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Tax Liability Computation for AY 2020-21

Q: What criteria determine the applicability and limits of tax deductions on lunch or meal expenses provided by employers?

Tax deductions on meal expenses depend on whether they exceed Rs. 50 per meal per day. Amounts less are generally exempt when provided during working hours. For instance, if a company incurs Rs. 48,000 per year on meal provisions, exceeding the per-meal cap, the excess amounts above the per-meal threshold are included in taxable income .

Q: How is the leave travel concession treated under income tax laws, and what charges might apply for excess reimbursement?

Under income tax laws, leave travel concession is exempt to the extent it is permissible by law. Any reimbursement exceeding the permissible limit is taxable. In the scenario where costs of air tickets for three children amount to Rs. 45,000, excess reimbursement not covered under permissible exemptions is taxable .

Q: What is the procedure for handling medical reimbursements under tax law, and when do they become taxable?

Medical reimbursements provided by an employer are exempt up to Rs. 15,000 annually for treatments within India. Amounts above this threshold are fully taxable if provided as monetary reimbursements. For treatments in specified hospitals owned by the employer, reimbursements can be tax-free. If Mr. X's medical bills exceed the allowable amount in a private facility, they become fully taxable .

Q: How does the Income Tax Act treat pre-construction interest, and what is its deductible scope?

Pre-construction interest is deductible in five equal installments starting from the year the property was acquired or construction completed. The scope of deduction favors completed construction by considering total interest during the pre-construction phase, deductible against the property income each year. For instance, if pre-construction interest totals Rs. 1,80,000 over three years, Rs. 36,000 is deductively apportioned annually upon completion .

Q: What are the tax implications of providing rent-free accommodation to employees?

The tax implications for providing rent-free accommodation to employees depend on whether the accommodation is owned by the employer or rented. The perquisite value is determined based on factors like the accommodation's size and the employee's salary. Generally, the taxable amount is the lower of 15% of the salary or the actual rent paid, reduced by a specified percentage. For instance, if the lease rent paid by the company is Rs. 1,20,000 and 15% of the employee’s salary is lesser at Rs. 44,145, this lesser amount will be added as a perquisite to the income .

Q: How is the taxability of a car facility determined for income tax purposes when used both for business and personal purposes by an employee?

The taxability of a car facility used for both business and personal purposes is determined based on the cubic capacity of the engine and the usage split. If the engine capacity exceeds 1.6 litres and is used both personally and officially, a perquisite value is added to the employee's income. For example, in the case where an employee is provided a company-owned car with a capacity above 1.6 litres, the entire maintenance cost paid by the employer (Rs. 60,000 in this case) is considered a perquisite .

Q: In what way does the treatment of gratuity differ for government and non-government employees under tax regulations?

Under tax regulations, gratuity received by a government employee is fully exempt. For non-government employees, the exemption depends on whether they are covered by the Payment of Gratuity Act, 1972. Covered employees may exempt the least of actual gratuity received, 15/26 times the last drawn salary for each completed year of service, or Rs. 20,00,000. Those not covered use a different formula, replacing 15/26 with 1/2 of average salary .

Q: How is income from house property computed when the property has multiple uses, such as part residential and part rental?

Income from house property is computed by separately evaluating each part's income use. For parts let out, gross annual value is the higher of expected rent or actual rent received minus any municipal taxes paid. Self-occupied portions may yield either a nil taxable income or a fixed nominal taxable income. Expenses like interest on borrowed capital are deductible within specified limits. For example, if a property is part let out with Rs. 1,65,000 rent received and part self-occupied, income must be computed proportionate to the area used .

Q: What factors influence the taxation of motor car expenses reimbursed by an employer for an employee's private use?

Factors influencing taxation of reimbursed motor car expenses include the car's engine capacity and usage split for private purposes. For personal-only use by an employee, the perquisite is taxable on the entire expense. For mixed use, it’s the lesser of a standardized perquisite rate or actual cost incurred by the employer. An employee using a company car solely for private purpose incurs tax on the entire running cost as a perquisite .

Q: What are the tax implications of clubbing provisions for income from assets transferred to a spouse?

Clubbing provisions require income from an asset transferred to a spouse without adequate consideration to be included in the transferor's income. However, income generated from accretion or secondary investment is not clubbed unless it arises directly from the original transfer. For instance, if assets are transferred and generate Rs. 1,00,000, this is clubbed, but any subsequent interest from reinvestment of this amount is not .

The document outlines Indian income tax rates for the 2020-21 assessment year. It provides tax rates for regular residents, senior citizens, and very senior citizens. Tax rates range from 0-30% with surcharges for higher-income individuals. Agricultural income is exempt from tax but may be integrated with non-agricultural income to potentially increase tax rates. The document also covers tax due dates, rebates, capital gains tax rates, and other income tax rules and definitions.

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Tax Liability Computation for AY 2020-21

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1

CHAPTER – 1 COMPUTATION OF TAX LIABILITY

Income-tax rates for Assessment Year 2020-21:
Up to Rs.2,50,000 : Nil
Rs.2,50,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.12,500
Above Rs.10,00,000 : 30% plus Rs.1,12,500

Tax rates for RESIDENT SENIOR CITIZEN for Assessment Year 2020-21:
Up to Rs.3,00,000 : Nil
Rs.3,00,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.10,000
Above Rs.10,00,000 : 30% plus Rs.1,10,000

Note: In case of a non-resident senior citizen, basic exemption is restricted to Rs.2,50,000.

Tax Rates for RESIDENT VERY SENIOR CITIZEN for Assessment Year 2020-21:
Up to Rs.5,00,000 : Nil
Rs.5,00,000 to Rs.10,00,000 : 20%
Above Rs.10,00,000 : 30% plus Rs.1,00,000

Note: In case of a non-resident very senior citizen, basic exemption is restricted to Rs.2,50,000.

Important points:
• Total income and tax should be rounded off to the nearest ten rupee.

• A rebate of Rs.12,500 under section 87A for RESIDENT INDIVIDUALS in case

TAXABLE INCOME does not exceed Rs.5,00,000 during the previous year.

• A SURCHARGE of 10% (tax on tax) in case taxable income exceeds Rupees Fifty lakhs
but does not exceed Rupees One crore

• A SURCHARGE of 15% in case taxable income exceeds Rupees ONE CRORE

• A SURCHARGE of 25% in case taxable income exceeds Rupees TWO CRORES

• A SURCHARGE of 37% in case taxable income exceeds Rupees FIVE CRORES

• HEALTH & EDUCATION CESS of 4% to be charged. Cess is to be calculated on the

total tax including surcharge.
2

• MAXIMUM MARGINAL TAX RATE: 42.744% (30% + 37% + 4%)

• SENIOR CITIZEN: An Individual who has attained the age of 60 years or more

• VERY SENIOR CITIZEN: An Individual who has attained the age of 80 years or more

• “MARGINAL RELIEF” is available in case taxable income exceeds Rupees FIFTY

LAKHS but does not exceed Rs.51,95,900 (Rs.51,95,520 in the case of a senior citizen
and Rs.51,94,030 in the case of a very senior citizen).

• “MARGINAL RELIEF” is also available in case taxable income exceeds Rupees ONE
CRORE but does not exceed Rs.1,02,14,700 (Rs.1,02,14,500 in the case of a senior
citizen and Rs.1,02,13,740).

• Similarly marginal relief is also available in case where taxable income of an assessee
exceeds [Link] crores or [Link] crores respectively.

• A person born on 1st April would be considered to have attained a particular age on
31st March, the day preceding the anniversary of his birthday. CBDT Circular

(e.g. A person born on 1st April, 1940 would be considered to have attained 80 years on 31st
March, 2020 and shall be treated as “Very Senior Citizen” for A.Y.2020-21).

• If basic exemption is not fully exhausted against other income, the unexhausted
exemption can also be adjusted against incomes taxable at special rates. This benefit is
available only for a resident individual.

• In addition to basic exemption of Rs.2,50,000; long-term capital gain on sale of listed

shares through the stock exchange shall be taxed at a special rate of 10% after availing
an exemption of Rs.1,00,000.

• Incomes taxed at special rates:

✓ Dividend from domestic companies exceeding Rs.10 lakhs 10%
✓ Long term capital gains (all capital assets except listed shares) 20%
✓ Long term capital gain on sale of listed shares exceeding Rs.1 lakh 10%
✓ Short term capital gain on sale of listed shares 15%
✓ Casual Incomes (e.g. winnings from lottery) 30%

“Due date” for filing (submitting) Income-tax return:

➢ If the assesse is subject to Tax Audit u.s.44AB: 30th September
➢ If the assesse is not subject to Tax Audit: 31st July
3

“Basic exemption” provisions in brief for various assessees for A.Y.2020-21:

Resident Non-Resident
For Super senior citizen Rs.5,00,000 Rs.2,50,000
For Senior Citizen Rs.3,00,000 Rs.2,50,000
For Others Rs.2,50,000 Rs.2,50,000

Surcharge rates are as follows:

Total income Rate

< Rs.50 lakhs nil
> Rs.50 lakhs < Rs.1 crore 10%
> Rs.1 crore < Rs.2 crores 15%
> Rs.2 crores < Rs.5 crores 25%
> Rs.5 crores 37%

1. Find out the tax liability in each case separately of Mr.X (age 30) if his total income for the
previous year 2019-20 (Assessment Year 2020-21) is:-

• Rs.2,10,000 Rs.3,50,000 Rs.5,00,000

• Rs.8,36,295 Rs.10,00,000 Rs.50,00,000

2. Mr.D (age 45) is a businessman. His income for the previous year 2019-20 (Assessment Year
2020-21) is as follows: Compute his tax liability in each case separately:-

• Rs.1,00,00,000 Rs.1,80,00,000
• Rs.4,10,00,000 Rs.9,10,00,000

3. Find out the tax liability in each case separately of Mr.Y (resident senior citizen) if his total
income for the previous year 2019-20 (Assessment Year 2020-21) is:-

• Rs.2,90,000 Rs.5,00,000 Rs.10,00,000

• Rs.70,00,000 Rs.1,40,00,000 Rs.3,50,00,000

What difference it would make if he had been a non-resident for A.Y.2020-21.

4. Mr.A is a senior citizen and a resident for the previous year 2019-20. His taxable income for
the assessment year 2020-21 is Rs.5,00,000. Compute his tax liability. What will be your
answer if he had been a non-resident for the relevant previous year.

5. Find out the tax liability in each case separately of Mr.R (a resident) (born on 01.07.1939) if his
total income for the previous year 2019-20 (Assessment Year 2020-21) is:-

• Rs.3,00,000 Rs.5,00,000 Rs.10,00,000

• Rs.1,00,00,000 Rs.4,10,00,000

6. Compute tax liability in each separately of Mr.B (a resident) (age 40 years) if his taxable income
for the previous year ending 31st March 2020 (Assessment Year 2020-21) is:

• Rs.50,00,000 Rs.50,00,100 Rs.50,10,000

• Rs.51,00,000 Rs.1,01,00,000 Rs.5,01,00,000

7. Mr.C has a salary income (computed) of Rs.10,00,000; dividend from domestic companies of
Rs.12,00,000; Long-term capital gain on sale of listed shares through stock exchange Rs.3,00,000
and winning from lottery amounting to Rs.10,00,000 for the previous year 2019-20. Determine
his tax liability for Assessment Year 2020-21.

8. Mr.X, a resident, declares the following incomes for the previous year 2019-20:

a) Income from other sources of Rs.2,00,000; and

b) long-term capital gain on sale of listed shares through the stock exchange Rs.5,00,000.

Compute his tax liability for the Assessment Year 2020-21. Will your answer differ if Mr.X had
been a non-resident for the relevant assessment year.

Previous Year: Section 3: & Assessment Year: Section 2(9):

Income earned in a year is taxable in the next year. The year in which income is earned is known as
previous year and the next year in which income is taxable is known as the Assessment Year.

Heads of Income:
5 heads of income. Salaries, house property, business or profession, capital gains and other sources

Meaning of “Gross Total Income”:

“Gross total income” means the aggregate income earned from all the heads before allowing
deductions under Chapter VIA of the Income-tax Act.

Meaning of “Total Income”:

“Total Income” is the income on which tax is payable by the assessee. It is computed after allowing
deductions under Chapter VIA of the Income-tax Act.
5

CHAPTER – 2 AGRICULTURAL INCOME

Agricultural Income:
• Income should be derived from land
• Land should be situated in India
• Land should be used for agricultural purposes

Treatment of agricultural income for tax purposes:

Agricultural Income is exempt from tax under section 10 (1). However, agricultural income
is integrated to non-agricultural income for rate purposes.

Step 1: Integrate both agricultural income and non-agricultural income if possible.

Step 2: Compute tax on the integrated income.
Step 3: Compute tax on agricultural income after adding basic exemption.
Step 4: Step 2 minus step 3.

note: Integration is possible only if agricultural income exceeds Rs.5,000 and non-
agricultural income exceeds basic exemption limit.

note: The object of integration is that assessee pays more tax on his non-agricultural income
by way of increase in the slab rate.

note: Integration is not applicable in cases where incomes are taxed at special rates or in
cases of companies or firms where income is taxed at flat rate.

Income Rule Agricultural Non-agricultural

income income
Growing and
manufacturing tea 8 60% 40%

Rubber 7A 65% 35%

Sale of coffee grown

and cured 7B (1) 75% 25%

Sale of coffee grown, cured,

roasted and grounded 7B (1A) 60% 40%
6

Few examples of agricultural income:

Income derived from the sale of seeds
Income from growing of flowers and creepers
Rent received from land used for grazing of cattle required for agricultural activities
Income from growing of bamboo

Few examples of Non-agricultural income:

Income from purchase and sale of standing crops
Income from breeding of livestock
Income from poultry farming
Income from fisheries
Income from dairy farming

Whether income from nursery constitutes agricultural income?

Yes, Income derived from saplings or seedlings grown in a nursery would be deemed to be
agricultural income, whether or not the basic operations were carried out on land.

Problems:
1. For the previous year ending March 31, 2020, non-agricultural income of X (age: 32 years) is
Rs.2,40,000, whereas agricultural income is Rs.18,00,000. Is he liable to pay income tax?

2. Mr.X, a resident, has provided the following particulars of his income for the p.y.19-20.
Income from salary (computed) Rs.2,80,000; Income from house property (computed)
Rs.2,50,000; Agricultural income from a land in Jaipur Rs.4,80,000; Expenses incurred for
earning agricultural income Rs.1,70,000. Determine his tax liability assuming his age is:
a) 45 years or b) 70 years.

3. Mr.A, aged 60 years, is engaged in the business of roasting and grounding of coffee, derives
income Rs.10 lakhs during the financial year 2019-20. Compute his tax liability assuming he
has no other income.

4. Mr.B earned Rs.20,00,000 from sale of coffee grown and cured (processed) by him. He claims
the entire income as agricultural income, hence exempt from tax. Is he correct?

5. Mr.C manufactures latex from the rubber plants grown by him in India. These are then sold
in the market for Rs.30 lacs. The cost of growing rubber plants is Rs.10 lacs and that of
manufacturing latex is Rs.8 lacs. Compute his total income.

6. Mr.A, a resident aged 25 years, manufactures tea from the tea plants grown by him in India.
These are then sold in the Indian market for Rs.40 lakhs. The cost of growing tea plants was
Rs.15 lakhs and the cost of manufacturing tea was Rs.10 lakhs. Compute his tax liability for
the Assessment Year 2020-21.
7

7. Mr.R had estates in Rubber, Tea and Coffee. He derives income from them. He has also a
nursery wherein he grows plants and sells. For the previous year ending 31.03.2020, he
furnishes the following particulars of his sources of income from estates and sale of plants.
You are requested to compute the taxable income for the Assessment Year 20-21:

• Manufacture of Rubber Rs.5,00,000

• Manufacture of Coffee grown and cured Rs.3,50,000
• Manufacture of Tea Rs.7,00,000
• Sale of plants through nursery Rs.1,00,000

8. Mr.K grows paddy and uses the same for the purpose of manufacturing of rice in his own
Rice Mill. The cost of cultivation of 40% of paddy produce is Rs.7,00,000 which is sold for
Rs.15,00,000; and the cost of cultivation of balance 60% of paddy is Rs.12,00,000 and the
market value of such paddy is Rs.24,00,000. To manufacture the rice, he incurred Rs.2,00,000
in the manufacturing process on the balance (60%) paddy. The rice was sold for Rs.30,00,000.
Compute the business income and agricultural income of Mr.K.

9. Miss Vivitha, a resident and ordinary resident in India, has derived the following incomes
from various operations (relating to plantations and estates owned by her) during the year
ended 31.03.2020:

• Income from sale of centrifuged latex processed from rubber plants grown in
Darjeeling: Rs.3,00,000
• Income from sale of coffee grown and cured in Yercaud, Tamil Nadu: Rs.1,00,000
• Income from sale of coffee grown, cured, roasted and grounded, in Colombo. Sale
consideration was received at Chennai: Rs.2,50,000
• Income from sale of tea grown and manufactured in Shimla Rs.4,00,000
• Income from sapling and seedling grown in a nursery at Cochin: Rs.80,000
(basic operations were not carried out by her on land)

You are required to compute the business income and agricultural income of Miss Vivitha for
the Assessment Year 2020-21.

Problems for practice

10. Taxable Income of Mr.S as computed under Income-tax Act, for the assessment year 2020-21
is Rs.10,00,000. Compute tax payable by Mr.S assuming that he has agricultural income of:

(a) Nil; (b) Rs.5,000; and (c) Rs.7,50,000.

11. Mr.A, a resident individual, aged 61 years, earned agricultural income of Rs.7,00,000 during
the previous year 2019-20. Compute his tax liability assuming that he has non-agricultural
income of: (a) Rs.3,00,000; (b) Rs.5,00,000.
8

12. X Ltd. grows sugarcane to manufacture sugar. Data for 2019-20 is as follows:

Cost of cultivation of sugarcane Rs.40,00,000

Market value of sugarcane when sugarcane is transferred to the factory Rs.90,00,000
Other manufacturing cost Rs.60,00,000
Sales turnover of sugar Rs.1,70,00,000

Compute taxable income of X Ltd.

13. Discuss with brief reasons, whether rent received for letting out agricultural land for a movie
shooting and amounts received from sale of seedlings in a nursery adjacent to the
agricultural lands owned by an assesse can be regarded as agricultural income, as per
provisions of the Income-tax Act, 1961.

14. State with brief reasons whether the following are agricultural income either in whole or in
part:

i. Purchase of standing sugarcane crop by Mr.A for Rs.2 lakhs and after cutting the
canes, selling them for Rs.2,50,000.
ii. Income from milk dairy run by Mr.R in his agricultural lands Rs.50,000
iii. Income from sale of plants Rs.1,00,000 earned by Mr.J who maintains a nursery
iv. Income from sale of rubber Rs.3,20,000 realised by Mr.T who owns rubber estate and
cultivates rubber.
v. Income from gracing of cattles allowed in the land owned by Mr.B Rs.60,000.
vi. Rent from a dwelling house in agricultural land in Coorg, Karnataka (it is occupied by
coffee estate labourers) Rs.90,000

Answers:
13. Land is not used for agricultural purposes. Therefore, rent received for letting out
agricultural land for a movie shooting is NOT agricultural income.

Amount received from sale of saplings or seedlings in a nursery is to be treated as

agricultural income, whether or not the basic operations were carried out on land.

14. a. No basic operations (agricultural activities) were carried out on the land.
To be treated as business income.
b. Business income
c. Agricultural income
d. Agricultural income (65%) and Business income (35%)
e. Agricultural income
f. Agricultural income
9

CHAPTER – 3 RESIDENTIAL STATUS

An Individual can be either:
a. Resident in India; (or)
b. Non-resident in India

A resident is an individual who satisfies any one of the basic conditions mentioned below:

BASIC CONDITIONS:
1. One should stay in India at least for 182 days during the relevant previous year;
(OR)
2. One should stay in India at least for 60 days during the relevant previous year AND
at least for 365 days during 4 preceding previous years.

A resident individual can further be classified into:

a. Resident and ordinary resident; (or)
b. Resident but not ordinary resident

ADDITIONAL CONDITIONS:
1. One should stay in India at least for 730 days during 7 preceding previous years.
(AND)
2. One should be a resident at least for 2 years out of 10 preceding previous years.

