED
 DIRECT TAXATION AY 21 - 22

subject to tax @ 10%, if STT is

paid as above.
3 Levy of STCG @ 15% if STT is Levy of STCG @ 15% even if STT is not paid
paid Second proviso to Section 111A(1) provides
Short Term Capital Gains arising that Short Term Capital Gains arising from
from transfer of Listed Equity transaction undertaken in foreign currency
111A Shares or listed units of an on a Recognised stock exchange located in an
Equity oriented fund or Business International Financial Services Centre would
Trust is taxable at a concessional be taxable at a concessional rate of 15% even
rate of 15% provided securities when Securities Transaction Tax is not paid
transaction tax is paid. in respect of such transaction.
4 MAT Levy @ 15% Concessional rate of MAT @ 9%
In case of a Company, if the tax Sub - Section (7) of Section 115JB to provides
payable on the Total Income as that in case of a Company, being a unit
computed under the Income - located in International Financial Services
Tax Act, is less than 15% of its Centre and deriving its income solely in
book profit, such book profit Convertible Foreign exchange, the Minimum
115JB
shall be deemed to be the Total Alternate Tax shall be chargeable at the rate
Income of the Company and the of 9% instead of 15%.
Minimum Alternate Tax (MAT)
payable by the Company for the
relevant Previous Year shall be
15% of such book profit.
5 AMT levy @ 18.50% Concessional rate of AMT @ 9%:
Where the regular income – tax Section 115JC(4) provides that where the
payable by a person, other than a person subject to AMT is a unit located in
company, computed under International Financial Services Centre and
Income Tax Act, 1961 is less than deriving its income solely in convertible
115JC the AMT payable, then adjusted foreign exchange, the alternate minimum tax
total income would be deemed shall be chargeable at the rate of 9% instead of
to be the total income of the 18.50%
person and such person shall be
liable to pay income - tax on the
adjusted total income @ 18.50%
6 Deduction in respect of certain Deduction @ 100% of profits increased to 10
income of off shore banking consecutive assessment years out of 15
units in SEZ consecutive assessment years for a unit of
Deduction @ 100% of such IFSC
income of offshore banking unit S. 80LA has been amended to provide 100%
in a SEZ is allowed for 5 deduction in respect of income of unit of IFSC
Consecutive assessment years. from its business which is approved for
80LA Thereafter , 50% of such income setting up in SEZ for any 10 consecutive AY
is allowable as deduction for the at the option of the assessee, out of 15
next 5 Consecutive AYs assessment years, beginning with assessment
year relevant to the previous year, in which
the permission under section 23(1)(a) of the
Banking Regulations Act, 1949 or permission
or registration under the SEBI Act, 1992 or
any other relevant law was obtained.

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AY 21- 22 DIRECT TAXATION
7 No deduction under Chapter VI Deduction u/s 80LA to be allowed to a unit
A against dividend and interest of an IFSC against interest and dividend
income chargeable to tax u/s income chargeable to tax u/s 115A
115A The proviso to Section 115A (4) provides that
Section 115A (1) provides special such condition of non - availability of
rate of tax on, inter alia, interest deduction under chapter VI-A shall not be
115A
and dividend income arising to applicable to deduction under section 80LA
non - corporate non - resident allowed to a unit of IFSC i.e., a unit of an IFSC
and foreign company. can claim deduction under section 80LA
Section 115A (4) prohibits any against interest and dividend income
deduction under chapter VI - A specified therein.
from such income.
8 TDS @ 5% in respect of interest Concessional rate of TDS @ 4% in respect of
payable by an Indian company interest payable on moneys borrowed from a
or Business Trust: source outside India by way of long-term
An Indian company or a bond or rupee denominated bond listed
business trust paying interest on only on a recognized stock exchange in any
money borrowed in foreign IFSC
currency from a source outside TDS rate applicable will be 4%, in respect of
194LC
India to a non-corporate non- interest payable on monies borrowed by an
resident or to a foreign company Indian company or a business trust from a
is liable to deduct tax @5% source outside India by way of issue of any
long-term bond or rupee denominated bond
between 1st April,2020 and 30th June, 2023
which is listed only on a recognized stock
exchange located in any IFSC
9 Option to pay tax at Deduction u/s 80LA to be available to units
concessional rate to domestic set up in an IFSC, even if option u/s 115BAA
companies or resident co- / 115BAD is exercised
operative society, subject to not In case of a person, having a unit in an IFSC,
claiming deductions under as referred to in section 80LA(1A), which has
Chapter VI A exercised option u/s 115BAA or 115BAD, as
Domestic companies and the case maybe, deduction u/s 80LA would
resident co-operative societies also be available to such unit subject to
115BAA/ can exercise option to pay tax at fulfilment of the conditions contained in that
115BAD concessional rate of 22% u/s section.
115BAA or 115BAD, respectively
subject to the condition that their
total income would be computed
without providing deduction
inter alia under chapter VI A
(other than 80JJAA or 80M (in
case of domestic companies
only)