Important points:
▪ If both the additional conditions are satisfied then he is an ordinary resident.

▪ Basic condition 2 does not apply for an Indian citizen who leaves India for the purpose
of employment or one who is working as a crew member of an Indian ship.

▪ Basic condition 2 does not apply for an Indian citizen or a person of Indian origin who
comes to India for the purpose of a visit.

▪ Official tours abroad in connection with employment in India shall not be regarded as
employment outside India.

▪ A person is deemed to be of Indian origin if he, or either of his parents or any of his
grandparents, were born in undivided India.

▪ Place of stay or the purpose of stay is not relevant. Stay need not be continuous.
10

▪ Time and hour of leaving and arrival is relevant. If clear information is not given then
the day he enters India and the day he leaves India should be taken into account.

Residential Status of a Hindu Undivided Family:

▪ If control and management of affairs is wholly or partly situated in India: Resident
▪ If control and management of affairs is wholly situated outside India: Non-resident

Note: Ordinary resident or not-ordinary resident depends upon the stay of “Karta” (i.e.
additional conditions mentioned above).

Residential status of firm:

▪ If control and management of affairs is wholly or partly situated in India: Resident
▪ If control and management of affairs is wholly situated outside India: Non-resident

Residential status of a company:

Domestic company:
Always resident irrespective of place of control and management

Foreign company:
A foreign company would be resident in India in any previous year, if its place of effective
management (POEM), in that year, is in India.

“POEM” means a place where KEY MANAGEMENT AND COMMERCIAL DECISIONS that
are necessary for the conduct of the business of an entity as a whole are, in substance made.

Note: A partnership firm, or a company can never be “ordinary” or “not ordinary resident”.

Problems:
1. X left India for the first time on May 20, 2017. During the financial year 19-20, he came to
India once on May 27 for a period of 53 days. Determine his residential status for the
assessment year 2020-21.

2. X, a foreign national (not being a person of Indian origin), comes to India for the first time on
April 15, 2015. During the financial years 15-16, 16-17, 17-18, 18-19 and 19-20 he was in India
for 130 days, 80 days, 13 days, 210 days and 75 days respectively. Determine his residential
status for the assessment year 2020-21.
11

3. Mr.X, an Australian Cricketer has been coming to India for 90 days every year since 2003-04.
Determine his residential status for the assessment year 2020-21. Would your answer differ
if he had come to India for: a) 100 days or b) 110 days every year?

4. During the previous year 19-20, X, a foreign national (not being a person of Indian origin),
visits India for 64 days. Determine his residential status for the assessment year 2020-21 on
the basis of the following information:

➢ During 15-16, X is present in India for 365 days.

➢ During 13-14 and 14-15, X was in India for 40 and 365 days respectively.
➢ Mrs.X is non-resident in India for the assessment year 2020-21.

5. X is a foreign citizen. During the financial year 19-20, he comes to India for 85 days.
Determine his residential status for the assessment year 2020-21 on the assumption that
during financial years 2005-06 to 18-19 he was present in India as follows:

05-06: 85 days 10-11: 180 days 15-16: 305 days

06-07: 310 days 11-12: 360 days 16-17: 65 days
07-08: 6 days 12-13: 16 days 17-18: 10 days
08-09: 5 days 13-14: 360 days 18-19: 126 days
09-10: 65 days 14-15: 181 days

6. X came to India from U.K. for the first time on 2nd of October, 2018. He returned to his
home country after staying in India up to 28th of September, 2019. Will he be a resident in
India for the assessment years 2019-20 and 2020-21.

7. Mr.R an Indian Citizen left India for the first time on 21.9.2019 for employment in
Germany. Determine the residential status of Mr.R for the A.Y. 2020-21. b) Will your
answer be different if he had gone on a leisure trip.

8. Mr.K, a CEO of a company had undertaken foreign tour on various occasions for company’s
work. He was out of India for a total number of 240 days during the previous year ending
31.03.2020. Can he submit his return of income for the A.Y. 2020-21 in the status of non-
resident?

9. Mr.G was born in Lahore in 1946. He has been staying in England since 1970. He came to
visit India on 4.10.2019 and returns on 30.3.2020. Determine his residential status for
A.Y.20-21.
12

10. X, an individual, is a resident but not ordinary resident in India for the A.Y.2020-21 (previous
year 2019-20). During the previous year 2019-20, the affairs of X (HUF), a Hindu undivided
family whose karta is X since 1980, are partly managed from Chennai and partly from
Singapore. Determine the residential status of X (HUF) for the assessment year 2020-21.

11. 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.2019-
20 after 15 years. He comes to India on 1.4.2019 and leaves for Australia on 1.12.2019.
Determine the residential status of Mr.E and the HUF for A.Y.2020-21.

12. A company, other than an Indian company, would be a resident in India for the P.Y.2019-20
if, during that year,

a. Its POEM is in India

b. Its control and management is wholly or partly in India
c. Majority of its directors are resident in India

1. INDIAN CITIZEN AS A CREW MEMBER OF A FOREIGN BOUND SHIP:

In case of foreign bound ships where the destination of the voyage is outside India, there is
uncertainty regarding the manner and the basis of determining the period of stay in India for
an Indian citizen, being a crew member.

According to Rule 126, 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 following period:

Period commencing from Period ending on

the date entered into the Continuous Discharge AND the date entered into the Continuous
Certificate in respect of joining the ship by the Discharge Certificate in respect of signing
said individual for the eligible voyage off by that individual from the ship in
respect of such voyage.

MEANING OF CERTAIN TERMS:

a. CONTINUOUS DISCHARGE CERTIFICATE:

This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge
Certificate-cum Seafarer’s Identity Document) Rules, 2001 made under the Merchant
Shipping Act, 1958.
13

b. ELIGIBLE VOYAGE:
A voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where:

i. For the voyage having originated from any port in India, has as its destination any
port outside India; and

ii. For the voyage having originated from any port outside India, has as its destination
any port in India.

13. Mr.X 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 6 th June,
2019. From the following details for the previous year 2019-20, determine the residential
status of Mr.X for A.Y.2020-21, assuming that his stay in India in the last 4 previous years
(preceding P.Y.2019-20) is 400 days and last seven previous years (preceding P.Y.2019-20) is
750 days.

Particulars Date
Date entered into the Continuous Discharge Certificate in 6th June, 2019
respect of joining the ship by Mr.X

Date entered into the Continuous Discharge Certificate in 9th December, 2019
respect of singing off the ship by Mr.X

Answer:
No. of days during the previous year 2019-20 365
Less: No. of days to be excluded from 6.6.19 to 9.12.19 187
Therefore, no. of days of stay in India 178

Basic condition one: Stay for atleast 182 days during the previous year: Not satisfied
Basic condition two: Does not apply for an Indian citizen who works as a crew member
of a Ship.

Note: Voyage is undertaken by an Indian ship engaged in the carriage of passengers in

international traffic, originating from a port in India and having its destination at a port
outside India. Hence, the voyage is an eligible voyage.

Hence assesse Mr.X is a non-resident for A.Y.2020-21.

14. During the last four years preceding the financial year 2019-20, Mr.D, a citizen of India, was
present in India for 430 days. During the last seven previous years preceding the previous
year 2019-20, he was present in India for 830 days.

Mr.D is a member of the crew of a Dubai bound Indian ship, carrying passengers in the
international waters, which left Kochi port in Kerala on 12th August, 2019.

Following details are made available to you for the previous year 2019-20:

Particulars Date
Date entered into the Continuous Discharge Certificate in 12th August, 2019
respect of joining the ship by Mr.D

Date entered into the Continuous Discharge Certificate in 21st January, 2020
respect of singing off the ship by Mr.D

In May, 2019 he had gone out of India to Singapore and Malaysia on a private tour for a
continuous period of 29 days. You are required to determine residential status of Mr.D for
the previous year 2019-20.

Answer:
No. of days during the previous year 2019-20 365
Less: No. of days to be excluded from 12.8.19 to 21.01.20 163
202
Less: Private tour to Singapore and Malaysia (did not stay in India) 29
Therefore, no. of days of stay in India 173

Basic condition one: Stay for atleast 182 days during the previous year: Not satisfied
Basic condition two: Does not apply for an Indian citizen who works as a crew member
of a Ship.

Note: Voyage is undertaken by an Indian ship engaged in the carriage of passengers in

international traffic, originating from a port in India and having its destination at a port
outside India. Hence, the voyage is an eligible voyage.

Hence assesse Mr.X is a non-resident for A.Y.2020-21.

15. Mr.R, a chartered accountant, is presently working in a firm in India. He has received an
offer for the post of Chief Financial Officer from a company at Singapore. As per the offer
letter, he should join the company at any time between 1st September, 2019 and 31st October,
2019. He approaches you for your advice on the following issues to mitigate his tax liability
in India:

a. Date by which he should leave India to join the company;

b. Direct credit of part of his salary to his bank account in Chennai maintained jointly
with his mother to meet requirement of his family;
c. Period for which he should stay in India when he comes on leave.

Answer:

a. Basic condition two does not apply for an Indian Citizen who leaves India for the
purposes of employment. Mr.R, can stay in India up to a maximum of 181 days
during the relevant previous year 2019-20. He should leave India on or before 28th
September, 2019.

b. Amount directly received is taxable in the hands even in the case of a Non-resident.
Hence, Mr.R is advised to receive his entire salary in Singapore and later remit to his
bank account in Chennai to avoid tax.

c. Basic condition two does not apply for an Indian Citizen or a person of Indian Origin
if he comes to India for a visit. Therefore, maximum period for which Mr.R can stay in
India should not exceed 181 days during the relevant previous year.

16. Mrs.K is a hollywood actress. Her passport reveals the following information about her stay in
India.

2019-20 from April 3rd to July 11th

2018-19 from June 22nd to July 11th
2017-18 from Feb 10th to March 26th
2016-17 from Sept 7th to March 26th
2015-16 from May 17th to Sept 30th
2014-15 from April 3rd to July 11th
2013-14 from April 3rd to July 11th
2012-13 from April 3rd to July 11th
2011-12 from April 3rd to July 11th

Find out her residential status for the assessment year 2020-21.
16

CHAPTER – 4 INCIDENCE OF TAXATION

ROR RNOR NR
• Income earned and received in India Taxable Taxable Taxable

• Income earned in India but received outside

India Taxable Taxable Taxable

• Income earned outside India but received in

India Taxable Taxable Taxable

• Income earned and received outside India Taxable Not taxable Not taxable

• Income earned and received outside India

from a business is controlled from India Taxable Taxable Not taxable

• Past untaxed profits brought into India Not taxable Not taxable Not Taxable

Interest, Royalty and Fees for technical services received by a NON-RESIDENT: Is it taxable?

If paid by Government of India Always deemed to accrue or arise in India, hence taxable
to a non-resident:

If paid by others (resident or Shall be deemed to accrue or arise in India only if used for
non-resident) to a non-resident: business or profession in India

1. X furnishes the following particulars of his income earned during the previous year:
Interest on German Development bonds (40% is received in India) Rs.60,000
Income from agriculture in Nepal, received there but later Rs.50,000 is remitted to India
Rs.1,81,000
Income from property in Canada received outside India Rs.86,000
Income from business in Australia controlled from Delhi (Rs.15,000 is received in India)
Rs.65,000
Dividend paid by a foreign company but received in India on 3.8.2018 Rs.46,500
Past untaxed profit of 18-19 brought to India in 19-20 Rs.10,00,000
Profits from a business in Chennai and managed from outside India Rs.27,000
Profits on sale of a building in India but received in Sri Lanka Rs.14,00,000
Pension from a former employer in India, received in Bangladesh Rs.36,000
Gift in foreign currency from a friend received in India Rs.80,000

Compute gross total income of X, if he is: a) Ordinary resident;

b) Not ordinary resident;
c) Non-resident
17

2. From the following particulars of income furnished by Mr.A pertaining to the year ended
31.03.2020, compute the total income for the assessment year 2020-21, if he is:

i. Resident and ordinary resident;

ii. Resident but not ordinary resident;
iii. Non-resident

a. Short term capital gain on sale of shares in India Company received in Germany
Rs.15,000
b. Dividend from a Japanese Company received in Japan Rs.10,000
c. Income from property in London deposited in a bank in London, later on remitted to
India through approved banking channels Rs.75,000
d. Dividend from RP Ltd., an Indian Company Rs.6,000
e. Agricultural income from lands in Gujarat Rs.25,000

3. [Link] & [Link] are brothers and they earned the following incomes during the
financial year 2019-20. [Link] settled in Canada in the year 1996 and [Link] settled
in Delhi. Compute the gross total income for the assessment year 2020-21.

Particulars [Link] [Link]

Interest on Canada Development Bonds (only 50%
of interest received in India) 35,000 40,000

Profit from a business in Nagpur, but managed

directly from London 1,00,000 1,40,000

Short term capital gain on sale of shares of an

Indian company received in India 60,000 90,000

Fees for technical services rendered in India,

but received in Canada 1,00,000 nil

Income from a business in Chennai 80,000 70,000

Dividend from British company received in London 28,000 20,000

Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000

Agricultural income from a land situated in A.P. 55,000 45,000

Rent received from house property at Bhopal 1,00,000 60,000
18

4. [Link], a Government employee serving in the Ministry of External Affairs, left India for
the first time on 31.03.2019 due to his transfer to High Commission of Canada. He did not
visit India any time during the P.Y. 2019-20. He has received the following incomes for the
financial year 2019-20:

Salary (after standard deduction) Rs.5,00,000

Foreign Allowance Rs.4,00,000
Interest on fixed deposit from bank in India Rs.1,00,000
Income from agriculture in Pakistan Rs.2,00,000
Income from house property in Pakistan Rs.2,50,000

Compute his gross total income for A.Y.2020-21.

5. State whether the following transactions attract income-tax in India in the hands of recipients:

a. Salary paid by Central Government to [Link], a citizen of India Rs.7,00,000 for the services
rendered outside India

b. Interest on moneys borrowed from outside India Rs.5,00,000 by a non-resident for the purpose
of business within India say, at Chennai.

c. Royalty paid by a resident to a non-resident in respect of a business carried on outside India

d. Legal charges of Rs.5,00,000 paid to a lawyer of United Kingdom who visited India to
represent a case at the Delhi High Court.

6. Explain with reasons whether the following transactions attract income-tax in India in the hands of
recipients:

a. Salary paid to [Link], a citizen of India Rs.15,00,000 (after standard deduction) by the
Central Government for the services rendered in Canada

b. Legal charges of Rs.7,50,000 paid to [Link], a lawyer of London, who visited India to
represent a case at the Supreme Court

c. Royalty paid to Rajeev, a non-resident by [Link], a resident for a business carried on in

Sri Lanka.

d. Interest paid Rs.1,00,000, on money borrowed from France, by B, a non-resident, for the
business at Bangalore.
19

7. A Korean Company, D Ltd entered into the following transactions during the financial year
2019-20:

a. Received Rs.20 lakhs from a non-resident for use of patent for a business in India
b. Received Rs.15 lakhs from a non-resident Indian for use of know-how for a business in
Sri Lanka and this amount was received in Japan (assume that the above amount is
converted in Indian Rupees).
c. Received Rs.7 lakhs from RR Co. Ltd., an Indian company for providing technical
know-how in India
d. Received Rs.5 lakhs from R and Co., Mumbai for conducting the feasibility study for a
new project in Nepal and the payment was made in Nepal.

Explain briefly, whether the above receipts are chargeable to tax in India.

8. Mr.S, a citizen of India, is Joint Secretary in the Ministry of Finance, Government of India.
On 15.03.2019, he is transferred as High Commission of Australia. He did not visit India any
time during the P.Y. 2019-20. He has received the following incomes for the financial year
2019-20:

Salary from Government of India (after standard deduction) Rs.7,20,000

Foreign Allowance from Government of India Rs.6,00,000
Rent of a house situated at London (received in London) Rs.3,60,000
Interest accrued on National Saving Certificate during the year 19-20 Rs.45,000

Compute his gross total income for A.Y.2020-21.

9. Mr.X, an India citizen left India on April 20, 2018 for the first time to set-up a software firm in
Singapore. On April 10, 2019, he enters into an agreement with LK Ltd., an Indian company,
for the transfer of technical documents and designs to set-up an automobile factory in Tamil
Nadu. He reaches India along with his team to render the requisite services on May 15, 2019
and completes his assignment on August 20, 2019. He leaves India for Singapore on August
21, 2019. He charges Rs.50 lakhs for his services from LK Ltd.

Determine the residential status of Mr.X for the assessment year 2020-21 and explain as to the
taxability of the fees charged from LK Ltd.

Hint: Amount received by Mr.X from LK Ltd. for transfer of technical documents and designs
is treated as “Royalty” income.
20

10. Mrs.X and Mrs.Y are sisters and they earned the following income during the financial year
2019-20. Mrs.X is settled in Malaysia since 1984 and visits India for a month every year.
Mrs.Y is settled in Indore since her marriage in 1992. Compute the total income of Mrs.X and
Mrs.Y for the assessment year 2020-21.
Mrs.X Mrs.Y

Income from profession in Malaysia (set up in India)

received there 15,000 ---

Profit from business in Delhi, but managed directly from Malaysia 40,000 ---

Rent (computed) from property in Malaysia deposited in a bank

at Malaysia, later on remitted to India through approved
banking channels 1,20,000 ---

Dividend from PQR Ltd., an Indian Company 5,000 9,000

Dividend from a Malaysian company received in Malaysia 15,000 8,000

Cash gift received from a friend on Mrs.Y’s 50th birthday --- 51,000

Agricultural income from land in Maharashtra 7,500 4,000

Past foreign untaxed income brought to India 5,000 ---

Fees for technical services rendered in India received in Malaysia 25,000 ---

Income from a business in Pune (Mrs.X receives 50% of the

income in India) 12,000 15,000

Interest on debentures in an Indian company (Mrs.X received

the same in Malaysia) 18,500 14,000

Short-term capital gain on sale of shares in an Indian company 15,000 25,500

Interest on savings account with SBI 12,000 8,000
Life Insurance premium paid to LIC --- 30,000
21

11. [Link], an Indian citizen, travelled frequently out of India for his business trip as well as for his
outings. He left India from Mumbai airport on 15th May 2019 as stamped in the passport. He has
been in India for less than 365 days during the 4 years immediately preceding the previous year and
has not been in India for at least 60 days in the previous year.

Determine: i. Residential status of [Link] and

ii. Total income for the assessment year 2020-21 from the following information:

1) Dividend amounting to Rs.20,000 received from Sassy Ltd., a Switzerland based company,
which was transferred to his Swiss bank account. He had borrowed money from Mr.
Sundarlal, a non-resident Indian, for the above mentioned investment on 2nd April, 2019.
Interest on the borrowed money for the previous year 2019-20 amounted to Rs.2,000.

2) Short term capital gain on the sale of shares of Trena India Ltd. a listed Indian Company
amounting to Rs.35,000. The sale proceeds were credited to his Swiss bank account.

3) Interest on fixed deposit with State Bank of India (Mumbai) amounting to Rs.8,000 was
credited to his saving account.

Answer:

Residential Status:
No. of days of stay in India during the previous year 19-20: 45
Basic conditions are not satisfied. [Link] is a non-resident for A.Y.2020-21.

Computation of total income for A.Y.2020-21:

Dividend earned outside India and received outside India Not taxable
Less: Since dividend is not taxable, interest on loan
for investing in shares is not deductible Nil Nil

Short-term capital gain on sale of shares of Indian company 35,000

Interest on fixed deposit with SBI 8,000

Total Income of the assessee 43,000
Answers to chapter “Incidence of Taxation” 22

Ordinary Not ordinary Non-resident

Resident resident
1. Income earned outside India; but 40%
Is received in India 60,000 24,000 24,000

Income earned outside India and

received outside India 1,81,000 nil nil

Income earned outside India and

received outside India 86,000 nil nil

Income earned outside India from a

business controlled from India;
Rs.15,000 is received in India 65,000 65,000 15,000

Income earned outside India but

received in India 46,500 46,500 46,500

Past untaxed foreign income not taxable not taxable not taxable
Income earned in India 27,000 27,000 27,000
Income earned in India 14,00,000 14,00,000 14,00,000
Income earned in India 36,000 36,000 36,000
Income received in India 80,000 80,000 80,000

Gross total income 19,81,500 16,78,500 16,28,500

Ordinary Not ordinary Non-resident

Resident resident

2. Income earned in India 15,000 15,000 15,000

Income earned and received outside India 10,000 nil nil
Income earned and received outside India 75,000 nil nil
Dividend from domestic company exempt exempt exempt
Agricultural income in India exempt exempt exempt

Total Income 1,00,000 15,000 15,000

Answers to chapter “Incidence of Taxation” 23

Ramesh Suresh
(non-resident) (ordinary resident)
3. Income earned outside India but partly
received in India 17,500 40,000

Income from a business in India 1,00,000 1,40,000

Income earned in India 60,000 90,000
Fees for services rendered in India 1,00,000 nil

Income earned in India 80,000 70,000

Income earned and received outside India nil 20,000
Interest on savings a/c in India 7,000 12,000
Agricultural income in India exempt exempt
Income from house property in India 70,000 42,000

Gross total income 4,34,500 4,14,000

Less: Section 80TTA 7,000 10,000
Total Income 4,27,500 4,04,000

4. [Link] is a non-resident for A.Y.2020-21 as he did not visit India during the previous year 2019-20.

Non-resident
Salary paid by Govt of India is deemed to
accrue or arise in India 5,00,000
Foreign allowance exempt u.s.10(7) – refer “Salaries”
Income earned in India 1,00,000
Income earned outside India Not taxable (assumed to be received outside India)
Income earned outside India Not taxable (assumed to be received outside India)

Total Income 6,00,000

5.
a. Salary paid to [Link] by Central Government for services rendered outside India is deemed to
accrue or arise in India and hence taxable in the hands of [Link]

b. Interest paid on money borrowed for the purpose of business in India is deemed to accrue or arise
in India and hence taxable in the hands of non-resident.

c. Royalty paid to a non-resident for the purpose of a business outside India is NOT deemed to
accrue or arise in India, not taxable

d. Legal charges received to represent a case at the Delhi High Court is deemed to accrue or arise in
India and hence taxable.
Answers to chapter “Incidence of Taxation” 24

6. Salary paid by Govt of India to [Link], an Indian Citizen for services rendered outside India is deemed
to accrue or arise in India and therefore taxable in the hands of David.

Legal charges received to represent a case at the Supreme Court is deemed to accrue or arise in India
and hence taxable.

Royalty paid to a non-resident for the purpose of a business outside India is NOT deemed to accrue or
arise in India, not taxable

Interest paid to a non-resident ([Link]) on money borrowed for the purpose of business in India is
deemed to accrue or arise in India and hence taxable in the hands of recipient.

7. Royalty received by the Korean Company for use of patent for a business carried on in India is deemed
to accrue or arise in India and therefore taxable in the hands of D Ltd.

Amount received from a non-resident by D Ltd for use of know-how for a business carried on in Sri Lanka
is NOT deemed to accrue or arise in India and therefore not taxable in the hands of D LTd.

Fees received from an Indian company by D Ltd for the purpose of a business in India is deemed to
accrue or arise in India and therefore taxable in the hands of D Ltd (Korean company)

Fees received for services rendered in Nepal is NOT deemed to accrue or arise in India and hence not
taxable in the hands of D Ltd.

8. Mr.S is a non-resident for A.Y.2020-21 as he did not visit India during the previous year 2019-20.

Non-resident
Salary paid by Govt of India is deemed to
accrue or arise in India 7,20,000
Foreign allowance exempt u.s.10(7) – refer “Salaries”
Income earned & received outside India Not taxable
Income earned in India 45,000

Total Income 7,65,000

9. Refer Institute material (institute website) page no.2.25; illustration 9.

10. Refer Institute material (institute website) page no.2.35; Question no.4 (Geetha and Leena).
25

CHAPTER – 5 INCOME UNDER THE HEAD “SALARIES”

1. Salary:
▪ Salary falls due on the last day of each month
▪ Salary falls due on the first day of next month

2. Dearness Allowance
▪ forming part of salary
▪ not forming part of salary

3. Commission:
▪ Fixed % commission on turnover
▪ Commission other than turnover commission

4. Advance Salary:
▪ Taxable on “receipt” basis

5. Arrears of Salary:
▪ Taxable on “due” basis

6. Allowances:
▪ Only in the form of cash
▪ Fixed in nature

Different forms of allowances:

▪ Exemption based on actual expenditure
▪ Exemption based not on actual expenditure
▪ Fully taxable allowances

i) Exemption of allowances based on actual expenditure:

a) House Rent Allowance:

▪ 40% of salary (50% in case of metros)
▪ Actual HRA received
▪ Rent paid (--) 10% of salary
whichever is less is exempt from tax

note: Salary = Basic + Dearness allowance (forming) + Sales commission

note: If the employee lives in his own house or in a house without paying any rent then
whole amount of H.R.A. is taxable.

b) Travelling / Conveyance / Uniform / Helper Allowance:

▪ Official Purpose: Exempt
▪ Private Purpose: Taxable
26

ii) Exemption of allowances not based on actual expenditure:

a) Entertainment Allowance for Government employees

▪ Maximum limit: Rs.5,000
▪ Actually received
▪ 20% of Basic
whichever is less is exempt from tax

note: Exemption is not based on actual expenditure incurred.

note: No exemption for non-Government employees

b) Children’s education allowance:

Amount exempt is Rs.100 per month per child subject to a maximum of two children.

c) Children’s hostel allowance:

Amount exempt is Rs.300 per month per child subject to a maximum of two children.

d) Tribal area allowance:

Amount exempt is Rs.200 per month.

e) Transport allowance (allowance for commuting between residence to office and back):
Amount exempt is Rs.3,200 p.m. only for blind or deaf and dumb and other disabled employees

f) Transport Allowance granted to employees working in any transport system to meet his
personal expenses while on duty: Amount exempt: 70% of allowance received or Rs.10,000 p.m.
whichever is less.

iii)Fully taxable allowances: All other allowances like medical, telephone, transport, city
compensatory allowance, special, project, lunch, tiffin, marriage, servant, gas-electricity-water,
overtime are fully taxable without any exemption.

note: Any Allowance paid by the Government of India to an Indian citizen for rendering service
outside India is fully exempt from tax. Section 10 (7).

Problems on Basics:
1. Discuss the head of income under which the following receipts are assessed to tax.
a. Salary received by a working partner from his firm
b. Pension received by the family members after the death of the employee
c. Salary received by MP/MLA

2. Mr.X draws Rs.80,000 p.m. as salary up to 31.08.2019. From 1.9.2019, his salary was increased
to Rs.1,00,000 p.m. Calculate his salary for the previous year 19-20 if it falls due on:
a) last day of each month; b) first day of next month
27

3. Mr.A receives Rs.7,20,000 p.a. as net salary. Employer had deducted Rs.36,000 as employees
contribution to provident fund, Rs.42,000 as income tax deducted at source and Rs.2,000 as
professional tax. During the year, employer had deducted Rs.40,000 towards the recovery of house
building advance taken by Mr.A. What will be his gross income?

4. X joins the service in the grade of 30,000—4,000--42,000—5,000--72,000 on 1.6.2014. Compute

his basic salary for the previous year 2019-20.

Problems On House Rent Allowance:

5. X, who resides in Chennai, gets Rs.3,00,000 p.a. as basic salary. He receives Rs.50,000 p.a. as
house rent allowance. Rent paid by him is Rs.40,000 p.a. Find out the taxable amount of HRA.

6. X, a resident of Bangalore, receives Rs.8,00,000 p.a. as basic, Rs.80,000 p.a. as dearness allowance
(forming part of salary) and 10% commission on sales made by him (sales made by X during the
previous year is Rs.12,00,000) and Rs.7,500 p.m. as house rent allowance. He, however, pays
Rs.8,000 p.m. as house rent. Determine the quantum of house rent allowance exempt from tax.

7. [Link] is employed with XY Ltd., on a basic of Rs.10,000 p.m. He is also entitled to dearness
allowance @ 100% of basic salary, 50% of which is included in salary as per terms of employment.
The company gives him house rent allowance of Rs.6,000 p.m. which was increased to Rs.7,000 p.m.
with effect from 01.01.2020. He also got an increment of Rs.1,000 p.m. in his basic salary with effect
from 1.02.2020. Rent paid by him during the previous year 2019-20 is as under:

April and May 2019 - Nil, as he stayed with his parents

June to October, 2019 - Rs.6,000 p.m. for an accommodation in Bangalore
November, 2019 to March, 2020 - Rs.8,000 p.m. for an accommodation in Chennai

Compute his gross salary for assessment year 2020-21.

Problems On Allowances:
8. X, a Government employee, gets Rs.4,00,000 p.a. as basic pay. In addition, he receives Rs.72,000
as entertainment allowance. His actual expenditure on entertainment for official purposes, however,
exceeds Rs.72,000. Calculate taxable amount of entertainment allowance. What would be
your answer if he is a non-government employee.

9. Mr.X of J Ltd. received the following during the year 2019-20: Compute his Gross Salary.

Basic Rs.30,000 p.m.; D.A. (forming part of salary) Rs.10,000 p.m.; Bonus one month salary
including D.A.; Entertainment Allowance Rs.1,000 p.m.; Education allowance for his 3 children
Rs.75 p.m. per child; Medical allowance Rs.1,000 p.m.; Uniform allowance Rs.600 p.m. (actual
expenditure Rs.500 p.m.); Transport Allowance Rs.3,500 p.m.; Lunch allowance Rs.600 p.m.
Telephone allowance Rs.600 p.m. Salary arrears relating to previous year 2016-17 Rs.18,000 was
received in September 2019 (this amount was not taxed earlier).
28

10. X a pilot in Indigo Airlines received Rs.25,000 p.m. as transport allowance to meet his personal
expenses while on duty. Calculate the taxable amount of allowance received.

11. Mr.A, an Indian citizen, is posted in the Indian High Commission at Nairobi during the Previous Year
2019-20. His emoluments consist of Basic Pay of Rs.4,00,000 per month and overseas allowance of
Rs.1,00,000 p.m. Besides, he is entitled to & fro journey to India and also use Government’s car at
Nairobi. Compute his Income from Salary.

12. [Link] has two sons. He is in receipt of children education allowance of Rs.150 p.m. for his
elder son and Rs.70 p.m. for his younger son. Both his sons are going to school. He also receives
the following allowances:

a. Transport allowance Rs.1,800 p.m.

b. Tribal area allowance Rs.500 p.m.

Compute his taxable allowances.

PERQUISITES
▪ Benefits attached to a job
▪ May be in cash (monetary) or in kind (non-monetary)

Classification of Perks:
▪ Tax free perks or exempted perks
▪ Perks taxable for both specified employee and non-specified employee
▪ Perks taxable for specified employees only.

Classification --- I: Tax-free perks (or) Exempted perks

▪ Medical bills reimbursed (refer provisions on medical facilities)
▪ Telephone provided to an employee at his residence
▪ Leave travel concession
▪ Free refreshments during office hours
▪ Free lunch provided during office hours up to a maximum of Rs.50 per meal
▪ Use of employer’s laptops and computers
▪ Amount spent on training of employees
▪ Interest-free loans or concessional loans taken for medical treatment
▪ Interest-free loans or concessional loans where the loan amount does not exceed Rs.20,000.
▪ Gift in kind if the value of the gift does not exceed Rs.5,000
▪ Medical insurance premium paid by employer on the health of employees
▪ Privilege passes granted by Indian Railways to its employees
▪ Perks provided by Government of India to its employees posted abroad u.s.10 (7)
▪ Free education facility in a school owned/maintained by the employer for employee’s children
▪ Tax paid by the employer on non-monetary perquisites
29

Specified employee:
▪ A Director-employee
▪ An employee who owns 20% equity shares in the employer-company; (i.e. substantial interest)
▪ An employee whose monetary (cash) emoluments exceed Rs.50,000 after deductions u.s.16.

Classification --- II: Perks taxable for both specified and non-specified employees:
a. Rent-free accommodation
b. Any obligation of employee met by the employer
c. Fringe benefits

Classification --- II: a) Rent free accommodation:

Unfurnished accommodation
Furnished accommodation
Accommodation provided at concessional rent

For Government employees:

The taxable value of RFA in the case of a Government employee is as per Government rules.

For Non-government employees:

The taxable value of rent-free accommodation for other employees (semi-Government or non-
government employees) is determined as under:

Population of the City House owned by House leased by employer

employer
Less than 10 lakhs 7.5% of salary 15% of salary or lease rent
(w.e.l)
More than 10 lakhs but less 10% of salary As above
than 25 lakhs
More than 25 lakhs 15% of salary As above

Salary: Basic + D.A. (forming) + Commission (any) + Bonus + Fees + All taxable allowances to
the extent taxable

Accommodation provided in a REMOTE AREA or in an OFFSHORE INSTALLATION is

exempt.

Accommodation provided in a HOTEL on account of TRANSFER of an employee from one place

to another place:
o fully exempt if the period of stay does not exceed 15 days
o if accommodation is provided for a period exceeding 15 days then the taxable value
will be 24% of salary for such period or actual hotel charges (whichever is less)
30

Rent free accommodation with furniture being provided:

If the employer owns the furniture then 10% of cost of furniture is taxable
Actual hire charges will be taxable if the furniture is hired by the employer.

note: Written down value of the furniture is not considered.

note: “Furniture” includes radio sets, television sets, refrigerators, air-conditioners and other
household appliances.

Classification --- II: b) Any obligation of employee met by the employer:

▪ Servants engaged by employee but salary paid or reimbursed by employer
▪ Gas, Electricity, Water bills in the name of employee but paid or reimbursed by employer
▪ Education expenditure of the employee’s children paid or reimbursed by employer
▪ Car owned by employee but expenses met by employer
▪ Professional tax of employee paid by employer

Classification --- II: c) Fringe benefits:

▪ Interest-free loans or loans at concessional rate of interest
▪ Use of moveable assets belonging to the employer
▪ Transfer of moveable assets belonging to the employer
▪ Gift from employer
▪ Credit card facility
▪ Club facility
▪ Travelling, touring, accommodation facility provided to the employee

Fringe Benefit 1: Interest-free loans or loans at concessional rate of interest

If the lending rate of the employer is less than the SBI rate, the difference would be taxable. Interest
will be calculated on the OUTSTANDING BALANCE AT THE END OF EACH MONTH.

note: The above provision does not apply if the:

o loan is taken for medical treatment in respect of diseases specified in rule 3A; or
o loan amount does not exceed Rs.20,000 in aggregate (petty loans).

Fringe Benefit 2: Use of moveable assets by the employee belonging to the

employer
Computers and laptops: Exempt
Any other asset: 10% p.a. of cost is taxable

Fringe Benefit 3: Transfer of moveable assets by the employer to his employee

Computers and its related
electronic items: Cost (-) depreciation @ 50% on w.d.v. method
Cars: Cost (-) depreciation @ 20% on w.d.v. method
Any other asset: Cost (-) depreciation @ 10% on straight line method.
31

note: Depreciation is to be calculated on basis of “completed year”.

note: Amount if any recovered from the employee shall have to be adjusted.
note: Transfer of assets (other than computer & car) which have been used by the employer for
more than ten years are exempt from tax.

Fringe Benefit 4: Free Gift:

a. Received in cash: Fully taxable
b. Received in kind: If the value of gift is less than Rs.5,000 : Fully exempt
If the value of gift exceeds Rs.5,000 : Fully taxable

Fringe Benefit 5: Credit card facility:

a. Official use: Exempt
b. Private use: Fully taxable

Fringe Benefit 6: Club facility:

a. Official use: Exempt
b. Private use: Fully taxable

Facility on sports or health club will be fully exempt

Fringe Benefit 7: Travelling, touring and accommodation facility:

a. Official tour: Exempt from tax
b. Personal purpose: Fully taxable

Classification --- III: Perks taxable for specified employees only

▪ Servant facility
▪ Gas, Electricity, Water facility
▪ Education facility
▪ Car facility

Gas, Electricity or Water facility:

• From employer’s own source: Manufacturing cost per unit is taxable
• If purchased from outside agency: Fully taxable

note: If gas, electricity or water bills are in the name of employee and if they are paid by employer
then it is taxable for both specified and non-specified employees.

Servant facility:
▪ Any servant (gardener, sweeper, watchman, cook) provided by employer to his employee is
fully taxable in the hands of a specified employee.
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▪ But if these servants are employed by employee and if they are paid by employer then it is
fully taxable for both specified and non-specified employees.

Education Facility:

Particulars School owned/maintained by Any other school

Employer
• For children: Exempt if cost of education does Fully taxable
not exceed Rs.1,000 p.m.

• Any household member: Fully taxable Fully taxable

• Taxable for: Both

Specified Employee only

Note: Scholarships given on the basis of merit is fully exempt from tax u.s.10 (16)

Provision of medical facilities:

a) Medical allowance: Fully taxable

b) Medical facility in a hospital maintained by employer: Exempt
c) Hospitals recognized by I.T. authorities (e.g. Public Hospitals): Exempt from tax
d) Medical insurance premium paid on the health of employees: Exempt from tax
e) Medical reimbursement for treatment in a Private hospital: Fully taxable

f) Medical expenses incurred outside India:

a. Treatment expenses: Exempt to the extent permitted by RBI
b. Stay expenses: Exempt to the extent permitted by RBI
c. Travel expenses: Exempt if Gross Total Income does not exceed Rs.2 lakhs.

“Family” means the individual, spouse, children, dependant parents and dependent brothers and
sisters of the individual.

Leave Travel Concession:

LTC is exempt to the extent the amount is spent on travel to any place in India.
This exemption is available twice in a block of 4 calendar years (current block is 2018 to 2021).
Exemption is available to the extent of economy fare by air.
If the journey is performed by rail then first-class AC fare is exempt from tax.
Exemption is available in respect of shortest route.
33

Deductions from Gross Salary:

Standard deduction u/s.16(ia):
A deduction of Rs.50,000 or the amount of salary, whichever is less

Entertainment allowance u/s.16 (ii):

This deduction is available only for Government employees. E.A. received is first included while
computing salary and then least of the provision is allowed as deduction.

Professional tax or employment tax under section 16 (iii):

Professional tax paid by employee is allowed as deduction u.s.16 (iii). If it is paid by employer on
behalf of employee then it is taxed as perk and the same amount is allowed as deduction.

Provision relating to provident fund:

Particulars Statutory PF Recognised PF Unrecognised PF
Employers contribution Exempt Above 12% of Exempt
salary is taxable

Interest on provident fund Exempt Above 9.5% of Exempt

contribution is taxable

Employees contribution Qualifies for Qualifies for Does not qualify

deduction u.s.80C deduction u.s.80C for deduction
Lumpsum received after
retirement Exempt Exempt (***)

Salary means basic + D.A. (forming) + Sales Commission

(***) Employers contribution and interest thereon is taxable under the head salary.

Interest on employees contribution is taxable under the head “Income from other sources”.

Problems On Rent-free Accommodation:

13. X an employee of ABC (P) Ltd., posted at Chennai (population > 25 lakhs), draws Rs.8,00,000 p.a. as
basic, Rs.5,00,000 p.a. as dearness allowance (forming) and Rs.3,00,000 p.a. as commission. Besides,
the company provides a rent-free unfurnished accommodation in Chennai. The house is owned by
the company. Determine the taxable value of the perk.

14. X, a Director-employee of a private sector company based at Delhi, draws Rs.80,000 p.m. as
basic. Dearness allowance (forming) Rs.82,000 p.a.; Bonus 30% of basic; Commission Rs.3,000
p.m.; Transport allowance Rs.2,000 p.m. for commuting between office and residence; Tribal area
allowance Rs.12,400 and rent free house (lease rent paid by the employer Rs.15,000 p.m.). The
company recovers Rs.2,000 p.m. from his salary for providing accommodation. Compute gross
salary.
34

15. A is working as a General Manager of a company. Particulars are given below:

Basic Rs.60,000 p.m.; Bonus Rs.40,000 p.a.; Conveyance allowance (70% official use) Rs.2,000 p.m.;
Medical allowance Rs.2,000 p.m. He has been provided with a rent free house in a city whose
population exceeds 10 lakhs but does not exceed 25 lakhs. Compute the taxable value of RFA if the
house is owned by the employer. What would be your answer if the house is taken on lease by the
employer at Rs.10,000 p.m.