242 CA DEEPAK P ANDIAN & CA ANEESH NOOR MOHAMMED

 DIRECT TAXATION AY 21 - 22

SUMMARY :-

Incentives to IFSC

Dedn u/s
80LA is
Dedn u/s alloweed
112A @ 111A @ Dedn @ Concessional
80LA even if
No STT & 10% even 15% even Concessional Concessional 100% for Rate of TDS
against option
No CTT though though MAT @ 9% AMT @ 9% 10Years @ 4% u/s
115A claimed
No STT No STT u/s 80LA 194LC
Income under
115BAA /
115BAD

CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 243

 AY 21 -22 [[DIRECT TAXATION]

CHAPTER - 22
TAXATION OF POLITICAL PARTIES
Taxation of Other Entities

Taxation of
Taxation of Taxation of
Income from Taxation of VPA
Political Parties Electoral Trust
Uints

EXEMPTION

Assessee

Political Party Electoral Trust

S. 13A S. 13B

SPECIAL PROVISIONS RELATING TO INCOMES FROM POLITICAL PARTIES – S. 13A

No Particulars Explanation
1 S. 13A Any income of political party which is chargeable under the head ‚IFHP‛ or
 ‚IFOS‛ or
 ‚CG‛ or
 any income by way of voluntary contributions received by a political party
from any person
 shall not be included in the total income of the PY of such political party:
2 Proviso Provided that ,
No Particulars
1 Such political party keeps and maintains BOA and other documents
that would enable the AO to properly deduce its income there from;
2 In respect of such voluntary contribution other than contribution by
way of electoral bond in excess of Rs. 20,000, such political party keeps
and maintains a record of such contribution and the name and address
of the person who had made such contribution
3 The accounts of such political party are audited by an accountant as
defined in Explanation below sub section – (2) of section – 288; and

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 [[DIRECT TAXATION]] AY 21 -22
4 No donation exceeding Rs. 2,000 is received by such political party
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 electronic mode as may be prescribed (Rule 6ABBA)
or
 through electoral bond

3 Explanation For the purpose of this proviso, ‚Electoral bond‛ means a bond referred to in
the explanation to sub section (3) of section – 31 of the Reserve Bank of India
Act, 1934
4 Proviso Provided further that if the treasurer of such political party or any other person
authorised by the political party in this behalf fails to submit a report u/s
29C(3) of the Representation of the People Act, 1951 for the financial year, no
exemption under this section shall be available for the political party for such
financial year
5 Proviso Provided also that such political party furnishes a return of income for the PY
in accordance with the provisions of sub – section (4B) of section 139 on or
before the due date under that section

SUMMARY :-
EXEMPTION TO POLITICAL PARTIES - SECTION 13 A
Section 13 A of the Income Tax Act, 1961, grants exemption from tax to political parties in respect
of their income specified below:

Exempt Income

Voluntary
Income from Income from Contributions
Capital Gains
House Property Other Sources
Received

The aforesaid categories of income would qualify for exemption provided additional conditions for
availing the benefit of the said section which are as under are met:

CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED| 245

 AY 21 -22 [[DIRECT TAXATION]

Maintains such books of accounts and other documents to enable the A.O to
properly deduce its income therefrom

Maintains a record of each such voluntary contribution(other than electoral bonds)

CONDITONS TO BE SATISFIED

in excess of Rs.20,000 and the name and address of the contributor

No donation exceeding Rs. 2000 to be received otherwise than by an A/c Payee

Cheque/Bank Draft or use of ECS through a bank or electoral bond

Audit of accounts of the political party by a CA

Submission of report u/s 29C(3) of the Representation of People Act, 1951 for the
Financial Year

Furnishing of return of income for the PY in accordance with Section 139 (4B)

Note :-

No Particulars Explanation
1 Political For the purpose of this section, ‚Political Party‛ means a political party
Party registered under section 29A of the Representation of the People Act, 1951.

QUESTION FOR UNDERSTANDING

Illustration 1
Explain in the context of provisions of the Act, whether the income derived during the year ended
on 31.03.2021 in following case shall be subject to tax in the A.Y. 2021 - 22 :
A Political party, duly Registered under Section 29A of the Representation of the People Act, 1951,
received Rent of Rs. 1,25,000 per month of one of its building let out to a bank from 01.06.2020.