16. Mr.R furnishes the following: Basic salary Rs.12,000 p.m.; Dearness allowance (40% of which
forms part of salary for retirement benefits) Rs.1,000 p.m.; Lunch allowance Rs.200 p.m.; Medical
allowance Rs.500 p.m.; City compensatory allowance Rs.300 p.m.; Children education allowance
Rs.230 p.m. per child for 2 children.

He is provided with a rent-free accommodation in Delhi. The cost of the furniture is Rs.1,00,000 and
two air-conditioners, which have been taken on hire by the employer, have also been provided in
the accommodation. The hire charges of each air conditioner is Rs.2,000 p.a. Compute the value of
the rent-free accommodation if the accommodation is provided by:

a. The Government and the value of the accommodation as per Govt. Rules is Rs.3,000 p.m.
b. Canara Bank and the accommodation has been taken on lease by the Bank at Rs.10,000 p.m.
c. XYZ Ltd. and the accommodation has been taken on rent by the company at Rs.10,000 p.m.

17. Mr.S was provided an accommodation in a hotel by his employer for 22 days before providing him a
rent free accommodation. The hotel charges paid Rs.33,000 of which Rs.5,000 was recovered from
the employee. Salary for the purpose of accommodation for the period of 22 days is Rs.66,000.
Compute the taxable perquisite of accommodation.

Interest free loan or loans at concessional rate of interest.

18. X Ltd. has advanced an interest free loan of Rs.5,00,000 to Mr.G for purchase of car on 01.09.2019.
Mr.G has been regularly repaying the loan in instalments of Rs.20,000 p.m. at the end of each month.
Compute the value of perquisite on account of interest assuming the interest charged by SBI is 10%
p.a. What will be your answer if G repays loan on the 1st of next month instead of end of each month.

Free Gas, Electricity and Water:

19. Find out the value of the perquisite in respect of gas in the cases given below:

X is employed by a gas supply company to whom free gas (manufacturing cost Rs.6,000) is supplied
by the employer.
Y is employed by A ltd. which supplies free gas to Y. Gas bills are issued in the name of A ltd.
Rs.10,000.
Z is employed by B ltd. which supplies free gas to Z. Gas bills are issued in the name of Z Rs.15,000.

Assuming that X, Y and Z are “specified employees” and gas is used only for household consumption;
find out the value of the perquisite.
35

Use of moveable assets by the employee belonging to the employer:

20. Find out the taxable value of the perk in the following cases:

X is given a laptop by the employer-company for using it for office and private purpose (ownership
is not transferred). Cost of the laptop to the employer Rs.50,000.
On 1.10.2019, the company gives its music system to Y for domestic use. Ownership is not
transferred. Cost of music system to the employer is Rs.85,000.
Free use of employer’s DVD player from 1.4.2019. Cost to the employer Rs.25,000
On 1.09.2019, the company purchases a fridge for Rs.90,000 for the kitchen of X. Ownership is not
transferred.

Sale of assets by the employer to his employee:

21. On 10.3.2020, a Company sells imported furniture to X for Rs.90,000 (the furniture was purchased
by the company on 30.6.15 for Rs.4,10,000 and since then it was used for business purposes).
On 01.03.2020, a Company purchases a music system for Rs.35,000 and the same is sold on the
same day to X for Rs.20,000.
On 10.3.2020, the employer sells a computer to X for Rs.6,000 (it was purchased for Rs.60,000 on
10.4.2017, and up till its transfer to X, it was used by the employer for business purpose).
On 10.3.2020, the employer sells a Car for Rs.2,00,000 (it was purchased by the company for
business purposes on 10.4.16 for Rs.6,00,000).

Problem on Servant facility

22. Mr.X and Mr.Y are working for Gama Ltd. As per salary fixation norms, the following perquisites
were offered:

i. For Mr.X, who engaged a domestic servant for Rs.4,000 per month, his employer reimbursed
the entire salary paid to the domestic servant i.e. Rs.4,000 per month.

ii. For Mr.Y, he was provided with a domestic servant @ Rs.4,000 per month as part of
remuneration package.

You are required to comment on the taxability of the above in the hands of Mr.X and Mr.Y,
who are not specified employees.

Problem on Leave Travel Concession:

23. Mr.R went to Simla on a holiday on 15.09.2019 with his wife and three children (one son – age 6
years; twin daughters – age 3 years). They went by aeroplane (economy class) and the total cost of
tickets met by his employer was Rs.58,000 (Rs.43,000 for adults and Rs.15,000 for the three minor
children). Compute the taxable amount of LTC.

Will the answer be different if, among his three children, the twins are 6 years and son 3 years old?
36

Deductions from Gross Salary:

24. Mr.G receives the following emoluments during the previous year ending 31.03.2020:
Basic pay Rs.4,00,000; Dearness Allowance Rs.15,000; Commission Rs.10,000; Entertainment
Allowance Rs.4,000; Medical expenses reimbursed for treatment in a public hospital Rs.25,000;
Professional tax paid Rs.3,000 (Rs.2,000 was paid by his employer). Determine Income from
Salary for A.Y.2020-21 if Mr.G is a State Government employee.

Problem on medical facilities:

25. Mrs.X is a tax consultant in A Ltd. (salary being Rs.1,76,000 p.a.). A Ltd. makes the following
expenses for medical treatment of her husband outside India during the previous year 2019-20:

Amount incurred Out of which

by A Ltd. permitted by RBI
Cost of medical treatment of X outside India Rs.6,90,000 Rs.6,30,000
Cost of stay abroad of X and Mrs.X Rs.3,70,000 Rs.3,60,000
Cost of travel of X and Mrs.X Rs.1,40,000

Find out the taxable value of the medical facility chargeable to tax in the hands of Mrs.X for the
assessment year 2020-21 on the assumption that:
(a) Mrs.X does not have any other income or
(b) has interest on fixed deposit with SBI is Rs.10,000.

26. Compute the taxable value of the perquisite in respect of medical facilities received by Mr.G
from his employer during the previous year 2019-20:

− Medical Insurance Premium for insuring health of Mr.G Rs.7,000

− Treatment of Mr.G by his family doctor Rs.5,000
− Treatment of Mrs.G in a Government hospital Rs.25,000
− Treatment of Mr.G’s grandfather in a private clinic Rs.12,000
− Treatment of Mr.G’s mother (68 years and dependant) by family doctor Rs.8,000
− Treatment of Mr.G’s sister (dependant) in a nursing home Rs.3,000
− Treatment of Mr.G’s brother (independent) Rs.6,000
− Treatment of Mr.G’s father (75 years and dependant) abroad Rs.50,000
− Expenses of staying abroad of the patient Rs.30,000
− Limit specified by RBI Rs.75,000

Problem on shares allotted to employees under ESOP:

27. AB Co. Ltd allotted 1000 sweat equity shares to Mr.R in June 2019. The shares were allotted at
Rs.200 per share as against the fair market value of Rs.300 per share on the date of exercise of
option by Mr.R. The fair market value was computed in accordance with the method prescribed
under the Act.
37

i. What is the perquisite value of sweat equity shares allotted to Mr.R?

ii. In the case of subsequent sale of those shares by Mr.R, what would be the cost of acquisition of
those shares?

Problems on car facility:

28. X is provided with 2 cars to be used for official and personal work and the following information is
available from the companies’ records:
18 h.p. car 12 h.p. car
Cost of the car Rs.24,00,000 Rs.4,00,000
Running and maintenance Rs.1,30,000 Rs.36,000
Salary of driver Rs.2,40,000 Rs.1,20,000

29. X has been provided with the benefit of a car by his employer. Compute the perquisite value
of the car for the assessment year 2020-21 in the following situations assuming X is a
specified employee.

a. X has been provided with a car (1200 cc) owned by the employer, cost of the car is Rs.12,00,000.
The expenditure incurred by the company on maintenance of the car are – petrol Rs.90,000;
driver’s salary Rs.84,000 and maintenance Rs.10,000. The car can be used by X partly for official
and partly for private purposes.

b. Assume in situation (a) that the car is used only for private purposes.

c. A car (1800 cc) is owned by the employer (cost of the car being Rs.6,00,000). X an employee, can
use it partly for official purposes and partly for private purposes. Expenses for private purposes
are, however, incurred by X.

d. Assume in situation (c) that the car can be used only for private purposes.

e. X owns a car (1400 cc). He uses it partly for official purposes and partly for private purposes.
During the previous year 19-20, he incurs a sum of Rs.50,000 on running and maintenance of
car. Besides, he has engaged a driver (salary Rs.84,000). The employer reimburses the entire
expenditure of Rs.1,34,000. Log book of the car is not maintained.

f. Assume in situation (e) that the log book of the car is maintained and 90% of the expenditure is
for official use and 10% for private use.

g. A car (1700 cc) is owned by the employer. All expenses (Rs.56,000) are incurred by the
employer. The employer maintains log book of the car. X, an employee, uses the car only for
official purposes. The employer gives a certificate that the car is used only for official purposes.
38

CAR facility:

Particulars Car owned by employee Car owned by employer Car owned by employer
but running &maintenance but running &maintenance and running & maintenance
met by employer met by employee also met by employer

Official purposes Exempt from tax Exempt from tax Exempt from tax

Private purpose Fully taxable Fully taxable Fully taxable

(R & M expenses) (10% of cost or (R&M expenses
Hire charges) and 10% of cost)

Both purposes If log-book is not maintained:

Actual expenditure Small car: 600 p.m. Small car: 1,800 p.m.
(-) 1,800 p.m. or Big car: 900 p.m. Big car: 2,400 p.m.
2,400 p.m. (taxable amount) (taxable amount)

If log- book is maintained:

Apply the ratio

Rs.900 p.m. exempt for driver Rs.900 p.m. taxable for driver Rs.900 p.m. taxable for driver
if engaged by employee if provided by employer if provided by employer

Note: Cubic Capacity of the car up to 16 h.p. (small car). More than 16 h.p. (big car)

Note: If more than one car is provided then according to the choice of the employee only one car will be treated as if used for both office
and private use and the rest of the cars will be treated as if used for private purposes [Link] other words, one car will enjoy
concessional rate (Rs.1,800 p.m./Rs.2,400 p.m.) and other cars will be fully taxed.
39

Problems in computation of Salary Income:

30. X receives the following emoluments during the previous year:

Basic pay Rs.12,00,000; Commission (50% of basic) Rs.6,00,000; Entertainment allowance
Rs.60,000. X contributes Rs.1,50,000 towards provident fund (employer makes matching
contribution). Interest credited in the provident fund account @ 10.5% is Rs.63,000. Income of X
from other sources Rs.4,00,000. Compute his total income if:

a. X is a Government employee and the provident fund is SPF.

b. X is an employee of ABC Ltd. and the provident fund is RPF.
c. X is an employee of PQR Pvt Ltd. and the provident fund is URPF

31. Mrs.X is offered an employment by PQR Ltd. at a basic salary of Rs.40,000 p.m. Other
allowances according to rules of the company are: dearness allowance 20% of basic pay (not
considered for retirement benefits), bonus Rs.1,08,000; Transport allowance Rs.12,000 to meet the
cost of transportation between residence to office and back.

The company gives Mrs.X an option either to take a rent-free unfurnished accommodation at
Bangalore for which the company would directly bear the rent of Rs.25,000 p.m. or to accept a
house rent allowance of Rs.25,000 p.m. and find out own accommodation. If Mrs.X opts for house
rent allowance, she will have to pay Rs.25,000 p.m. for an unfurnished house.

Which one of the two options should be opted by Mrs.X in order to minimise her tax bill?

32. Mr.X is employed with AB Ltd. on a monthly salary of Rs.25,000 and an entertainment allowance
and commission of Rs.1,000 p.m. each. The company provides him with the following benefits:

a. A company owned accommodation is provided to him in Delhi. Furniture costing Rs.2,40,000

was provided on 01.08.2019.

b. A personal loan of Rs.5,00,000 on 01.07.2019 on which it charges interest @ 6% p.a. The

entire loan is still outstanding. (Assume SBI rate of interest to be 12% p.a.)

c. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for Rs.60,000 on 01.05.2016. The motor cycle was finally sold to
him on 01.08.2019 for Rs.30,000.

d. Professional tax paid by Mr.X is Rs.2,000. Compute the income from salary of Mr.X for
A.Y.2020-21.
40

33. X Ltd., provided the following perquisites to its employee Mr.Y for the P.Y.2019-20:

a. Accomodation taken on lease by X Ltd., for Rs.15,000 p.m. Rs.5,000 p.m. is recovered from the
salary of Mr.Y.

b. Furniture, for which the hire charges paid by X Ltd., is Rs.3,000 p.m. No amount is recovered
from the employee in respect of the same.

c. A 12 hp car which is owned by X Ltd., and given to Mr.Y to be used both for official and
personal purposes. All running expenses are fully met by the employer. He is also provided
with a chauffeur.

d. A gift voucher of Rs.10,000 on his birthday.

Compute the value of perquisites chargeable to tax for the A.Y.2020-21, assuming his salary
for perquisite valuation to be Rs.10 lakh.

34. Mr.X, is working with True Care Hospitals (P) Ltd. He gives the list of perquisites provided by the
employer to him for the entire financial year 2019-20:

His son had undergone a medical treatment in True Care Hospitals (P) Ltd. free of cost. The hospital
would have charged a sum of Rs.60,000 for a similar treatment to unrelated patients.

Domestic servant was provided at the residence of X. Salary of domestic servant is Rs.1,500 per
month. The servant was engaged by him and the salary is reimbursed by the company. In case, the
company has employed the domestic servant, what is the value of perquisite?

Free education was provided to his two children A and B in a school maintained and owned by the
company. The cost of such education for A is computed at Rs.900 per month and for B at Rs.1,200
per month. No amount was recovered by the company for such education facility from X.

The employer has provided movable assets such as television, refrigerator and air-conditioner at
the residence of X. The actual cost of such assets provided to the employee is Rs.1,10,000.

A gift voucher worth Rs.10,000 was given on the occasion of his marriage anniversary. It is given by
the company to all employees above certain grade.

Telephone provided at the residence of Mr.X and the bill aggregating to Rs.25,000 paid by the
employer.

Housing loan @ 6% p.a. Amount outstanding on 01.04.2019 is Rs.6 lakhs. Mr.X pays Rs.12,000 p.m.
towards principal, on 5th of each month. SBI rate of interest is 10%.

State the taxability of the above said perquisites and compute the total value of taxable perquisites.
41

35. Mr.B, employed as Production Manager in Beta Ltd., furnishes you the following information for the
year ended 31.03.2020:

Basic salary up to 31.10.2019 Rs.50,000 p.m.

Basic salary from 1.11.2019 Rs.60,000 p.m.
Note: Salary is due and paid on the last day of every month.

Dearness allowance (not forming part of salary) @ 40% of basic salary.

Bonus equal to one-month salary. Paid in October 2019 on basic salary plus dearness allowance
applicable for that month.

Contribution of employer towards RPF account of the employee @ 16% of basic salary.

Professional tax paid Rs.2,500 of which Rs.2,000 was paid by the employer.

Facility of laptop and computer was provided to Mr.B for both official and personal use. Cost of
laptop Rs.45,000 and computer Rs.35,000 were acquired by the company on 01.12.2019.

Motor car owned by the employer (cubic capacity of engine exceeds 1.6 litres) provided to the
employee from 01.11.2019 meant for both official and personal use. Repair and running expenses of
Rs.45,000 from 01.11.2019 to 31.03.2020, were fully met by the employer. The motor car was self-
driven by the employee.

Leave travel concession given to employee, his wife and three children (one daughter aged 7 and
twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer Rs.30,000 for
adults and Rs.45,000 for three children. Mr.B is eligible for availing exemption this year to the
extent it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr.B for the assessment year 2020-21.

36. [Link], aged 52 years, is the Production Manager of XYZ Ltd., from the following details compute
the taxable income for the assessment year 2020-21.

Basic salary Rs.50,000 p.m.

Dearness allowance 40% of basic salary

Transport allowance (for commuting between Rs.3,800 per month

place of residence and office)

Motor car running and maintenance charges fully Rs.60,000

paid by employer (The motor car is owned by the
company and driven by the employee. The engine
cubic capacity is above 1.6 litres. The motor car is
used for both purposes by the employee.)
42

Expenditure on accommodation in hotels while touring

on official duties met by the employer Rs.80,000

Loan from recognized provident fund (maintained by the Rs.60,000

Employer)

Lunch provided by the employer during office hours.

Cost of the employer Rs.24,000

Computer (cost Rs.35,000) kept by the employer in the

residence of [Link] from 1.06.2019

37. From the following details, compute salary chargeable to tax for the A.Y.2020-21:

Mr.X is a regular employee of Rama & Co., in Chennai. He was appointed on 1.1.2019 in the scale of
20,000–1,000-30,000. He is paid 10% D.A. (forming part of salary for retirement benefits) & Bonus
equivalent to one month pay based on salary of March every year. He contributes 15% of his pay and
D.A. towards recognized provident fund and the company contributes the same amount.

He is provided free housing facility which has been taken on rent by the company at Rs.10,000 per
month. He is also provided with following facilities:

a. Facility of laptop costing Rs.50,000.

b. Company reimbursed the medical treatment bill of his brother of Rs.25,000, who is
dependent on him.

c. The monthly salary of Rs.1,000 of a house keeper is reimbursed by the company.

d. A gift voucher of Rs.10,000 on the occasion of his marriage anniversary.

e. Conveyance allowance of Rs.1,000 per month is given by the company towards actual
reimbursement.

f. He is provided personal accident policy for which premium of Rs.5,000 is paid by the
company.

g. He is getting telephone allowance @ Rs.500 p.m.

h. Company pays medical insurance premium of his family of Rs.10,000.

38. [Link], Finance Manger, of KLM Ltd., Mumbai, furnishes the following particulars for the
financial year 2019-20:

a. Salary Rs.46,000 per month.

b. Value of medical facility in a hospital maintained by the company Rs.7,000.

c. Rent free accommodation owned by the company.

d. Housing loan of Rs.6,00,000 given on 01.04.2019 at the interest rate of 6% p.a. (No
repayment made during the year). The rate of interest charged by the State Bank of India as
on 01.04.2019 in respect of housing loan is 10%.

e. Gifts in kind made by the company on the occasion of wedding anniversary of [Link]
Rs.4,750.

f. A wooden table and 4 chairs were provided to [Link] at his residence (dining table).
This was purchased on 1.05.2016 for Rs.60,000 and sold to [Link] on 01.08.2019 for
Rs.30,000.

g. Personal purchases through credit card provided by the company amounting to Rs.10,000
was paid by the company. No amount was recovered from [Link].

h. An ambassador car which was purchased by the company on 16.07.2016 for Rs.2,50,000 was
sold to the assesse on 14.07.2019 for Rs.80,000.

Compute the taxable income of [Link] for A.Y.2020-21.

39. Mr.N, a salaried employee, furnishes the following details for the financial year 2019-20:

Basic salary 6,00,000

Dearness allowance 3,20,000
Commission 50,000
Entertainment allowance 7,500

Medical expenses reimbursed by the employer 21,000

Professional tax (of this, 50% paid by the employer) 7,000

Health insurance premium paid by the employer 9,000

Gift voucher given by the employer on his birthday 12,000
Life insurance premium of Mr.N paid by employer 34,000

Laptop provided for use at home. Actual cost of laptop 30,000

(children of the assesse are also using the laptop)
44

Employer company owns a Tata Nano car, which was

provided to the assesse, both for official and personal
use. No driver was provided. (Engine cubic capacity
less than 1.6 litres)

Annual credit card fees paid by employer (Credit card

is not exclusively used for official purposes, details of
usage are not available) 2,000

You are required to compute the income chargeable under the head Salaries for the A.Y.2020-21.

40. [Link] is working with a domestic company having a production unit in the U.S.A. for last 15
years. He has been regularly visiting India for export promotion of company's product. He has been
staying in India for at least 184 days every year.

He submits the following information:

Salary received outside India (for 6 months) ₹ 50,000 p.m.

Salary received in India (for 6 months) ₹ 50,000 p.m.