Answer
No Particulars
1 Rent received by the political party from the bank is an income chargeable under the head
"Income from house property".
2 However, according to the provisions of section 13A, income from, inter alia, house property
shall not be included in total income of a political party registered under section 29A of the
Representation of the People Act, 1951, provided the political party fulfils the conditions as
specified therein including furnishing a return of income for the previous year in accordance
with the provisions of section 139(4B) on or before the due date under section 139.
3 Therefore, if the stipulated conditions are fulfilled by the political party, rent of ` 1,25,000 per
month received by the registered political party from letting out of its building to a bank
would not be included in its total income

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 [[DIRECT TAXATION]] AY 21 -22
Illustration 2
The books of accounts maintained by a National Political Party registered with Election Commission
for the year ended on 31.03.2021 discloses the following receipts:
No Particulars Amt
1 Rent of Property Let out to a Departmental Store at Chennai 6,00,000
2 Interest on Deposits other than Banks 5,00,000
Contributions from 100 Persons (who have secreted their names) of Rs. 21000
3 21,00,000
each
4 Contribution from 10 persons by way of electoral bonds of Rs.25000 each 2,50,000
Cash contribution @ Rs.2100 each from 1000 members (recorded in books of
5 21,00,000
account)
6 Net Profit of Cafeteria run in the premises at Delhi 3,00,000

Compute the total income of the political party for the AY 2021 - 22, with reasons for inclusion or
otherwise.

Answer
No Particulars Explanation
1 The total income of a political party registered with the Election
Commission is to be computed as per section 13A under which the income
derived from house property, income from other sources and income by
way of voluntary contributions received from any person, on fulfilling of
the conditions as mentioned thereunder, are exempt from tax. However, in
this case, since cash contribution in excess of Rs. 2,000 is received from
1000 persons, the political party has violated the condition of receipt of
donation through account payee cheque/draft or prescribed electronic
modes. Further, the political party has also violated the condition of
maintenance of records in case of donations exceeding Rs. 20,000 received
otherwise than by way of electoral bonds. Hence, its total income has to be
computed as under without providing for exemption available under
section 13A
2 Computation of
No Particulars Amount
Total Income of
National The rent of the property of Rs. 6 lacs located at 4,20,000
Political Party 1 Chennai -assuming the same to be the Gross Annual
Value less 30% of Rs.6 lacs, being deduction u/s 24
2 Interest received on deposits 5,00,000
Contribution from 100 persons (who have secreted 21,00,000
3
their names) of Rs. 21,000 each
Contribution from 10 persons by way of electoral 2,50,000
4
bonds of Rs. 25,000 each
Cash contribution @ Rs. 2,100 each from 1,000 21,00,000
5
members (recorded in books of account)
6 Net profit of cafeteria at Delhi 3,00,000
Total Income 56,70,000

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 AY 21 -22 [[DIRECT TAXATION]
3 Note –
Alternatively, Computation of Total Income of National Political Party
the political No Particulars Amount
party can 1 Rent of the property of Rs. 6 lacs located at Chennai Exempt
contend that
2 Interest received on deposits Exempt
only Rs. 45 lakh
Contribution from 100 persons (who have secreted 21,00,000
is taxable on 3
account of non - their names) of Rs. 21,000 each
maintenance of Contribution from 10 persons by way of electoral Exempt
4
records and bonds of Rs. 25,000 each
receipt of cash Cash contribution @ Rs. 2,100 each from 1,000 21,00,000
donations, in 5
members (recorded in books of account)
which the case
6 Net profit of cafeteria at Delhi 3,00,000
the total income
would be Total Income 45,00,000
computed as
under
4 Note It is presumed that the conditions regarding maintenance of books of
account, audit, submission of report under section 29C of the
Representation of the People Act, 1951 and filing of return of income under
section 139(4B) are fulfilled by the political party, and hence it is eligible for
exemption of income under section 13A

248 | CA DEEPAK PANDIAN& CA ANEESH NOOR MOHAMMED

 [[DIRECT TAXATION]] AY 21 -22

CHAPTER - 23
TAXATION OF ELECTORAL TRUSTS
Taxation of Other Entities

Taxation of
Taxation of Taxation of
Income from Taxation of VPA
Political Parties Electoral Trust
Uints

No Particulars
1 The concept of electoral trust has been introduced with a view to reform the system of
funding political parties. The industries are reluctant to fund any political party as their name
gets associated with that political party. However, the industry prefers funding electoral trust
since the name of the political party is not associated with Electoral Trust.
2 Electoral trust has been defined in section 2(22AAA) to mean:
 A trust
 Approved by CBDT
 In accordance with the scheme made in this regard by the central government.
3 Section 13B provides that the Electoral trust must function in accordance with the rules made
by the Central Government
4 Section 2(24) which defines ‚Income‛ has been amended to provide that any voluntary
contribution i.e. donation received by an Electoral trust shall be deemed to be its income.
5 Since Electoral Trust is not a religious or charitable trust, exemption u/s 11 or 12 is not
available. Therefore, section 13B provides as under:
Any voluntary contributions received by an electoral trust shall not be included in the total
income of the previous year of such electoral trust, if-
No Particulars
1 Such electoral trust distributes to any political party, registered under section 29A of
the Representation of the People Act,1951, during the said previous year, 95% of the
aggregate donations received by it during the said previous year along with the
surplus, if any, brought forward from any earlier previous year; and
2 Such electoral trust functions in accordance with the rules made by the Central
Government.