He has been given rent free accommodation in U.S.A. for which company pays 15,000 p.m. as rent,
but when he comes to India, he stays in the guest house of the company. During this period he is
given free lunch facility. During the previous year, company incurred an expenditure of ₹ 48,000 on
this facility.

He has been provided a car of 2000 cc capacity in U.S.A. which is used by him for both office and
private purposes. The actual cost of the car is ₹ 8,00,000. But when he is in India, the car is used by
him and the members of his family only for personal purpose. The monthly expenditure of car is ₹
5,000.

His elder son is studying in India for which his employer spends 12,000 per year whereas his
younger son is studying in U.S.A. and stays in a hostel for which Mr. Honey gets ₹ 3,000 p.m. as
combined allowance.

The company has taken an accident insurance policy and a life insurance policy. During the
previous year, the company paid premium of ₹ 5,000 and ₹ 10,000, respectively. Compute Mr.
Honey's taxable income from salary for the Assessment Year 2020-21.
45

37. Basic (note 1) 2,43,000

DA (forming part) 24,300
Bonus (21,000 x 1) 21,000
Employers contribution to RPF (note 2) 8,019
RFA (note 3) 44,145
Facility of laptop tax free
Medical bills reimbursed (fully taxable) 25,000
Reimbursement of house-keeper salary (fully taxable) 12,000
Gift-in-kind (value > Rs.5,000) 10,000
Conveyance allowance (assuming official purpose) exempt
Accident Insurance policy not taxable
Telephone allowance (fully taxable) 6,000
Medical Insurance premium tax free
Gross Salary 3,93,464
Less: Standard Deduction u.s.16(ia) 50,000
Income from Salary 3,43,464

Note 1: Basic
On 01.04.2019 20,000 p.m.
On 01.01.2020 21,000 p.m.
For previous year 2019-20: (20,000 x 9) + (21,000 x 3)

Note 2: PF
Salary = Basic + DA (forming) + Sales commission 2,43,000 + 24,300 = 2,67,300

Employer contribution to RPF (15% of 2,67,300) 40,095

Less: Exempt up to 12% of 2,67,300 32,076
Excess is taxable 8,019

Note 3: Rent free accommodation:

Salary = 2,43,000 + 24,300 + 21,000 + 6,000
= 2,94,300

Lease rent (10,000 x 12) Rs.1,20,000

(or)
15% of 2,94,300 is Rs.44,145 (whichever is less is taxable)

Medical bills reimbursed is fully taxable assuming that treatment was taken in a private hospital.

Accident policy taken by the employer on the life of employee is for the benefit of the employer,
hence not taxable.

39. Basic 6,00,000

Dearness allowance 3,20,000
Commission 50,000
Entertainment allowance 7,500
46

Medical expenses reimbursed 21,000 (fully taxable: assuming private treatment)

Professional tax paid by employer 3,500
Health insurance premium paid by Er tax-free
Gift-in-kind > Rs.5,000 12,000
Life insurance premium paid by Er 34,000
Laptop provided for use at home tax-free
Car facility (1800 x 12) 21,600
Credit card expenses (fully taxable) 2,000 (details of usage not available)
Gross Salary 10,71,600
Less: Standard deduction u.s.16(ia) 50,000
Less: Entertainment allowance nil
Less: Professional tax 7,000
Income from Salary 10,14,600

40. Since [Link] stays in India for atleast 184 days every year, he is resident and ordinary
resident in India every year. Therefore, his global income would be taxable in India. The salary
received by him in India and outside India would be taxable in India.

Basic (50,000 x 6) + (50,000 x 6) 6,00,000

Children education and hostel allowance 36,000 (fully taxable)
RFA (note 1) 95,400
Guest house in India (wholly for official purpose) not taxable
Free lunch facility (exceeds Rs.50 per meal) 48,000
Car facility (14,400 + 70,000) (note 2) 84,400
Education expenditure of elder son 12,000
Life Insurance premium paid by employer 10,000
Gross Salary 8,85,800
Less: Section 16(ia) 50,000
Income from salary 8,35,800

Note 1: RFA:
Salary = 6,00,000 + 36,000 = Rs.6,36,000
Lease rent Rs.1,80,000 (15,000 x 12) (or) 15% of Rs.6,36,000 is Rs.95,400
Whichever is less is taxable. Therefore, taxable value is Rs.95,400

Note 2: Car facility

III category; Both use for 6 months (2,400 x 6) Rs.14,400
Balance 6 months for personal purpose.
Taxable value: 10% of cost Rs.80,000 x 6/12 Rs.40,000
Add: Expenses for 6 months @ Rs.5,000 p.m. Rs.30,000
Taxable value Rs.84,400

Note: Life Insurance premium paid by the employer is fully taxable.

Note: Accident policy taken by the employer on the life of employee is for the benefit of the
employer, hence not taxable.
47

CHAPTER – 6 SALARIES – PART II

PROVIDENT FUND:

Lump sum received after retirement:

Statutory Provident Fund: Exempt from tax

Recognized Provident Fund: Exempt from tax

Unrecognized Provident Fund: Employer’s contribution and interest thereon is taxable

under “salaries”

Interest on employee’s contribution is taxable under the

head “other sources”
GRATUITY:

Gratuity received by a Government employee is fully exempt from tax.

Gratuity received by a non-Government employee:

a. Employees covered by Payment of Gratuity Act, 1972:

▪ Maximum limit Rs.20,00,000

▪ Actual amount received
▪ 15/26 (x) last drawn salary (x) every completed year of service (rounded off)

whichever is less is exempt from tax

note: Salary = Basic + D.A. (any)

b. Employees not covered by Payment of Gratuity Act, 1972:

▪ Maximum limit Rs.20,00,000

▪ Actual amount received
▪ 1/2 (x) Average Salary (x) every completed year of service (ignore fraction)

whichever is less is exempt from tax

note: Salary = Basic + D.A. (forming) + Sales Commission

note: Average salary means: Last ten months salary excluding the month of retirement
10

note: If gratuity is received from more than one employer then the maximum limit of Rs.20,00,000
will be reduced to the extent of exemption previously availed.
48

LEAVE SALARY:
Leave salary received while in service is fully taxable for both Government and non-Government
employees

Leave salary received after retirement by a:

a) Government employee: Exempt from tax

b) Non-government employee:

▪ Maximum limit: Rs.3,00,000

▪ Actual amount received:
▪ 10 months’ average salary:
▪ Leave at the credit of employee (x) Average salary

whichever is less is exempt from tax

note: Salary = Basic + D.A. (forming) + Sales Commission

note: Any fraction of a year is to be ignored
note: LEAVE SHOULD NOT EXCEED ONE MONTH FOR EVERY COMPLETED YEAR OF SERVICE.

PENSION:

Uncommuted Pension (monthly pension):

Uncommuted pension is fully taxable for both government and non-government employees.

Commuted Pension (lump sum pension):

For Government employees: Fully exempt from tax

For non-government employees:

a. If he receives gratuity also: One-third of full value of commuted pension is exempt.
b. If he does not receive gratuity: One-half of full value of commuted pension is exempt.

VRS COMPENSATION:

• Maximum limit: Rs.5,00,000

• Compensation received: [Link]
• Last drawn salary (x) 3 (x) No. of years of service (ignore fraction) [Link]
• Last drawn salary (x) Balance of no. of months of service left [Link]

whichever is less is exempt from tax

Note: Salary means Basic + D.A. (forming) + Sales commission

RETRENCHMENT COMPENSATION:
a. Received in accordance with any scheme, which is approved by the Central Government,
fully exempt from tax.

b. If received under any other scheme:

▪ Maximum limit Rs.5,00,000
▪ Actual amount received xxx
▪ Amount determined under the Industrial Disputes Act, 1947 xxx
(whichever is less is exempt from tax)

Note: Amount determined under the ID Act:

15/26 (x) Average salary (x) No of years of service (rounded off)
Average salary means: Average of last 3 months
Salary = Basic + DA (any)

1. Mr.A retires from service on December 31, 2019, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2019-20:

Basic pay @ Rs.16,000 per month for 9 months Rs.1,44,000

D.A. (50% forms part of retirement benefits) Rs.8,000 p.m. for 9 months Rs.72,000

Lumpsum payment received from the Unrecognised Provident Fund Rs.6,00,000. Out of the amount
received from the provident fund, the employer’s share was Rs.2,20,000 and the interest thereon
Rs.50,000. The employees share was Rs.2,70,000 and the interest thereon Rs.60,000.

What is the taxable portion of the amount received from the unrecognized provident fund in the
hands of Mr.A for the assessment year 2020-21?

2. X, an employee of the Central Government, receives Rs.6,00,000 as gratuity at the time of his
retirement on 11.10.2019 under the New Pension Code. Is gratuity fully exempt from tax?

3. [Link] retired on 15.6.2019 after completion of 26 years 8 months of service and received gratuity
of Rs.6,00,000. At the time of retirement, his salary was:

Basic Salary: Rs.5,000 p.m.

Dearness Allowance: Rs.3,000 p.m. (60% of which is for retirement benefits)
Commission: 1% of turnover (turnover in the last 12 months was Rs.12,00,000)
Bonus: Rs.12,000 p.a.

Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.
50

4. Mr.S, an Accounts Manager, has retired from JK Ltd. on 15.01.2020 after rendering services for 30
years and 7 months. His salary is Rs.25,000 p.m. up to 30.09.2019 and Rs.27,000 p.m. thereafter.
He also gets Rs.2,000 p.m. as D.A. (55% of it is part of salary for computing retirement benefits). He
is not covered by the Payment of Gratuity Act, 1972. He has received Rs.8,00,000 as gratuity from
the employer company. Calculate taxable gratuity.

5. X, is working with two companies. He retires from A Co. in 2010 (salary at the time of retirement
Rs.12,600 p.m.) and receives Rs.92,000 as gratuity out of which Rs.50,000 was exempt. He also
retires from B Co. in December 2019 after 28 years and 8 months of service and receives
Rs.2,90,000 as death-cum-retirement gratuity.

His average basic from B Co. for the preceding 10 months ended on November 30, 2019 is Rs.18,200
p.m. He has received Rs.1,000 p.m. as D.A. (80% forming) and 6% commission on turnover
achieved by him. Turnover achieved by him during 10 months ending on November 30, 2019 is
Rs.2,00,000. Compute the amount of gratuity exempt from tax.

6. R is the Sales Manager. He is paid salary @ Rs.8,000 p.m. from 1.4.2019. D.A. Rs.4,000 p.m. (50%
forming). He retires on 10.02.2020. He is paid 2% commission on sales. Sales effected by him
during the preceding 10 months ended on 31.01.2020 amounted to Rs.4,00,000. He is entitled for
1.5 months earned leave for every year of service, ignoring part of the year. He retires after 20
years and 7 months. He has availed 18 months leave while in service. The leave encashment is
allowed @ Rs.8,000 p.m. Compute taxable amount of leave salary.

7. Mr. Gupta retired on 1.12.2019 after 20 years 10 months of service, receiving leave salary of Rs.
5,00,000. Other details of his salary income are:

Basic Salary: Rs.5,000 p.m. (Rs.1,000 was increased w.e.f. 1.4.2019)

Dearness Allowance: Rs.3,000 p.m. (60% of which is for retirement benefits)
Commission: Rs.500 p.m.
Bonus: Rs.1,000 p.m.
Leave availed during service: 480 days
He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:

(a) He is a government employee.
(b) He is a non-government employee.

8. Mr.S retired on 1.10.2019 receiving a pension of Rs.5,000 p.m. On 1.2.2020, he commuted 60% of
his pension and received Rs.3,00,000 as commuted pension. Compute the taxable amount of
pension in the following cases assuming:

• He is a Government employee
• He is a non-government employee who did not get gratuity
• He is a non-government employee who got gratuity at the time of retirement.
51

9. A retired on 1.4.2019 from B Co. Ltd. He was entitled to a pension of Rs.20,000 p.m. At the time of
retirement he got 75% of the pension commuted and received Rs.6,75,000 as commuted pension.

Compute the taxable portion of the commuted pension if:

a) he is also entitled to gratuity
b) he is not entitled to gratuity.

10. Mr.S, aged 56 years and who has put in 20 years of service in a public sector undertaking
voluntarily resigns the job under a scheme of voluntary separation. He has 4 years and 2 months of
service left and his last drawn salary is Rs.20,000. He is paid Rs.14 lakhs as compensation.
Calculate the taxable amount of compensation.

11. Mr. Dutta received voluntary retirement compensation of Rs.7,00,000 after 30 years 4 months of
service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic
salary Rs.20,000 p.m.; Dearness allowance (which forms part of pay) Rs.5,000 p.m. Compute his
taxable voluntary retirement compensation, assuming that he does not claim any relief under
section 89.

12. X, an employee of a private sector transport company, based at Nagpur and covered by Payment of
Gratuity Act, retires on 31.12.19 after service of 33 years and 7 months. At the time of retirement
his employer pays Rs.2,26,538 as gratuity and Rs.3,50,000 as accumulated balance of recognised
provident fund. He is also entitled for a pension of Rs.3,000 p.m. He gets 70% of pension
commuted for Rs.84,000 on 1.2.2020.

Basic Rs.81,000 (9000 x 9); bonus Rs.3,600; transport allowance Rs.22,000; house rent allowance
Rs.3,600 (400 x 9) rent paid by him Rs.13,200 (1,100 x 12); employer’s contribution to R.P.F.
Rs.11,000.

As per the terms of employment X and his family members can use deluxe buses operated by the
employer (value of the facility enjoyed by X and family during the previous year is Rs.12,000).
Compute his salary income assuming that he has paid Rs.2,000 as professional tax.

13. Mr.X retired from the services of M/s.Y Ltd on 31.01.2020, after completing service of 30 years and
one month. He had joined the company on 01.01.1990 at the age of 30 years and received the
following on his retirement:

i. Gratuity Rs.6,00,000. He was covered under the Payment of Gratuity Act, 1972

ii. Leave encashment of Rs.3,30,000 for 330 days leave balance in his account. He was credited
30 days leave for each completed year of service.

iii. As per the scheme of the company, he was offered a car which was purchased on 30.01.2017
by the company for Rs.5,00,000. Company has recovered Rs.2,00,000 from him for the car.
Company depreciates the vehicles at the rate of 15% on SLM.
52

iv. An amount of Rs.3,00,000 as commutation of pension of 2/3rd of his pension commuted.

v. Company presented him a gift voucher worth Rs.6,000 on his retirement

vi. His colleagues also gifted him a television (LCD) worth Rs.50,000 from their own
contribution.

Following are the other particulars:

a. He has drawn a basic salary of Rs.20,000 and 50% dearness allowance per month for the
period from 01.04.2019 to 31.01.2020.

b. Received pension of Rs.5,000 per month for the period 01.02.2020 to 31.03.2020 after
commutation of pension.

Compute his gross total income from the above for Assessment Year 2020-21.

14. Mr.N, who retired from the services of Hotel Savera Ltd on 31.01.2020 after putting on service for 5
years, received the following amounts from the employer for the year ending 31.03.2020:

Salary @ Rs.16,000 p.m. comprising of basic salary of Rs.10,000, Dearness allowance of Rs.3,000,
City compensatory allowance of Rs.2,000 and Night duty allowance of Rs.1,000.

Pension @ 30% of basic salary from 01.02.2020. Gratuity of Rs.50,000

Leave salary of Rs.75,000 for 225 days of leave accumulated during 5 years @ 45 days leave in each
year. He has not availed any earned leave during his tenure of 5 years and utilized only his casual
leave. Compute his taxable salary income for the A.Y. 2020-21.

15. Mr.M was retrenched from service of ABC Limited. He received retrenchment compensation
amounting to Rs.8,75,000. Amount of compensation determined under the Industrial Disputes Act,
1947 is Rs.4,80,000. The scheme of retrenchment is not approved by the Central Government.
Compute the taxable retrenchment compensation.

16. [Link] received retrenchment compensation of Rs.10,00,000 after 30 years 4 months of service. At
the time of retrenchment, he was drawing basic salary Rs.20,000 p.m.; dearness allowance Rs.5,000
p.m. Compute his taxable retrenchment compensation.
53

Additional problems:
1. Mr. Swaraj has provided the following particulars for the year ended 31-03-2020:

He retired on 31-12-2019 at the age of 58, after putting in 25 years and 9 months of service, from a private
company at Delhi.

He was paid a salary of Rs. 25,000 p.m. and house rent allowance of Rs. 6,000 p.m. He paid rent of Rs. 6,500
p.m. during his tenure of service.

On retirement, he was paid a gratuity of Rs.3,50,000. He was covered by the Payment of Gratuity Act, 1972.
He had not received any other gratuity at any point of time earlier, other than this gratuity.

He had accumulated leave of 15 days per annum during the period of his service; this was encashed by him
at the time of his retirement. A sum of Rs. 3,15,000 was received by him in this regard. Employer allowed 30
days leave per annum.

The company presented him with a gift voucher of Rs. 5,000 on his retirement. His colleagues also gifted him
a mobile phone worth Rs. 50,000 from their own contribution.

You are requested to compute his income from salary for the assessment year 2020-21.

2. [Link], a resident individual, aged 48 years, is an assistant manager of Dye Hard Ltd. She was appointed
on 10 June, 2017 at a salary of Rs.32,000 per month During the previous year 2019-20, she received the
following amounts from her employer.

Dearness allowance (10% of basic pay which forms part of salary for retirement benefits).

Bonus for the previous year 2018-19 amounting to Rs.32,000 was received on 1st October, 2019.

Fixed medical allowance of Rs.20,000 for meeting medical expenditure.

She was also reimbursed the medical bill of her father-in-law dependent on her amounting to Rs.3,000.

[Link] was provided:

a laptop both for official and personal use. Laptop was acquired by the company on 1st June, 2019 at Rs.
15,000.

a domestic servant at a monthly salary of Rs.1,000 which was reimbursed by her employer.

Dye Hard Ltd. allotted 500 equity shares in the month of December 2019 @ Rs. 150 per share against the fair
market value of Rs.250 per share on the date of exercise of option by [Link]. The fair market value was
computed in accordance with the method prescribed under the Act.

Professional tax Rs. 2,500 (out of which Rs. 1,800 was paid by the employer).

Compute the total Income of [Link] for the assessment year 2020-21. (Assume that [Link] pays tax
on the receipt basis).
54

CHAPTER – 7 INCOME FROM HOUSE PROPERTY

1. Chargeability – Section 22:
• The assessee should be the owner of the house (owner includes deemed owner)
• There should be a building or land connected with building
• The building should not be occupied by the assessee for his own business

2. Self-occupied property -- format:

Annual Value Nil
Less: Deductions under section 24
Interest on borrowed capital xxx
-----
Loss from self occupied property (xxx)
-----

note: The maximum amount deductible on account of interest on loan is Rs.30,000.

note: However, if the loan is borrowed on or after 1.4.99 for PURCHASE or CONSTRUCTION and
the house is purchased or constructed within 5 years from the end of the relevant
previous year during which the loan was borrowed then Rs.2,00,000 (instead of
Rs.30,000) shall be allowed as deduction.

3. Let-out property -- format:

Gross Annual Value xxx
Less: Municipal taxes xxx
------
Net Annual Value xxx

Less: Deductions under section 24:

Standard deduction xxx
Interest on borrowed capital xxx
-----
Income from let out property xxx
-----

Determination of Gross Annual Value:

1. Municipal Valuation (value fixed by municipal authorities)
2. Fair Rent (market rent)
3. Rent receivable (rent charged by the owner)
4. Standard Rent (rent fixed under the Rent Control Act)

note: If 1, 2 and 3 are given then Gross Annual Value is the highest among the three.
55

If Standard Rent is also given then:

Step 1: Find out the maximum of 1, 2 and 3.
Step 2: Find out the maximum of 3 and 4.
Step 3: Gross Annual Value is the least of the two maximums calculated above.

Unrealised Rent: A default made by the tenant in the payment of rent is unrealised rent.