6  Section 80GGB and 80GGC have been amended to provide that if any person makes
donation to an electoral trust, then such donation shall be allowed as deduction in
computing the total income of such person.
 Section 80GGB and 80GGC have been amended to provide that deduction shall be
available only if sum is contributed by any mode other than cash.
7 The donations received during the previous year by an Electoral Trust shall be exempt from
tax if such electoral trust distributes to any political party during the previous year, 95% of
the total donation received by it during the previous year along with the surplus, if any ,
brought forward from any earlier previous year
8 If Electoral Trust invests the donations received by it in say Bank FDR, then the interest from
such investment is not exempt u/s 13B and shall be taxable.

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QESTIONS FOR UNDERSTANDING

Illustration 1

No Particulars Amount
1 Donation received by electoral trust Rs.10,00,00,000
2 Interest earned by electoral trust Rs.40,00,000

Solution
Case Particulars Explanation
1 Case I - Electoral  Rs.10,00,00,000 donations are exempt u/s 13B
Trust distributes  Rs.40,00,000 interest is taxable as IFOS
9,50,00,000 to a If in next year Electoral Trust receives Rs.20,00,00,000 as donations,
political party then, in next year Rs.20,00,00,000 shall be exempt if the Electoral trust
distributes 95% of Rs.20,50,00,000 to a political party in next year
2 Case II - Electoral Exemption u/s 13B shall not be available and Rs.10,00,00,000 is not
Trust distributes exempt. Therefore, Rs.10,40,00,000 shall be taxable as income.
9,00,00,000 to a
political party

Illustration 2
No Particulars
1 An electoral trust approved by the CBDT is not liable to income tax in respect of voluntary
contribution received and other income – Discuss the correctness of the statement
2 What is the effect of contribution made by an individual to electoral trust on his taxable
income?

Answer:

No Particulars
1 The statement is partially correct. Section 13B provides as under:
Any voluntary contributions received by an electoral trust shall not be included in the total
income of the previous year of such electoral trust, if-
No Particulars
(a) Such electoral trust distributes to any political party, registered u/s 29A of the
Representation of the People Act,1951, during the said PY, 95% of the aggregate
donations received by it during the said PY along with the surplus, if any, brought
forward from any earlier previous year; and
(b) Such electoral trust functions in accordance with the rules made by the CG
Therefore, if the above said conditions are fulfilled, then the voluntary contribution received
by the electoral trust shall not be included in the income of the electoral trust. However, any
other income shall continue to be taxable in the hands of the electoral trust. Section 13B
provides exemption in respect of voluntary contributions only.
2 Section 80GGC provides that if any person makes a donation to an electoral trust, then such
donations shall be allowed as deduction in computing the total income of such person.

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Illustration 3
Which are the conditions to be satisfied by an electoral trust for claiming the benefit of exemption of
its income? Is this benefit available in respect of all the income earned by an electoral trust?

Answer:
As per section 13B any voluntary contributions received by an electoral trust shall not be included in
the total income of the PY of such electoral trust, if –
No Particulars
1 Such electoral trust distributes to any political party, registered u/s 29A of the Representation
of the People Act, 1951, during the said PY, 95% of the aggregate donations received by it
during the said PY along with surplus, if any, brought forward from any earlier PY; and
2 Such electoral trust functions in accordance with the rules made by the CG.

The donation received during the PY by an electoral trust shall be exempt from tax if such electoral
trust distributes to any political party during the previous year, 95% of the total donation received
by it during the previous year along with the surplus, if any , brought forward from any earlier
previous year.

If Electoral Trust invests the donations received by it in say Bank FDR, then the interest from such
investment is not exempt u/s 13B and shall be taxable. The benefit of exemption u/s 13B is available
only for voluntary contributions and not for any other income. All other income shall be taxable
normally.

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CHAPTER - 24
TAXATION OF INCOME OF UNITS
Taxation of Other Entities

Taxation of
Taxation of Taxation of
Income from Taxation of VPA
Political Parties Electoral Trust
Uints

No Particulars Explanation
1 Exemptions of all All incomes of all mutual funds are exempt from tax
incomes of all
mutual funds -
S. 10(23D)
2 Exemption of all All income of ‚Administrator‛ and ‚Specified company‛ are exempt
incomes of from tax by virtue of Unit Trust of India (Transfer of Undertaking and
“Administrator” Repeal) Act,2002
and “Specified
Company”
3 Proviso to S. 57 Provided that no deduction shall be allowed from the dividend income
or income in respect of units of mutual fund specified u/s 10(23D) or
income in respect of units from a specified company defined in the
Explanation to S.10(35), other than deduction on account of interest
expense, and in any previous year such deduction shall not exceed 20%
of the dividend income, or income in respect of such units, included in
the total income for that year, without deduction under this section
4 Analysis of
Provisions No Particulars
Relating to 1 Prior to the amendments made by the Finance Act, 2020, income
Taxation of Income distributed on units to unitholders was subject to tax in the
Distributed on hands of the distributing mutual fund or specified company at
Units rates specified in section 115R. Further, such income was exempt
in the hands of the unitholders u/s 10(35). However, Finance
Act, 2020 has shifted the incidence of tax charge from such
mutual funds and specified company to the hands of
unitholders. Such distributed income shall be taxable in the
hands of unitholders at the applicable tax rates
2 As per proviso to section 57, while computing income in respect
of units of Mutual Fund or a Specified Company, a deduction on
account of interest expense is allowed subject to a maximum
limit of 20% of the income before such deduction. However, the
proviso does not apply to the income received in respect of units
from an ‚Administrator‛. Accordingly, all expenses incurred by
an assesse towards earning such income shall be allowed as a
deduction u/s 57
5 TDS on income in Section -194K provides for a deduction of TDS at the rate of 10% on
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respect of units payment of any income in respect of units of a Mutual Fund or an
Administrator or a specified company to a resident unitholders.
Provided that no deduction shall be made where such income:
 Does not exceed Rs.5,000 or
 Is of the nature of capital gains
6 Notes The provisions of section 194K apply in respect of distributed income
i.e., amount of income distributed by Mutual Fund or the Specified
Company or Administrator. Therefore, on redemption of units or
repurchase of units, capital gains shall arise which shall be taxable in the
hands of unitholders unlike in the case of buy-back of shares

CAPITAL GAINS ON U NITS - REDEMPTION OR SALE

No Particulars Explanation
1 Units of equity
oriented mutual No Particulars
funds 1 Long term capital gains on units of equity oriented mutual fund
shall be taxable @ 10% u/s 112A, where:
 such units are sold through stock exchange and security
transaction tax has been paid on such sale transaction or
 such units are sold to the Mutual Fund and securities
transaction tax has been paid on such sale transaction
2 Short term capital gains on units of equity oriented mutual fund
shall be taxable @15% u/s111A where:
 such units are sold through stock exchange and security
transaction tax has been paid on such sale transaction or
 such units are sold to the Mutual Fund and securities
transaction tax has been paid on such sale transaction

2 Units of funds Short term capital gains shall be taxable at normal tax rates.
other than units of Long term capital gains shall be taxable at the rates specified in section
equity oriented 112. i.e. 20%
mutual funds

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SUMMARY :-

Taxation of Mutual Fund

In the Hands of In the hands of

TDS Capital Gain
Mutual Fund Unit Holders

Taxable under
Exempt u/s
IFOS subject to TDS u/s 194K *As Below
10(23D)
proviso to S. 57

CG from

Transfer of units from EOF Other than EOF

LTCG STCG STCG LTCG

Provisions of Provisions of
Taxed at Normal Taxed @ 20%
S. 112A will be S. 111A will be
rates u/s 112
applicable applicable

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CHAPTER - 25
TAXATION OF
VARIOUS PROFESSIONAL ASSOCIATIONS - VPA

Taxation of Other Entities

Taxation of
Taxation of Taxation of
Income from Taxation of VPA
Political Parties Electoral Trust
Uints

No Particulars Explanations
1 Applicability This section applies only to trade, professional or similar association -
other than a professional association or institution referred under
Section 10(23A), the income of which or any part thereof is not
distributed to its members except as grants to any association or
institution affiliated to it.
2 Exemption to Any income (other than income chargeable under the head ‚Income
professional from house property‛ or any income received for rendering any specific
association - services or income by way of interest or dividends derived from its
Section 10 (23A) investments) of an association or institution established in India, having
as its object the control, supervision, regulation or encouragement of the
specified professions shall not be included in computing the total
income
3 Deficiency The deficiency is computed as follows –
No Particulars Amount
1 Amount received during previous year by it from its
members by way of subscription or otherwise (not
XXX
being remuneration received for rendering any
specific services to such members)
2 Less: Expenditure incurred by such association
during that previous year solely for protection or (XXX)
advancement of common interests of its members**

** Exception:
Expenditure deductible in computing income under any other provision
of this Act and capital expenditure shall not be deductible.

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4 Deduction of The Deficiency is deductible as per following steps :
Deficiency
No Particulars Amount
1 Profits and Gains of Business or Profession before
XXX
allowing deficiency
2 Less: Any set off allowance or loss under any other
provision of the Act carried forward from earlier XXX
assessment years
3 Less:
Deficiency to the extent of lower of the following -
i. Amount of Deficiency; or XXX
ii. 50% of the total income (before allowing the
deficiency of association

In case profits of business are less than such deficiency:

In case there is no profits and gains or business or profession or the
deficiency allowable exceeds such profits and gains the whole or the
balance of the deficiency shall be allowed as a deduction in computing
income of the association assessable for the relevant assessment year
under any other head. For deduction thereof the above steps are
followed.