Conditions to be satisfied (Rule 4):

a. The tenancy is bona fide (genuine and real);
b. Reasonable steps should have been taken by the assessee to make the tenant to vacate
the property.
c. The defaulting tenant should not occupy any other house of the assessee.
d. The assessee has taken legal steps for its recovery

note: RECOVERY OF URR. (to the extent it was allowed as loss earlier) is treated as income of the
year in which it is recovered. Such recovery is taxed under this head irrespective of the
fact whether the assessee owns the house or not. Any amount spent on such recovery is
ignored. Standard deduction is allowed @ 30%. Section 25A

note: RENTAL ARREARS received by the assessee shall be taxed after allowing standard
deduction of 30% under the head “Income from house property”. Section 25A

Unrealised rent recovered Arrears of rent received

a. Taxable in the year in which the loss is Taxable in the year in which the arrears
recovered is received

b. Taxable (under IFHP) whether the Taxable (under IFHP) whether the
assessee owns the house or not assessee owns the house or not

c. Standard deduction @ 30% is allowed Standard deduction @ 30% is allowed

Where a let-out house remains vacant during a part of the previous year
Step 1: Compute gross annual value of the property as if it is let out for the whole year.
Step 2: Reduce vacancy loss from the gross annual value computed in step 1.

Municipal taxes: Municipal taxes including water tax and sewage tax actually paid by the
owner during the previous year is allowed as deduction. Municipal tax paid
by the tenant is not allowed as deduction.
56

DEDUCTIONS UNDER SECTION 24:

1. STANDARD DEDUCTION: Compulsory deduction allowed @ 30% of net annual value.

2. INTEREST ON BORROWED CAPITAL:

a. Any interest paid or payable on loan borrowed for the purpose of purchase, construction,
reconstruction, renewal, repairs of house property is allowed as deduction.

b. The maximum amount of deduction allowed is Rs.30,000 in case of a self occupied

property (in certain cases Rs.2,00,000). No such limit is fixed for a let out property.

c. Any interest paid out of India without TDS. shall not be allowed as deduction.

d. Interest paid may relate to: i) post-construction period; or ii) pre-construction period.

i. Interest paid during the post construction period is fully allowed as deduction in the
respective years.

ii. Interest paid up to the date of completion of construction or up to the date of

repayment of loan (whichever is earlier) is pre-construction interest. Such interest is
allowed in FIVE equal installments.

note: If date of completion of construction is earlier then pre-construction period is

restricted to 31st March of the preceding year.

note: If date of repayment of loan is earlier then pre-construction period is up to the date of
repayment.

e. Where a fresh loan has been taken to repay the original loan, interest paid on the second
loan is also allowable as deduction.

f. Interest on loans borrowed from a friend or a relative is allowed as deduction u.s.24.

However, principal repayment does not qualify for deduction u.s.80 C.

g. Interest paid on delay in payment of original interest due (penalty) is not deductible.

PARTLY SELF-OCCUPIED AND PARTLY-LET OUT:

Case A: Where a house is let for some part of the year and self-occupied for the
remaining part of the year.

ANNUAL VALUE IS COMPUTED AS IF THE HOUSE IS LET OUT FOR THE WHOLE YEAR.
for eg: X owns a house. Municipal valuation Rs.60,000 p.a.; Fair rent Rs.72,000 p.a.; The house is
let out for Rs.7,000 p.m. for 8 months and for the remaining period it remained self-occupied.
What will be the gross annual value of the property? What would be the answer if the house is
let for Rs.10,000 p.m. instead of Rs.7,000?
57

A. Municipal valuation Rs.60,000 p.a.

Fair rent Rs.72,000 p.a.
Rent received Rs.56,000 (7,000 x 8) (ignore self-occupied period)

Gross Annual Value in this case would be Rs.72,000 (i.e. whichever is higher)

B. In the second case GAV. would be Rs.80,000 (i.e. higher of 60,000; 72,000 and Rs.80,000)

Case B: Where a house consists of more than one unit:

Each unit is treated separately. (i.e. a self-occupied unit like a separate self-occupied
property and a let-out unit similar to a separate let-out property).

Eg. X owns a house consisting of 3 units. Each unit is treated separately as if he is

the owner of 3 houses.

OTHER PROVISIONS:
a. Composite Rent:
Where the landlord receives rent for other amenities from the tenant in addition to house
rent then such a rent is known as composite rent. In such a situation, house rent is to be
separated from the composite rent and is assessed to tax under the head “Income from house
property”. Rent received for providing other amenities shall be assessed under the head
“Income from other sources”.

b. Deemed to be let out property – Annual value of two houses can be ‘NIL’:
Where the assessee owns more than two houses for self-occupation, then annual value of any
two houses according to his choice shall be NIL and the remaining properties shall be deemed
as let out.

c. Property owned by co-owners:

Where a house owned by joint owners is self-occupied by each of the co-owner, the annual
value of the property will be nil and each co-owner shall be entitled to a deduction of
Rs.30,000 or Rs.2,00,000 as the case may be on account of interest on borrowed capital.

Where the house owned by co-owners is let out, the income shall be computed as if the
property is owned by one owner and thereafter the income so computed shall be divided
amongst each co-owner as per their respective share.
58

Problems:

1. In the following cases, state the head of income under which the receipt is to be assessed
and comment.

a. X lets out his property to Y. Y sublets it. How is sub-letting receipt to be assessed in the
hands of Y.

b. Y has built a house on a leasehold land. He has let out the property and claims the rental
income to be assessed under “Other Sources”. Is he correct?

c. Z uses his property for his own business. Can he claim depreciation?

d. Income from a vacant land is taxable under the head ……………………………

e. Rent received from employees for letting out residential quarters is taxable under the head
………………………

f. Rental income from properties held as stock-in-trade is taxed under the head …………………

2. X owns a house. It is self-occupied. Municipal valuation is Rs.1,66,000, whereas Fair rent is

Rs.1,76,000 and Standard rent under the Rent Control Act is Rs.1,50,000. The following expenses
are incurred by Mr.X: Repairs Rs.20,000; Municipal tax Rs.7,000; Insurance Rs.2,000;

Interest on borrowed capital to construct the property Rs.2,25,000; Interest on capital borrowed
by mortgaging the property for daughter’s marriage Rs.50,000 (in either case capital is borrowed
after April 1, 1999). Income of X from Salary is Rs.12,00,000. Find out his net income.

3. Choose the correct answer with reference to the provisions of the Income-tax Act, 1961:
The ceiling limit of deduction under section 24 in respect of interest on loan taken on 01.04.2009
for repairs of a self-occupied house is:

a. Rs.30,000 per annum

b. Rs.2,00,000 per annum
c. No limit
d. 30% of NAV

4. R owns six houses in Chennai, details of which are as follows, compute GAV.

Particulars I II III IV V VI
Municipal valuation 20,000 24,000 56,000 42,000 48,000 45,000
Fair rental value 24,000 24,000 40,000 42,000 50,000 50,000
Rent received or receivable 18,000 36,000 48,000 36,000 54,000 56,000
Standard rent ** 42,000 50,000 30,000 ** 48,000
59

5. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 60,000 60,000 60,000 1,12,000
Fair rent 68,000 68,000 68,000 1,17,000
Actual rent (before adjusting unrealised rent) 66,000 66,000 72,000 1,20,000
Standard rent 62,000 62,000 70,000 1,15,000
Unrealised rent (conditions of Rule 4 satisfied) 2,000 6,000 5,000 50,000

6. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 60,000 60,000 60,000 1,12,000
Fair rent 68,000 68,000 68,000 1,17,000
Actual rent (per annum) 60,000 66,000 72,000 1,20,000
Standard rent 62,000 62,000 70,000 1,15,000
Vacancy period (in months) 1 2 3 4

7. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 1,40,000 1,40,000 1,40,000 1,40,000
Fair rent 1,45,000 1,45,000 1,45,000 1,45,000
Actual rent (before adjusting urr.) 1,68,000 1,68,000 1,68,000 1,68,000
Standard rent 1,42,000 1,42,000 1,50,000 1,42,000
Unrealized rent (Rule 4 satisfied) 14,000 42,000 42,000 70,000
Vacancy period (in months) 1 1 1 3

8. X owns 3 houses in Delhi, details of which are as under: Compute net annual value.

Particulars House I House II House III

Municipal value 1,20,000 72,000 60,000
Fair rent 1,50,000 75,000 75,000
Rent per unit p.a. 70,000 84,000 21,000
Standard rent 1,30,000 80,000 72,000
No. of residential units 2 1 3
Municipal taxes Rs.12,000 Rs.8,000 for last Rs.60,000 (includes
(due but not year paid in this Rs.45,000 which
paid) year & Rs.9,000 of relates to last three
current year is due years paid now)

9. Mr.A has a property whose municipal valuation is Rs.1,30,000 p.a. The fair rent is Rs.1,10,000
p.a. and the standard rent fixed by the Rent Control Act is Rs.1,20,000 p.a. The property was let
out for a rent of Rs.11,000 p.m. throughout the previous year. Unrealised rent was Rs.11,000 and
all the conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @ 10% of
municipal valuation. Interest on borrowed capital was Rs.40,000 for the year. Compute income
from house property.
60

10. Mr.G has a property whose municipal valuation is Rs.2,50,000 p.a. The fair rent is Rs.2,00,000
p.a. and the standard rent under the Rent Control Act is Rs.2,10,000 p.a. The property was let out
for a rent of Rs.20,000 p.m. However, the tenant vacated the property on 31.01.2020. Unrealised
rent was Rs.20,000 and all the conditions prescribed by Rule 4 are satisfied. He paid municipal
taxes @ 8% of municipal valuation. Interest on borrowed capital was Rs.65,000 for the year.
Compute income from house property.

11. For the assessment year 20-21, X submits the following information:

House I House II
Fair rent 3,50,000 3,20,000
Rent 6,00,000 4,20,000
Municipal valuation 3,60,000 3,50,000
Standard rent 3,00,000 5,00,000

Municipal taxes paid 40,000 50,000

Interest on capital borrowed by mortgaging House I
(funds are used for construction of House II) 1,40,000 Nil

Unrealised rent of the previous year 19-20 10,000 80,000

Vacancy period (number of months) 2 4
Loss on account of vacancy 1,00,000 1,40,000

Nature of occupation Let out for Let out for

residence business

12. For the assessment year 20-21, X submits the following information:

House I House II
Municipal valuation 1,80,000 3,60,000
Standard rent 1,50,000 3,00,000
Actual Rent 2,40,000 6,00,000

Municipal taxes paid 20,000 30,000

Municipal taxes – outstanding 10,000 15,000

Interest on money borrowed – paid 60,000 20,000

Interest on money borrowed – outstanding 1,00,000 60,000
Housing loan principal repaid to bank 50,000 30,000

Nature of occupation Let out for Let out for

residence business

Compute Income from house property.

Property held by co-owners:

13. [Link] is a co-owner of a house property alongwith his brother:

Municipal value of the property Rs.1,60,000

Fair rent Rs.1,50,000
Standard Rent Rs.1,70,000
Rent received Rs.15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the
bank is Rs.25,000 has been paid. Interest on the unpaid interest is Rs.450. To repay this loan,
Raman and his brother have taken a fresh loan and interest charged on this loan is Rs.5,000. The
municipal taxes of Rs.5,100 have been paid by the tenant.

Compute income from house property in the hands of [Link] for the A.Y.2020-21.

14. [Link] co-owns a residential house property in Calcutta along with her sister [Link],
where her sister's family resides. Both of them have equal share in the property and the same is
used by them for self-occupation. Interest is payable in respect of loan of Rs.50,00,000 @ 10%
taken on 1.4.2018 for acquisition of such property. In addition, [Link] owns a flat in Pune in
which she and her parents reside. She has taken a loan of Rs.3,00,000 @ 12% on 1.10.2018 for
repairs of this flat. Compute the deduction which would be available to [Link] and Ms.
Dimple under section 24(b) for A.Y.2020-21.

15. Two brothers Arun and Bimal are co-owners of a house property with equal share. The house
was constructed during the financial year 1998-99. The property consists of eight identical units
and is situated at Cochin.

During the financial year 2019-20, each co-owner occupied one unit for residence and the
balance of six units were let out at a rent of Rs.12,000 per month per unit. The municipal value
of the house property is Rs.9,00,000 and the municipal taxes are 20% of municipal value, which
were paid during the year. One of the let out properties remained vacant for 4 months.

The other expenses were as follows:

Repairs Rs.40,000; Insurance paid Rs.15,000; Interest payable on loan Rs.3,00,000

Arun could not occupy his unit for six months as he was transferred to Chennai. He does not own
any other house.

Compute the income under the head “Income from House Property” of two brothers for the
assessment year 2020-21.
62

Problem on Composite Rent:

16. R is the owner of a house property in Chennai. It has been let out for Rs.7,20,000 which includes
house rent and also rent for all amenities mentioned below. Municipal valuation Rs.5,40,000.

The landlord, however, bears the following expenses on tenants amenities: Water charges (as
per agreement) Rs.24,000; Lift maintenance Rs.15,000; Salary of Gardener Rs.15,000;
Lighting of stairs Rs.6,000.

R claims the following expenses: Repairs Rs.8,000; Land revenue paid Rs.12,000; Collection
charges Rs.10,000. Compute income from house property.

Problems on Interest computation on borrowed capital:

17. Identify pre-construction period from the following information given below:

Date of borrowing Date of completion Date of repayment

a. 1.4.17 1.4.18 1.4.2030
b. 1.4.16 1.4.18 1.4.2030
c. 1.4.13 31.8.16 1.4.2028
d. 1.4.14 31.10.16 1.4.2030
e. 1.8.15 1.12.17 1.4.2024
f. 1.4.16 31.12.16 1.4.2030

18. Mr.R took a loan of Rs.15 lakhs @ 12% p.a. on 1.7.2017 for constructing a house. The
construction of the house was completed on 19.10.2019. Compute for A.Y. 2020-21 the amount
of interest deductible in computing the income from house property if the house is: (i) let out;
(ii) self-occupied.

19. The assessee took a loan of Rs.6,00,000 on 1.4.16 from a bank for construction of a house on a
land he owns in Chennai. The loan carries an interest @ 10% p.a. The construction is completed
on 15.6.2018. The entire loan was paid on 30.11.2022. Compute interest allowable for the
previous year 2019-20.

20. Poorna has one house property at Bangalore. She stays with her family in the house. The rent of
similar property in the neighbourhood is Rs.25,000 p.m. The municipal valuation is Rs.23,000
p.m. Municipal taxes paid is Rs.8,000.

The house construction began in April 2013 with a loan of Rs.20,00,000 taken from SBI Housing
Finance Ltd. @ 9% p.a. on 01.04.2013. The construction was completed on 30.11.2015. The
accumulated interest up to 31.3.2015 is Rs.3,60,000. During the previous year 2019-20, Poorna
paid Rs.2,40,000 which included Rs.1,80,000 as interest. There was no principal repayment
prior to this date. Compute income from house property for A.Y. 2020-21.
63

Problems on Deemed to be let out property

21. [Link] owns two house properties one at Bombay, wherein his family resides and the other at
Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in a rented
house. For acquisition of house property at Bombay, he has taken a loan of Rs.30 lakh @ 10% p.a.
on 1.4.2018. He has not repaid any amount so far. In respect of house at Delhi, he has taken a
loan of Rs.5 lakh @ 11% p.a. on 1.10.2018 towards repairs. Compute the deduction which would
be available to him u.s.24(b) for A.Y.2020-21 in respect of interest payable on such loan.

22. X has occupied three houses for his residential purposes, particulars of which are as follows:

House I House II House III

Standard Rent 1,50,000 2,00,000 Nil
Municipal Valuation 1,00,000 3,00,000 3,00,000
Fair rent 1,80,000 1,80,000 3,50,000

[Link] paid 12,000 24,000 36,000

Repairs Nil Nil 2,000

X borrows Rs.6,00,000 @ 10% p.a. for construction of House III (date of borrowing June 1st,
2011, date of repayment of loan 31.5.2020). Construction of all the houses is completed in May
2016. Mr.X, seeks your professional advice to plan his tax liability. Give suggestions to Mr.X
which houses should be considered and treated as self-occupied so that his house property
income is minimum for A.Y.2020-21.

23. Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the P.Y.
2019-20 are as under:

Particulars House I House II House III

Municipal valuation p.a. Rs.3,00,000 Rs.3,60,000 Rs.3,30,000
Fair rent p.a. Rs.3,75,000 Rs.2,75,000 Rs.3,80,000
Standard rent p.a. Rs.3,50,000 Rs.3,70,000 Rs.3,75,000

Date of completion/purchase 31.3.1999 31.3.2001 01.4.2014

Municipal taxes paid during the year 12% 8% 6%

Interest on money borrowed for repair

of property during the current year - 55,000

Interest for current year on money

borrowed in July 2013 for purchase 1,75,000
of property

Compute Income from house property and suggest which houses should be opted to be assessed
as self-occupied so that his tax liability is minimum.
64

Problem on recovery of Unrealised rent:

24. For the A.Y.18-19, X claims a deduction of Rs.86,000 on account of unrealized rent pertaining to
the previous year 17-18 and the same was allowed by the A.O. On 20.10.19, he recovers
Rs.46,000 from the defaulting tenant (legal expenses on recovery is Rs.5,000). What will be the
tax treatment?

Problem on arrears of rent collected:

25. [Link] sold his residential house property in March, 2019. In June, 2019, he recovered rent of
Rs.10,000 from [Link], to whom he had let out his house for two years from April 2013 to
March 2015. He could not realise two months rent of Rs.20,000 from him and to that extent his
actual rent was reduced while computing income from house property for A.Y.2015-16.

Further, he had let out his property from April, 2015 to February, 2019 to Mr. Satish. In April,
2017, he had increased the rent from Rs.12,000 to Rs.15,000 per month and the same was a
subject matter of dispute. In September, 2019, the matter was finally settled and [Link]
received Rs.69,000 as arrears of rent for the period April 2017 to February, 2019. Would the
recovery of unrealised rent and arrears of rent be taxable in the hands of [Link], and if so in
which year?

26. [Link] completed construction of a residential house on 01.04.2019.

Interest paid on loans borrowed for the purpose of construction during the 30 months prior to
completion was 60,000. The house was let out on a monthly rent of 18,000.

Annual corporation tax paid is 35,000. Interest paid during the year is 25,000;
Amount spent on repairs is 6,000 The property was vacant for 4 months.

Annual letting value as per corporation records is Rs.1,50,000.

Fire insurance premium paid 3,000 p.a.

He owns another house in Kerala. In respect of this house, he had received arrears of rent of
36,000 during the year, which had not been charged to tax in the earlier year.

Compute the income from “Income from House Property” for the Assessment Year 20-21.

Problem on property held in a foreign country:

27. Mrs.R, a citizen of the USA., is a resident and ordinary resident in India during the financial year
2019-20. She owns a house property at Los Angeles, USA., which is used as her residence. The
annual value of the house is $20,000. The value of one USD may be taken as Rs.65.

She took ownership and possession of a flat in Chennai on 01.07.2019, which is used for self
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.03.2020. The municipal valuation is Rs.32,000 p.m. and fair rent is Rs.4,20,000 p.a.
65

She paid the following to Corporation of Chennai:

Property tax Rs.16,200
Sewage tax Rs.1,800

She took a loan from Standard Chartered Bank for purchasing this flat in June 2017. Interest on
loan was as under:

Period prior to 01.04.2019 Rs.49,200

01.04.2019 to 30.06.2019 Rs.50,800
01.07.2019 to 31.03.2020 Rs.1,31,300

She had a house property in Bangalore, which was sold in March, 2016. In respect of this house,
she received arrears of rent of Rs.60,000 in March, 2020. This amount has not been charged to
tax earlier. Compute income from house property, exercising the most beneficial option
available.

Problems on partly self-occupied and partly let-out

28. X owns a property at Chennai (Municipal valuation Rs.1,64,000 p.a.; Fair rent Rs.2,16,000 p.a.;
Standard rent Rs.1,80,000 p.a.). The house is let out up to 31.1.2019 (monthly rent being Rs.14,000).
From 1.2.2019 the property is self-occupied for own residential purposes.

Expenses incurred by X are: Municipal tax Rs.6,000 (actually paid); Repairs Rs.2,000; Interest on
capital borrowed (date of borrowing 10.6.98) for acquiring the property: Rs.1,23,000. Compute
income from house property.