Note: -
Any deficiency remaining unabsorbed after giving effect to the above
provisions cannot be carried forward to subsequent years.
5 Exception to According to the Principle of Mutuality, any income arising to a trade
principle of professional or similar association is not considered as income and thus,
mutuality not taxable.
 But, any deficiency arising there from is allowed as deduction as per
section 44 A.
 Hence, Section 44 A is an exception to the rule that ‘since income
from mutual activities is not taxable, thereof, any deficiency arising
therefrom is not deductible’

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QUESTIONS FOR PRACTICE

Illustration 1
A trade association furnishes the following details –
No Particulars Amount
1 Receipts by way of entrance fees and Annual Membership fees from members 3,60,000
2 Expenditure on members 4,60,000
3 Bank Interest 70,000
4 Receipts from members for specific services 2,10,000
5 Expenditure incurred on providing specific services to members 1,70,000
6 Collection from non - members 4,40,000
7 Expenditure on non - members 3,77,000
Compute the taxable income of the trade association.

Solution:
The taxable income of the trade association shall be computed as follows
No Particulars Rs. Rs.
1 Profits and gains from business or profession:
2 Income from members from specific services (Rs. 2,10,000 – Rs. 1,70,000) 40,000
3 Income from non - members (Rs. 4,40,000 – Rs. 3,77,000) 63,000 1,03,000
4 Income from other sources:
5 Bank interest 70,000
6 Total income before allowing deficiency 1,73,000
7 Less: Amount of deficiency: Lower of -
 Actual deficiency (Rs. 3,60,000 – Rs. 4,60,000) (1,00,000)
 50% of total income before allowing deficiency (50% of 1,73,000) (86,500) 86,500
8 Total income 86,500

Working notes:
No Particulars
1 Net income from specific services to members i.e., Rs. 40,000/ - (Rs. 2,10,000 – Rs. 1,70,000) is
also chargeable to tax as per the provisions of section 28(iii) of the Act
2 Net receipts from non - members i.e., Rs. 63,000/ - (Rs. 4,40,000 – Rs. 3,77,000) is taxable
income as it is tainted with commerciality as it has been received from outside
3 The deficiency on account of general services to members amounting Rs. 1,00,000 (Rs. 4,60,000
– Rs. 3,60,000) can be set off to the extent of 50% of total income before allowing the deficiency.
Balance deficiency of Rs. 13,500 (Rs. 1,00,000 – Rs. 86,500) shall not be allowed to be carried
forward

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 AY 21 -22 [[DIRECT TAXATION]
Illustration 2
Boat Club is an Association governed by the Provisions of Section 44A of the Income - Tax Act,
[Link] subscription received from members for the year ended 31st March, 2021 was Rs. 2, 00,000.
The expenditures in the normal course of its activities were Rs. 3, 85,000. It’s other Income Taxable
under the Act works out to Rs. 2,75,000. You are consulted as to how Boat Club’s Income would be
determined for Assessment Year 2021 - 22? In case the association did not have other taxable
income, will there be any difference in the computation of its income.

Solution
As per Section 44A, the deficiency arising on account of income from members by way of, inter alia,
subscriptions, falling short of the expenditure incurred solely for the protection or advancement of
the interest of its members, shall first be set off against the association’s income under the head
‚Profit and Loss from Business or Profession‛. If there is no such income under this head, the
deficiency shall be set off against income under any other head.
No Particulars Amount
1 Income from Subscription 2,00,000
2 Less : Expenses incurred in the course of its activities 3,85,000
3 Deficiency (1,85,000)
4 Other Income 2,75,000
5 Less : Deficiency Rs. 1,85,000 but limited to 50% of other income 1,37,500
6 Income of the Association 1,37,500

There is a ceiling on the deduction admissible by way of deficiency being that it shall not exceed one
- half of the total income of the association computed before making any allowance under this
section. The ceiling has been exceeded above and the deficiency hence is limited to Rs. 1,37,500
being one - half of Rs. 2,75,000 Section 44A(3).

In case the association did not have other taxable income, then the total income shall have been Nil.
The deficiency of Rs. 1,85,000 would have no tax treatment and would have not be carried forward.

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CHAPTER - 26
CASE LAWS – VARIOUS ENTITIES
No Particulars Key Word
1 Venkatesh Premises Co - Operative Principle of Mutuality
Society
2 Sind Co - Operative Housing Society Principle of Mutuality
3 Madras Gymkhana Club Interest on FD - Principle of Mutuality
4 Govind Bhai Mamaiya Status of Assessment of AOP / Individual
5 D.L. Nadagopala Reddy Ownership – HUF / Individual
6 Sudhir Nagpal Rental Income from Plinth
7 Anil Hardware Store Manner of determination of Remuneration
8 Rolta India Ltd S. 234B + 234C interest for 115JB Route
9 Metal and Chromium Plater (P) 54EC exemption for MAT Route
Ltd,.(2019) (Mad)

VENKATESH PREMISES CO - OPERATIVE SOCIETY

Facts
Whether certain receipts by Co - operative societies from its members (non -
occupancy charges, transfer charges, common amenity fund charges) are exempt
based on the doctrine of mutuality?

Court
The doctrine - of mutuality is based on the common law principle that a person
Observation
cannot make a profit from himself. The income of a co - operative society from
business is taxable u/s 2 (24) (vii) and will stand excluded based on the principle of
mutuality.

The essence of the principle of mutuality lies in the commonality of the contributors
and the participants who are also the beneficiaries. The contributors to the common
fund must be entitled to participate in the surplus and the participators in the
surplus are contributors to the common fund. Any surplus in the common fund
shall, therefore, not constitute income but will only be an increase in the common
fund meant to meet sudden eventualities.
The Supreme Court made the following observations. If for convenience, part of the
transfer charges were paid by the transferee, they would not partake of the nature
of profit. The amount is appropriated only after the transferee was inducted as a
member. In the event of non - admission, the amount was returned. The moment
the transferee was inducted as a member the principles of mutuality would apply.
Non - occupancy charges were levied by the society and were payable by a member
who did not himself occupy the premises but let them out to a third person. The
charges were utilised only for common benefit of facilities and amenities to the
members.
Contribution to the common amenity fund taken from a member disposing of
property was utilized for meeting heavy repairs to ensure hazard - free
maintenance of the properties of the society which ultimately benefitted the

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members. Membership forming a class, the identity of the individual member not
being relevant, induction into membership automatically attracted the doctrine of
mutuality. If a society had surplus floor space index available, it was entitled to
utilize it by making fresh construction in accordance with law. Naturally, such
additional construction would entail extra - maintenance charges. If the society first
inducted new members who were required to contribute to the common fund for
availing of the common facilities, and then granted only occupancy rights to them
by draw of lots, the ownership remaining with the society, the receipts could not be
bifurcated into two segments of receipt and costs, so as to hold the former to be
outside the purview of mutuality satisfying it as income of the society with
commerciality.
Conclusion
.
The doctrine of mutuality is based on the common law principle that a person
cannot make a profit from himself. Accordingly, the transfer charges, non -
occupancy charges common amenity fund charges and other charges are
exempt owing to application of the doctrine of mutuality

SIND CO-OPERATIVE HOUSING SOCIETY

Facts Can transfer fees received by a co-operative housing society from its incoming
and outgoing members be exempt on the ground of principle of mutuality?

Court The HC observed that charging of transfer fees had not element of trading or
observation commerciality. The amount paid was to be exclusively used for the benefit of the
members as a class.

Conclusion .
It’s NOT taxable

MADRAS GYMKHANA CLUB

Facts Would the interest earned on surplus funds of a club deposited with
institutional members satisfy the principle of mutuality to escape taxability?

Court The HC held that interest earned from investment of surplus funds in the form of
observation fixed deposits with institutional members does not satisfy the principle of
mutuality.

Conclusion
Hence cannot be claimed as exempt on this ground

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GOVIND BHAI MAMAIYA

Facts Where land inherited by three brothers is compulsorily acquired by the State
Government, whether the resultant capital gain would be assessed in the status
of “Association of Persons” (AOP) or in their individual status? Three brothers
inherited a property consequent to demise of their father. A part of this
bequeathed land was acquired by the State Government and compensation was
paid for it. On appeal, compensation was enhanced and the enhanced
compensation was paid with interest. The issue under consideration is
regarding the status in which capital gain arising on transfer of property would
be assessed. The assessees’ offered income in their status as “individual” but
the revenue sought to tax the same in their status as “Association of Persons”
(AOP).
Court The Apex Court noted that ‚AOP‛ means an association which two or more
observation persons join in a common purpose or common action. In this case, the property
came to the assessee’s possession through inheritance i.e., by operation of law.
Further, even the interest earned is not because of any business but is the result of
compulsorily
chgcbv acquiring of land. Thus, the basic test to be satisfied for making an
assessment in the status of AOP is absent in this case.

Conclusion
It held that income from asset inherited by the legal heirs is taxable in their
individual hands and not in the status of AOP.

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D.L. NADAGOPALA REDDY

Facts Would the ancestral property received by the assessee after the death of his
father, be considered as HUF property or as his individual property, were the
assessee’s father had received such property as his share when he went out of
the joint family under a release deed?
Court The High Court observed that the property originally belonged to HUF. One of
observation the members of the family (i.e., the assessee’s father) went out of the joint family
under a release deed and the remaining members continued to be the members of
joint family. After the death of assessee’s father and mother, the assessee, being
the adopted son, became the sole surviving co - parcener. When such property
came to the hands of the assessee it was not his individual property; it was the
property of his HUF.