29. [Link] owns a house property at Adyar in Chennai. The municipal value of the property is
Rs.5,00,000, fair rent is Rs.4,20,000 and standard rent is Rs.4,80,000. The property was let-out for
Rs.50,000 p.m. up to December 2019. Thereafter, the tenant vacated the property and
[Link] used the house for self-occupation. Rent for the months of November and
December 2019 could not be realised in spite of the owner’s efforts. All the conditions prescribed
under Rule 4 are satisfied.

She paid municipal taxes @12% during the year. She had paid interest of Rs.25,000 during the year
for amount borrowed for repairs for the house property. Compute her income from house property
for the A.Y.2020-21.

Problems on Part of the house is let out and the other part is self-occupied.
30. Prem owns a house in Chennai. During the previous year 2019-20, 2/3rd portion of the house was
self occupied and 1/3rd portion was let out for residential purposes at a rent of Rs.8,000 p.m.
Municipal value of the property is Rs.3,00,000 p.a., fair rent is Rs.2,70,000 p.a. and standard rent is
Rs.3,30,000 p.a. He paid municipal taxes @ 10% of municipal value during the previous year.

A loan of Rs.25,00,000 was taken by him during the year 2015 for acquiring the property. Interest on
loan paid during the previous year 2019-20 was Rs.1,20,000. Compute IFHP.
66

31. X owns a residential house property. It has two equal residential units--Unit I and Unit 2. While
Unit I is self-occupied by X for his residential purpose, Unit 2 is let (rent being Rs.6,000 p.m., rent
of 2 months could not be recovered).

Municipal value of the property is Rs.1,30,000 p.a., Standard rent is Rs.1,25,000 p.a. and fair rent
is Rs.1,40,000 p.a. Municipal tax is imposed @ 12% which is paid by X. Other expenses being
repairs Rs.9,000; insurance Rs.600; interest on capital borrowed during 1997 for constructing
the property Rs.63,000. Compute his taxable income assuming his income from other
sources is Rs.10,00,000.

32. Mr.A and B constructed their houses on a piece of land purchased by them at New Delhi. The
built up area of each house was 1,000 sq. ft. ground floor and an equal area in the first floor. A
started construction on 01.04.2018 and completed on 01.04.2019. B started the construction on
01.04.2018 and completed the construction on 30.06.2019.

A occupied the entire house on 01.04.2019. B occupied the ground floor on 01.07.2019 and let
out the first floor for a rent of Rs.15,000 per month. However, the tenant vacated the house on
31.12.2019 and B occupied the entire house during the period 01.01.2020 to 31.03.2020.

Following are the other information:

i. Fair rental value of each unit

(ground floor/first floor) Rs.1,00,000 per annum

ii. Municipal value of each unit

(ground floor/first floor) Rs.72,000 per annum

iii. Municipal taxes paid by A-Rs.8,000

B-Rs.8,000

iv. Repair and maintenance charges paid by A-Rs.28,000

B-Rs.30,000
A has availed a housing loan of Rs.20 lakhs @ 12% p.a. on 01.04.2018. B has availed a housing
loan of Rs.12 lakhs @ 10% p.a. on 01.07.2018. No repayment was made by either of them till
31.03.2020. Compute IFHP for A and B for the previous year 2019-20 (A.Y.2020-21)

Additional Problems:
33. Rajesh, a British national, is a resident and ordinary resident in India during the P.Y. 2019-20. He
owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes paid to the
Municipal Corporation of London is £ 8,000 during the P.Y. 2019-20. The value of one £ in Indian
rupee to be taken at Rs.92.50. Compute Net Annual Value of the property for the A.Y. 2020-21.
67

34. Mr. X owns one residential house in Mumbai. The house is having two identical units. First unit
of the house is self-occupied by Mr. X and another unit is rented for Rs.8,000 p.m. The rented
unit was vacant for 2 months during the year. The particulars of the house for the previous year
2019-20 are as under:

Standard rent Rs.1,62,000 p.a. Municipal valuation Rs.1,90,000 p.a.

Fair rent Rs.1,85,000 p.a. Municipal tax (paid by Mr. X) 15% of M.V.
Light and water charges Rs.500 p.m. Interest on borrowed capital Rs.1,500 p.m.
Lease money Rs.1,200 p.a. Insurance charges Rs.3,000 p.a.
Repairs Rs.12,000 p.a.

35. Mrs.R owns a residential house. Ground floor of the house is self-occupied by her while first
floor has been rented out since 01.10.2019. The reconstruction of the house was started on
01.04.2019 and was completed on 30.09.2019. The monthly rent is Rs.10,000. The tenant also
pays Rs.3,000 p.m. as power back-up charges. She took a housing loan of Rs.12 lakhs on
01.04.2019. Interest on housing loan for the period 01.04.2019 to 30.09.2019 was Rs.60,000 and
for the period 01.10.2019 to 31.03.2020 was Rs.40,000. During the year, she also paid municipal
taxes for the f.y.2018-19 Rs.5,000 and for f.y.2019-20 Rs.5,000. Compute IFHP.

36. [Link] owns a house property whose Municipal Value, Fair Rent and Standard Rent are
Rs.96,000, Rs.1,26,000 and Rs.1,08,000 (per annum), respectively. During the Financial Year
2019-20, one-third of the portion of the house was let out for residential purpose at a monthly
rent of Rs.5,000. The remaining two-third portion was self-occupied by him. Municipal tax @ 11
% of municipal value was paid during the year.

The construction of the house began in June, 2012 and was completed on 31-5-2015. Vikas took
a loan of Rs.1,00,000 on 1-7-2012 for the construction of building. He paid interest on loan @
12% per annum and every month such interest was paid. Compute IFHP.

37. [Link], is a resident but not ordinarily resident in India for the A.Y.2020-21. He owns two
houses, one in Dubai and the other in Mumbai. The house in Dubai is let out there at a rent of
DHS 20,000 p.m. (1 DHS = INR 18). The entire rent is received in India. He paid property tax of
DHS 2,500 and sewerage tax DHS 1,500 there, for the financial year 2019-20.

The house in Mumbai is self-occupied. He had taken a loan of Rs.25,00,000 to construct the
house on 1st June, 2016 @ 12%. The construction was completed on 31st May, 2018 and he
occupied the house on 1st June, 2018. The entire loan is outstanding as on 31st March, 2020.
Property tax paid in respect of the second house is Rs.2,400 for the financial year 2019-20.
Compute the income chargeable under the head “IFHP” for A.Y.2020-21. DHS = Dirhams
68

38. [Link] owns a commercial building whose construction got completed in June 2015. He took
a loan of Rs.15,00,000 from his friend on 01.08.2014 and had been paying interest calculated at
15% p.a. He is eligible for pre-construction interest as deduction as per the provisions of
Income-tax Act.

[Link] has let out the commercial building at a monthly rent of Rs.40,000 during the
financial year 2019-20. He paid municipal tax of Rs.18,000 each for the financial year 2018-19
and 2019-20 on 01.05.2019 and on 05.04.2020 respectively.

Compute income under the head “IFHP” of [Link] for A.Y.2020-21.

Treatment of interest and principal repaid during the construction period:

39. Mr.K borrowed a sum of Rs.30,00,000 from the State Bank of India towards purchase of a
residential flat. The loan amount was disbursed directly to the flat promoter by the bank.
Though the construction was completed in May, 2020, repayments towards principal and
interest had been made during the year ended 31.03.2020.

In the light of the above facts, state:

a. Whether Mr.K can claim deduction u.s.24 in respect of interest for the A.Y. 2020-21.

b. Whether deduction under section 80 C can be claimed for the above assessment year, even
though the construction was completed only after the closure of the year?

RECENT AMENDMENT
1. House property held as STOCK-IN-TRADE and NOT let out:

The ANNUAL VALUE of house property shall be taken as ‘Nil’ if the following conditions are satisfied:

i. The property has been held as stock-in-trade; and

ii. It has not been let out for whole or part of the year

This benefit of ‘Nil’ annual value shall be applicable for the period up to two years from the end of the
financial year in which certificate of completion of construction of the property is obtained from the
competent authority.

Problem 1:
Neha Builders, a property dealer constructed one property each at Kochi, Bangalore and Chennai. The
completion certificate for all the three properties were issued by the respective Competent Authorities in
the month of January, 2020. The properties at Kochi and Bangalore were sold in January, 2020.
69

The property at Chennai remained unsold and vacant as on 31.03.2020. Municipal taxes paid for Chennai
property is Rs.10,000 for the year ended 31.03.2020. The assessee has borrowed Rs.3 crores from SBI for
construction of all the three properties. Interest amounting to Rs.4,50,000 was incurred for the year
ended 31.03.2020. Compute the taxable income.

Would your answer differ if the Chennai property remains unsold and Neha Builders let out the same
from April 2020 for a monthly rent of Rs.50,000 as against the fair rent of Rs.75,000 per month?

Solution:
In the given case, the profits derived from sale of Kochi and Bangalore property shall be chargeable to tax
under the head “Profits and Gains from Business or Profession”.

The stock-in-trade at Chennai which remains unsold and vacant shall be considered for taxability based
on its gross annual value under the head “Income from House Property”. Section 23(5) provides that the
gross annual value of such unsold and vacant stock-in-trade shall be deemed to be ‘Nil’ for the financial
year in which the certificate of completion of construction is issued by the Competent Authority and for
two subsequent financial years. Accordingly, for the financial year 2019-20 (year of obtaining the
certificate) and for the subsequent financial years 2020-21 & 2021-22, the annual value of Chennai
property shall be deemed to be ‘Nil’.

CASE B:
In case the assessee has let out the property, the benefit of NIL annual value as provided u.s.23(5) shall
not apply for financial year 2019-20. Accordingly, the higher of actual rent Rs.6,00,000 or fair rent
Rs.9,00,000 shall be adopted as gross annual value. In the given case Rs.9,00,000 shall be the gross
annual value and accordingly, the computation of income from house property shall be made for
A.Y.2020-21.
70

CHAPTER – 8 PROFITS & GAINS OF BUSINESS OR PROFESSION

Format to compute business income of an assessee:

Net Profit as per profit and loss account xxx

Add: Disallowances (if debited) xxx
Less: Incomes considered separately (if credited) xxx
Less: Depreciation as per Income tax rules xxx
INCOME FROM BUSINESS xxx

Few items of disallowances while computing business income:

• All provisions and reserves (e.g. provision for bad and doubtful debts)
• Income tax including advance income tax paid

• Notional items debited to profit and loss account such as:

▪ Salary drawn by the proprietor
▪ Interest charged by the proprietor on his own capital

• All capital expenditure (purchase of an asset) and capital losses (loss on sale of plant)

• Charities and donations

• All personal expenses (household expenses) of the assessee including drawings

• Fines or Penalty paid for violation or contravention of any law

• Expenditure on CSR activities

• Failure to deduct tax at source on payments made to residents shall be disallowed to the
extent of 30% of such expenditure

• Any payment exceeding Rs.10,000 by way of cash or bearer cheque (limit is Rs.35,000 in
case of payment to a transport operator plying trucks)

• Any payment to a relative which is excessive or unreasonable to the assessing officer

Few items of Allowances:

• Repairs, fire insurance premium paid on the assets used for business
• Bad debts (if relevant conditions are satisfied)
• Advertisement expenditure (except advertisement in the souvenir, etc., of a political party)
• Printing, postage and stationery, telephone expenses, travelling expenses
• Interest on capital borrowed for the purpose of investment in business
• Audit fees
• Loss of stock-in-trade
• Employer’s contribution to recognized provident fund and other approved funds
• Contribution to Research Institutions for the purpose of approved research
71

• Any tax payable to the Government (e.g. GST, customs duty, municipal tax); bonus or
gratuity to employees; interest on loan borrowed from banks; shall be allowed only on
“payment” basis. Payment should be made before the “due date” of filing return of income.

Section 37(1): General deduction:

An expenditure shall be allowed under section 37(1), provided:

• It is not in the nature of expenditure described under section 30 to 36;

• It is not in the nature of capital expenditure;
• It is not a personal expenditure of the assesse;
• It should have been spent wholly and exclusively for the purpose of business / profession;
• It should not be incurred for any purpose which is an offence or is prohibited by any law
• It is not an expenditure incurred by the assesse on CSR activities

Depreciation on tangible assets and intangible assets:

i. Asset acquired during the previous year and put to use for less than 180 days:
50% of the normal depreciation is allowed.

ii. Asset acquired during the previous year and put to use for more than 180 days:
Full depreciation is allowed.

Important: Where an asset is purchased by way of cash payment exceeding Rs.10,000;

depreciation shall NOT be allowed.

Disallowances: If debited in profit and loss account: Add

If not debited in profit and loss account: No adjustment is required.

Allowances: If debited in profit and loss account: No adjustment is required.

If not debited in profit and loss account: Deduct

Important: “Business income” is computed as per the method of accounting followed by the
assessee. (Mercantile system or Cash system). Under ‘Mercantile’ system, expenditure is
allowed on ‘due’ basis. However, certain expenses covered by section 43B shall be allowed as
deduction only on ‘payment’ basis even though assessee follows ‘mercantile’ system for
accounting the expenditure.
72

1. The following items are debited to P and L A/c. of an assesse for the year ended 31.03.2020. State
whether these items are admissible or inadmissible while computing income from business.

a. Single payment for an expenditure exceeding Rs.10,000 in cash or bearer cheque

b. Payment of rent exceeding the limit without Tds.
c. Donation to Swachh Bharat & Clean Ganga Fund
d. Bonus payable to employees due on 31.03.2020 was not paid before ‘due date’ of filing IT return
e. Purchase of computer for office use through on-line payment
f. Income tax paid
g. Provision for bad and doubtful debts, provision for gratuity
h. Loss on sale of machinery
i. Expenses on Corporate Social Responsibility activities
j. Fine paid for violation of provisions of any law
k. Household expenses

2. The following is the Profit and Loss Account of Mr.A for the year ended 31.3.2020:

Telephone expenses 6,200 Gross profit 6,80,000

Advertisement 24,000 Dividend from domestic companies 14,000
General expenses 16,000 Income from house property 25,000
Office rent 22,000 Bad debts recovered
Drawings 24,000 (allowed earlier as deduction) 12,000
Interest on bank loan 16,000 Agricultural Income 30,000
Interest on own capital 7,000 Gold coins received from father 10,000
Travelling expenses 5,000
Depreciation 15,000
Bonus (due on 31.03.2020) 26,000
Car purchased 72,000
Expenses on car (petrol) 12,000
Donations to Clean Ganga Fund 2,000
Provision for bad debts 6,000
Commission to agent 30,000
Net profit 5,15,300

• Advertisement relates to a bill for which payment was made by bearer cheque.
• General expenses include a personal expenditure of Rs.4,000
• Depreciation allowable under section 32 on all assets including car is Rs.10,000.
• Interest on bank loan was not paid till 31.7.2020 being the due date of filing return of income.
• Bonus to employees was paid on 30.6.2020 and due date of filing return is 31.7.2020.
• Car was used only for business purposes.
• Commission to agent was paid without deduction of tax at source (Mr.A was subject to Tax
Audit u.s.44AB for the preceding financial year 2018-19)
• Compute business income of Mr.A.
73

3. The following is the Profit and Loss Account of Mr.B for the year ended 31.3.2020:

General expenses 30,000 Gross Profit 4,60,000

Fire insurance prm on stock 4,000 Bad debts recovered
Bad debts 10,000 (disallowed earlier by A. O.) 4,000
Advance Income tax paid 15,000 Interest on Govt. securities 4,000
Salaries 1,50,000 Interest on Income tax refund 3,000
Audit fees 7,500 Interest on savings account with SBI 6,000
Interest on own capital 2,000 LIC maturity amount received 42,000
Income tax 25,000 Interest on PPF account 8,000
Depreciation 20,000
Household expenses 40,000
Municipal tax on office building 15,000
Advertisement 20,000
Car expenses (50% personal use) 15,000
Net profit 1,73,500

• General expenses include Rs.14,000 paid as compensation to an old employee whose services
were terminated in the interest of the business and Rs.10,000 by way of help to a poor student.
• Depreciation calculated according to the rates (section 32) comes to Rs.29,000.
• Municipal tax was paid on 18.5.2020. Due date of filing return is 31.7.2020.
• Salaries include salary drawn by the proprietor himself Rs.60,000
• Expenditure on advertisement was spent in a souvenir published by a political party.
• Compute Business Income of Mr.B.

4. The following is the Profit and Loss Account of [Link] for the year ending 31.3.2020:

Opening stock 3,60,000 Sales (agency business) 69,00,000

Purchases 50,00,000 Closing stock 4,50,000
Salaries and wages 11,20,000
Rent and rates 40,000
Household expenses 1,18,000
Commission (tds not deducted) 50,000
Income tax 42,000
Advertisement 10,000
Postage and telegrams 4,000
Interest on own capital 6,000
Reserve for future losses 5,000
Depreciation on machinery 10,000
Net profit 5,85,000

• Both opening and closing stock have been consistently valued at 10% below cost price.
• Depreciation according to the Income-tax Rules works out to Rs.5,000.
• [Link] was subject to Tax Audit in the preceding financial year 2018-19.
• Sales include a sum of Rs.50,000 representing goods withdrawn for the use of his family
members. These goods were purchased at a cost of Rs.60,000.
74

5. Following is the profit and loss account of Mr.X for the year ending March 31, 2020:-

Repairs to building 1,81,000 Gross Profit 6,01,000

Paid to IIT, for an approved Income-tax refund 8,100
scientific research programme 1,00,000 Interest on company deposit 6,400
Interest 1,10,000
Travelling 1,34,500
Net Profit 90,000

The following additional information is given:

• Repairs to building includes Rs.1,00,000 being cost of building a new room.

• Interest payment includes Rs.50,000 on which TDS has not been deducted and penalty for
contravention of GST Rules of Rs.24,000

Compute Income from business of Mr.X for A.Y.2020-21 ignoring depreciation.

6. Mr.D, an Indian Resident aged 38 years, carries on his own business. He has prepared the
following Profit and Loss account for the year ending March 31, 2020:-

To Salary 48,000 Gross profit 4,30,400

To Advertisement 24,000 Cash gift on the occasion
To Sundry expenses 54,500 of marriage 1,20,000
To Fire insurance (Rs.10,000 Interest on debentures
relates to house property) 30,000 (listed) (net of taxes) 5,400
To Income-tax 27,000
To Household expenses 42,500
To Depreciation (allowable) 23,800
To Contribution to a University
approved u.s.35(1)(ii) 1,00,000
To Municipal taxes on h.p. 36,000
To Printing and stationery 12,000
To Repairs and maintenance 24,000
To Net Profit 1,34,000
------------ ------------

Other information:
a. Mr.D owns a house property which is being used by him for the following purposes:
- 25% of the property for own business
- 25% of the property for self-residence
- 50% let out for residential purpose

b. Rent received from 50% let out portion during the year was Rs.1,65,000.

c. Compute Income from house property and Income from business.

7. Dr.G, a resident individual at Madurai, aged 50 years is running a clinic. His income and
expenditure account for the year ending March 31st 2020 is as under:

Expenditure Income
To Medicine consumed 48,40,000 By Consultation & medical charges 61,00,000
To Staff salary 4,25,000 By Income-tax refund (principal
To Clinic consumables 1,55,000 Rs.15,000; interest Rs.1,500) 16,500
To Rent paid 1,20,000 By Dividend from Indian companies 27,000
To Administrative exps 3,00,000 By Winning from lottery (net of tds) 35,000
To Donation to IIT for By Rent received 54,000
programmes in By Interest on savings account with SBI 7,000
scientific research 1,00,000
To Net Profit 2,92,500
----------- -------------

a. Rent paid includes Rs.36,000 paid by cheque towards rent for his residence.

b. Clinic equipments are:

01.04.2019 Opening WDV Rs.4,50,000
09.02.2020 Acquired (cost) Rs.1,00,000 (online payment)

c. Rent received relates to property let out at Madurai. Gross Annual Value Rs.54,000. The
municipal tax of Rs.9,000, paid in January 2020 has been included in “administrative
expenses”

From the above, compute Gross Total Income of Dr.G.

8. R furnishes you the following information:

Income and Expenditure Account for the year ended 31-3-2020

To Medicines consumed 52,42,000 By Fee receipts 58,47,000

To Staff salary 1,65,000 By Rent 27,000
To Hospital consumables 47,500 By Dividend from Indian Co. 9,000
To Rent paid 60,000
To Administrative expenses 1,23,000
To Net income 2,46,000

Rent paid includes the rent for his residential accommodation of Rs.30,000 (paid by cheque).