Conclusion
The HC held that when the property came to the hands of the assessee, it was
property belong to HUF. If the same transferred to his wife without registered
documents, then HUF Property, If with reg. doc., then individual property

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SUDHIR NAGPAL

Facts Under which head of income is rental income from plinths inherited by
Individual co – owners from their ancestors taxable – “IFHP” or “IFOS”?
Further, would such income be assessable in the hands of the individual co –
owners or in the hands of the AOP?
Court HC observed that plinth is not treated as Building. Merely accruing of Income
observation jointly to more persons that one would not constitute them an AOP. Unless the
members join in a common purpose, it cannot be held that they have formed
themselves into an AOP.
Conclusion .
The court held that the income from letting out the plinth is assessable u/s 56
as ‘IFOS‛. There was nothing to show that they had acted as an AOP. Hence,
income has to be assessed in the status of individual and not AOP

ANIL HARDWARE STORE

Facts In a case where the partnership deed does not specify the remuneration payable
the each individual working partner but lays down the manner of fixing the
remuneration, would the firm be entitled to deduction in respect of
remuneration paid to partners?
Court The manner of fixing the remuneration of the partners has been specified in the
observation partnership deed. There is nothing which debars them from claiming the
maximum amount of remuneration payable in terms of the partnership deed.

Conclusion Firm can claim deduction of remuneration

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ROLTA INDIA LTD

Facts Can interest under sections 234B and 234C be levied where a company is
assessed on the basis of book profits under section115JB?

Court SC observe that there is specific provision in sec. 115JB (5) providing that all other
observation provision of the IT ACT, 1961 shall apply to every assessee. Section 115JB is a self-
contained code pertaining to MAT, and by virtue of sub-section (5) thereof, the
liability for payment of advance tax would be attracted.

Conclusion
SC held that interest u/s 234B, 234C shall be payable on failure of the company
to pay advance tax in respect of tax payable u/s 115JB.

Metal and Chromium Plater (P) Ltd,.(2019) (Mad)

Facts / Should CG Exempt u/s 54EC which forms part of the net profit in the statement
Matter of profit & loss of the assessee – company, be taken into account for calculation
of tax on book profits as per section – 115JB
Court Sub section (5) of the section 115JB allows for application of all other provisions
observation contained in Income Tax Act, 1961. Except if specifically barred by that section
itself. Thus, the ‚Book Profit‛ would be further eligible to the benefits set out in
the other provisions of the Act. Both the judgments relied upon by the AO were
rendered in the context of erstwhile section 115J which does not contain provision
analogous to sub – section (4) of erstwhile section 115JA and sub section (5) of
section 115JB of the Act. Assessment under erstwhile section 115J would be
concluded exclusively on the basis of the book profit i.e. the net profit as adjusted
by the items set out in the explanation thereunder. However, in an assessment in
terms of section 115JB, the book profit would be further subjected to the effect of
the other provisions of the Act that are specifically bought into play by virtue of
subsection (5) of section115JB

Final
Conclusion The HC affirmed the decision of the tribunal holding that CG which forms
part of net profit in the statement of profit & loss of the assessee – company,
in respect of which exemption u/s 54EC is available while computing total
income under the regular provisions of the Income tax Act, 1961, Should not
be taken into account for calculation of MAT on the book profits u/s 115JB.

SUMMARY: -
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NO CASE LAW ONE LINE SUMMARY

1 Venkatesh Premises Co The doctrine of mutuality is based on the common law principle
- Operative Society – that a person cannot make a profit from himself. Accordingly, the
Principle of Mutuality transfer charges, non - occupancy charges common amenity fund
charges and other charges are exempt owing to application of the
doctrine of mutuality
2 Sind Co - Operative It’s NOT taxable
Housing Society -
Principle of Mutuality
3 Madras Gymkhana Hence cannot be claimed as exempt on this ground
Club – Interest on FD -
Principle of Mutuality
4 Govind Bhai Mamaiya It held that income from asset inherited by the legal heirs is taxable
– Status of Assessment in their individual hands and not in the status of AOP.
of AOP / Individual
5 D.L. Nadagopala Reddy The HC held that when the property came to the hands of the
– Ownership – HUF / assessee, it was property belong to HUF. If the same transferred to
Individual his wife without registered documents, then HUF Property, If with
reg. doc., then individual property
6 Sudhir Nagpal – Rental The court held that the income from letting out the plinth is
Income from Plinth assessable u/s 56 as ‘IFOS‛. There was nothing to show that they
had acted as an AOP. Hence, income has to be assessed in the
status of individual and not AOP.
7 Anil Hardware Store- Firm can claim deduction of remuneration
Manner of
determination of
Remuneration
8 Rolta India Ltd – S. SC held that interest u/s 234B, 234C shall be payable on failure of
234B + 234C interest for the company to pay advance tax in respect of tax payable u/s
115JB Route 115JB.
9 Metal and Chromium The HC affirmed the decision of the tribunal holding that CG
Plater (P) Ltd,.(2019) which forms part of net profit in the statement of profit & loss of
(Mad) – 54EC the assessee – company, in respect of which exemption u/s 54EC is
exemption for MAT available while computing total income under the regular
Route provisions of the Income tax Act, 1961, Should not be taken into
account for calculation of MAT on the book profits u/s 115JB.

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