Medicines consumed include medicines (cost) Rs.10,000 used for R’s family.

Hospital equipments (eligible for depreciation @ 15%)

1.04.2019 Opening WDV Rs.5,00,000
7.12.2019 Acquired (cost) Rs.2,00,000 (payment through NEFT)
76

Rent received relates to a property situated at Mysore (Gross Annual Value). The municipal tax of
Rs.2,000 paid in December, 2019 has been included in the “administrative expenses”.

He received Rs.25,000 p.m. as salary from a Hospital. This has not been included in the “fee
receipts” credited to income and expenditure account.

Compute R’s gross total income for the year ended 31.3.2020.

9. X carries on his own business. An ANALYSIS of his profit and loss for the year ending March
31, 2020 reveals the following: Compute the total income of Mr.X for the A.Y. 2020-21.

Net Profit is Rs.11,20,000

The following incomes are credited in the profit and loss account:
a. Dividend from domestic companies Rs.22,000
b. Interest on debentures Rs.17,500
c. Winning from races Rs.15,000

It is found that some stocks are omitted to be included in both the opening and closing stocks,
the value of which are – opening stock: Rs.8,000 and closing stock Rs.12,000

Rs.1,00,000 debited to P&L account being contribution to a University approved and notified
u.s.35(1)(ii) for the purpose of scientific research.

Salary includes Rs.20,000 paid to his brother which is unreasonable to the extent of Rs.2,500.

Advertisement expenses include 15 gift packets of dry fruits costing Rs.2,000 per packet
presented to important customers.

Total expenses on car is Rs.78,000. The car is used both for business and personal purposes.
3/4th is for business purposes.

Miscellaneous expenses included Rs.30,000 paid to A & Co., a goods transport operator, in cash
on January 31, 2020 for distribution of the company’s product to the warehouses.

Depreciation debited in the books is Rs.55,000. Depreciation allowable as per IT rules Rs.50,000

Drawings Rs.10,000 and Investment in NSC Rs.15,000.

10. [Link], aged 55 years, is a CA. in practice. She maintains her accounts on cash basis. Her
Income and Expenditure account for the year ended March 31, 2020 reads as follows:

Expenditure (₹) Income (₹) (₹)

Salary to staff 45,50,000 Fees earned:
Stipend to articled Audit 47,88,000
assistants 37,000 Taxation services 5,40,300
Incentive to Consultancy 2,70,000 55,98,300
articled assistants 3,000
Office rent 24,000 Dividend on shares from
Printing and Indian companies (Gross) 10,524
stationery 22,000 Income from UTI 7,600
Meeting, seminar
and conference 31,600 Honorarium received from
Purchase of car 80,000 various institutions for
Repair, valuation of answer papers 15,800
maintenance and 4,000
petrol of car 35,000 Rent received from residential
Travelling expenses flat let out 85,600
Municipal tax paid
in respect of h.p. 3,000
Net profit 9,28,224

17,17,824 17,17,824

Other Information:
i. Allowable rate of depreciation on motor car is 15%.

ii. Value of benefits (LED TV) received from clients during the course of profession is ₹ 40,000

iii. Incentives to articled assistants represent amount paid to two articled assistants for
passing IPCC Examination at first attempt.

iv. Repairs and maintenance of car include ₹ 2,000 for the period from 1-10-19 to 30-09-2020.

v. Salary include ₹ 30,000 to a computer specialist in cash for assisting [Link] in one
professional assignment.

vi. The total travelling expenses incurred on foreign tour was ₹ 32,000 was within the RBI
norms.
78

11. [Link], is a partner in Oscar Musicals & Co., a partnership firm. He also runs a wholesale
business in medical products. The following details are for the year ended 31.3.2020:

S.I. No Particulars ₹ ₹
i. Interest on capital received from Oscar Musicals & Co., at 15% 1,50,000

ii. Interest from bank on fixed deposit (net of tds ₹ 1,500) 13,500

iii. Income–tax refund received relating to A.Y.2019-20 including

interest of ₹ 2,300 34,500

iv. Net profit from wholesale business 5,60,000

Amounts debited include the following:

Deprecation as per books 34,000
Motor car expenses 40,000

Municipal taxes for the shop 7,000

(for two half years; payment for one half year made on
12.11.2019 and for the other on 14.10.2020)

Salary to manager by way of a single cash payment 21,000

The WDV of the assets (as on 1.4.2019) used in above

wholesale business is as under:
Computers 1,20,000
Motor car (20% used for personal use) 3,20,000

Compute the total income of the assesse for the A.Y. 2020-21. The computation should show the
proper heads of income. Also compute the WDV of the different blocks of assets as on 31.3.2020.

12. Mr Rajiv aged 50 years, a resident individual and practicing Chartered Accountant, furnishes you
the receipts and payment account for the financial year 2019-20.

Receipts and Payments Account

Receipts ₹ Payments ₹
Opening balance (1.4.2019) Staff salary, bonus and stipend to
Cash on hand and at bank 12,000 articled clerks 51,50,000

Fee from professional Other administrative expenses 48,000

services 59,38,000 Office rent 30,000
Rent 50,000 Housing loan repaid to SBI (includes
Motor car loan from Canara interest of ₹ 88,000) 1,88,000
Bank (@ 9% p.a.) 2,50,000
79

Life insurance premium 24,000

Motor car (acquired in Jan. 2020)
(payment through a/c payee cheque) 4,25,000

Medical insurance premium 18,000

Books bought (annual publications)

(payment through debit card) 20,000

Computer acquired on 1.11.2020 (for

professional use) (credit card) 30,000

Domestic drawings 2,72,000

Public provident fund subscription 20,000
Motor car maintenance 10,000

Closing balance (31.3.2020)

Cash on hand and at bank 15,000
62,50,000 62,50,000

Following further following information is given to you:

1. He occupies 50% of the building for own residence and let out the balance for residential
use of monthly rent of ₹ 5,000. The building was constructed during the year 1997-98

2. Motor car was put to use both for official and personal purpose. One–fifth of the motor
car use is for personal purpose. No car loan interest was paid during the year

3. The written down value of assets as on 1-4-2019 are given below:

Furniture & fittings ₹ 60,000
Plant & Machinery ₹ 80,000
(air-conditioners, photocopies etc)
Computers ₹ 50,000

Note: Mr. Rajiv follows regularly the cash system of accounting. Compute the total income of
[Link] for the assessment year 2020-21.
80

Answers:

11. Income from business:

a. Interest on capital from Oscar Musicals (a firm) 1,20,000
(1,50,000 x 12/15)

b. Wholesale business:
Net profit as per P & L A/c 5,60,000

Add: Disallowances
Depreciation as per books 34,000
Car expenses (20%) 8,000
M.T. not paid before due date (half) 3,500
Cash payment > Rs.10,000 21,000
6,26,500
Less: Depreciation as per IT Rules
On computers (40%) 48,000
On Motor car (3,20,000 x 15% x 80%) 38,400 5,40,100 6,60,100

Income from other sources:

a. Interest from bank on fixed deposit 15,000
(gross amount including tds) (tds rate 10%)
b. Interest on Income-tax refund 2,300 17,300

Gross Total Income of the assessee 6,77,400

WDV. of different block of assets as on 31.03.2020:

Asset w.d.v. Rate Depreciation w.d.v
as on 1.4.19 of dep (Rs.) as on 31.3.2020
Computer 1,20,000 40% Rs.48,000 Rs.72,000
Motor car 3,20,000 15% Rs.38,400 Rs.2,81,600

Answer: 12:

A. Income from house property

Unit 1 (self-occupied 50%)

Annual value nil
Less: Section 24:
Interest on loan (maximum) 30,000 (30,000)

Unit 2 (let-out 50%)

Gross Annual Value (note 1) (5,000 x 12) 60,000
Less: Municipal tax nil
Net Annual Value 60,000
Less: Section 24:
Standard deduction (30% of nav) 18,000
Interest on loan 44,000 (2,000) (32,000)
81

Note 1: IFHP is based on the ‘Annual Value’ of the property. Hence 12 months’
rent is taken as the GAV. Method of accounting is not relevant for
computing “IFHP”

B. Income from Profession:

Fees from professional services 59,38,000

Less: Professional expenses:

Staff salary, bonus and stipend 51,50,000
Other administrative expenses 48,000
Office rent 30,000
Depreciation on car (4,25,000 x 15% x ½ x 4/5) 25,500
Depreciation on books (20,000 x 40%) 8,000
Depreciation on computer (note 2) 26,000
Car maintenance (10,000 x 4/5) 8,000
Depreciation on furniture (60,000 x 10%) 6,000
Depreciation on P & M (80,000 x 15%) 12,000
Interest on car loan (not paid to the bank) nil 6,24,500

Gross Total Income 5,92,500

Less: Section 80 C
Housing loan repaid (principal amount) 1,00,000
Life Insurance premium 24,000
PPF 20,000 1,44,000

Section 80D (medical insurance premium) 18,000

Total Income of the assessee 4,30,500

Note 2: Depreciation on computer:

(50,000 x 40%) + (30,000 x 40% x ½)
82

BUSINESS OR PROFESSION – A DISCUSSION ON IMPORTANT SECTIONS

SECTION 44 AA: COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS

1. Who are required to maintain books of accounts?
Professionals notified under this section and others on fulfillment of certain conditions

2. Professionals notified by CBDT?

Specified Professionals include: Legal, medical, engineering or architectural profession, or
accountancy or technical consultancy or interior decoration or any other profession notified by
CBDT (notified profession includes: authorized representative, film artist, company secretary
and information technology)

3. When are Professionals required to maintain books as per Rule 6F?

Books are required to be maintained as per Rule 6F:
If GROSS RECEIPTS from such profession exceed Rs.1,50,000 in all the three years
immediately preceding the previous year (OR) is likely to exceed Rs.1,50,000 during the
current previous year if the profession is newly setup.

4. What are the books that are prescribed under Rule 6F?

Books that are prescribed under Rule 6F are:

• Cash book;
• Journal book (if books are maintained on mercantile basis);
• Ledger;
• Carbon copies of bills issued for an amount exceeding Rs.25;
• Original bills / vouchers in respect of expenditure exceeding Rs.50

In case where a person is carrying on medical profession: In addition to the above books he
has to maintain
• a daily case register and
• an inventory register

5. Place at which and period for which the books are to be kept and maintained:
Place where the person is carrying on the profession or at the principal place of his profession
in case where there is more than one place. The books of account and documents are required
to be maintained for a minimum of 6 years from the end of the relevant assessment year.

6. When other assesses (business) are required to maintain books?

Where TURNOVER or GROSS RECEIPTS exceeds Rs.10,00,000 in ANY one year out of the
three years immediately preceding the previous year; or is likely to exceed Rs.10,00,000
during the current previous year in case of newly setup business; (OR)
83

Where INCOME FROM SUCH BUSINESS exceeds Rs.1,20,000 in ANY one year out of the three
years immediately preceding the previous year; or is likely to exceed Rs.1,20,000 during the
current previous year in case of newly setup business.

Important: However, in the case of individuals and HUF, the above “turnover” limit is
Rs.25,00,000 and “income” limit is Rs.2,50,000.

7. Books that are required to be maintained by others?

“SUCH BOOKS OF ACCOUNT AND DOCUMENTS” as would enable the A.O. to compute the total
income of the assessee.

1. Vinod is a person carrying on profession as film artist. His gross receipts from profession are:

Financial year 2016-17 Rs.1,15,000

Financial year 2017-18 Rs.1,80,000
Financial year 2018-19 Rs.2,10,000

What is his obligation regarding maintenance of books of accounts for assessment year 2020-21
(financial year 2019-20) under section 44AA of Income-tax Act, 1961? (sum no.18 page: 4.296)

2. A person carrying specified profession will have to maintain books of account prescribed by Rule
6F of the Income Tax Rules, 1962, if gross receipts are more than Rs.1,50,000 for:-

a. All preceding 5 years c. Any of the preceding 5 years

b. All preceding 3 years d. Any of the preceding 3 years

SECTION 44 AB: COMPULSORY TAX AUDIT

1. When is Tax Audit Compulsory?

An assessee carrying on Business: If his total sales, turnover or gross receipts from such
business during the previous year exceed Rs.1 crore.

An assessee carrying on Profession: If his gross receipts from such profession exceed
Rs.50,00,000 during the previous year.

Assessee covered u.s.44AD or 44ADA: Where a person who is covered u.s.44AD or u.s.44ADA,
but claims that income from such business or
profession is lower than the presumptive rate and his
total income exceeds basic exemption.
84

Assessee covered u.s.44AE, etc.: Where a person who is covered by Section 44 AE and
claims that income from such business is lower than the
presumptive rate.

2. What is the due date for filing return on income?

30th September.

3. What is required to be furnished?

Tax Audit Report has to be furnished duly signed and verified by a C.A.
Form 3CA and 3CD for assesses subject to audit under any other law (e.g. companies)
Form 3CB and 3CD for assesses not subject to audit under any other law (e.g. individuals, firms)

PRESUMPTIVE INCOME SCHEME:

SECTION 44 AD: INCOME ON PRESUMPTIVE BASIS IN THE CASE OF A
RESIDENT-ASSESSEE ENGAGED IN ANY BUSINESS:

1. Eligibility: Individuals, HUF and Firms having a gross turnover not

exceeding Rs.2 crores (Rs.200 lakhs)

2. How is income estimated: Income is computed @ 8% of turnover or a higher

percentage as claimed by the assesse

Income is computed @ 6% of turnover if the gross

receipts or turnover is received by way of account
payee cheque (or by account payee bank draft or by use
of electronic clearing system) during the previous year
or before due date of filing return of income

3. Advantages of this scheme: No need to maintain books of accounts

No need for tax audit
Advance tax (whole amount – one instalment) should be
paid on or before 15th March.

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been
allowed. However, bfd business losses from earlier
assessment years can be set-off.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of account and gets them audited if total income
exceeds basic exemption.
85

6. Important condition: An assessee who claims benefit of section 44AD for any
previous year has to offer income as such for five
consecutive years. (refer example given below)
Example: For the assessment years 2017-18, 2018-19 and 2019-20, the assessee claims the
benefit of presumptive income u/s.44AD. For A.Y.2020-21 he offers a lower income. In this case,
he will not be eligible to claim the benefit of this section for the next five assessment years starting
from 2021-22. Such assessees, if their total income is above the basic exemption, shall maintain
books and get them audited.

7. Due dates for filing I.T. return: If the assessee opts for presumptive scheme then audit
is not required, therefore 31st July will be the due date.

If the assessee does not opt for presumptive scheme

then audit is required and therefore 30th September.

8. Who cannot avail this scheme:

• A person carrying on any profession notified u.s. 44AA
• A person earning income in the nature of commission or brokerage
• A person carrying on any agency business
• A person engaged in plying of goods carriages
• LLPs & Company-assessee

1. Mr.N engaged in the business of automobiles has a turnover of Rs.1,50,00,000 from such business
during the previous year 19-20.

• Compute the profits from the business, if he opts for Section 44 AD.
• In case the total turnover is received by way of account payee cheque or through ECS
during the previous year, what shall be the income?
• Is he required to maintain books of accounts and get such books audited?
• Mr.N wants to know by what date he is required to pay advance tax and the quantum.
• What will be his due date for filing his income tax return?

2. [Link] engaged in retail trade, reports a turnover of Rs.1,98,50,000 for the financial year
2019-20. His income from the said business as per books of account is computed at Rs.13,20,000.
Retail trade is the only source of his income. A.Y.19-20 was the first year for which he declared his
business income in accordance with the provisions of presumptive taxation u.s.44AD.

• Is [Link] eligible to opt for presumptive income scheme for the AY 2020-21?
• If so, determine his income from retail trade as per the applicable presumptive provision
assuming that whole of the turnover represents cash receipts.
• In case he does not opt for presumptive income scheme, what are his obligations.
• What is the due date for filing his return of income under both the options?
(sum no.19 page: 4.302)
86

3. When [Link] engaged in manufacturing activity with turnover of Rs.125 lakhs has realized sale
proceeds through banking channel of Rs.90 lakhs and balance by cash, his income under section
44AD would be (A) Rs.10 lakhs (B) Rs.7.50 lakhs (C) Rs.8.20 lakhs (D) Not eligible for presumptive
income under section 44AD

4. Zing Zang is an individual, manufacturing a product. He has turnover of Rs.98,50,000 which is

inclusive of amount of Rs.25 lakhs received through electronic clearing system. The accounts are
not properly maintained and you have advised him to pay tax u.s.44AD of the Act. On how much
income he will pay tax for A.Y.2020-21: (A) Rs.7,88,000 (B) Rs.7,38,000 (c) Manufacturers not
allowed u.s.44AD (D) Rs.5,91,000.

5. Real Builders (a partnership firm) admitted income u.s.44AD up to the assessment year 2019-20
resorted to determination of income as per regular provisions by getting the books of account
audited for the assessment year 2020-21. The assessee firm cannot revert to presumptive
provisions contained in section 44AD up to the assessment year ………………………………..

(A) 2025-26 (B) 2026-27 (C) Indefinitely (D) 2021-22

SECTION 44 ADA: PRESUMPTIVE INCOME SCHEME FOR RESIDENT

PERSONS ENGAGED IN SPECIFIED PROFESSION:

1. Eligibility: Professionals notified (resident) under section 44AA.

having gross receipts not exceeding Rs.50 lakhs.

2. Presumptive income: 50% of gross receipts or a higher % as claimed in the

tax return by the assesse

3. Advantages of this scheme: Not required to maintain books of accounts

Audit not required
Advance tax (whole amount – one instalment) should be
paid on or before 15th March

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been allowed.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of accounts and gets them audited if total income
exceeds basic exemption limit.

1. [Link], a Doctor by profession has earned gross receipts of Rs.42 lakhs from such profession during
the previous year 2019-20. His income as per books of account maintained is Rs.18,20,000. [Link]
wants to offer income as per the presumptive income scheme u.s.44ADA. Also state the due date for
payment of advance tax.
87

SECTION 44 AE: BUSINESS OF PLYING, HIRING OR LEASING

OF GOODS CARRIAGES

1. Eligible for this scheme: An assessee who owns not more than 10 trucks at any
time during the previous year. Assessee can be an
Individual, Huf, Firm or a Company.

2. How is income computed: A. Heavy goods vehicle:

Rs.1,000 per ton of gross vehicle weight or unladen
weight (without load) for every month or part of a
month

B. Other than heavy goods vehicle:

Rs.7,500 p.m. or part of a month

Important: Heavy Goods Vehicle means the gross vehicle weight of which exceeds 12,000 kilograms

3. Eligibility of further deductions: No further deductions are allowed. All expenses

including depreciation are deemed to have been allowed.
However, salary and interest paid by a firm to its partners
shall be allowed subject to limits u.s.40(b).

4. Is it possible to declare income Yes the assessee can declare income at a rate lower than
at a lower rate: the presumptive income provided, the assessee
maintains books of accounts and gets them audited.

1. Mr.X commenced the business of operating goods vehicles on 1.4.2019. He purchased the
following vehicles during the P.Y.2019-20. Compute his income u.s.44AE for A.Y.2020-21.

Gross Vehicle Weight Number Date of purchase

(in kilograms)
7,000 2 10.04.2019
6,500 1 15.03.2020
10,000 3 16.07.2019
11,000 1 02.01.2020
15,000 2 29.08.2019
15,000 1 23.02.2020

Would your answer change if the goods vehicles purchased in April, 2019 were put to use only
in July, 2019? (sum no.20; page 4.306)
88

2. Mr.T had 4 heavy goods vehicles (14,000 kilograms – 14 tons) as on 01.04.2019. He acquired 7
heavy goods vehicles (same capacity) on 27.06.2019. He sold 2 heavy goods vehicles on
31.05.2019. He has brought forward business loss of Rs.2,50,000 relating to assessment year
2018-19 of a discontinued business. Assuming that he opts for presumptive taxation of income
as per section 44AE, compute his total income chargeable to tax for the A.Y. 2020-21.

3. Mr.S engaged in the business of plying, hiring or leasing of goods carriages owned 6 vehicles
during the period 01.04.2019 to 31.03.2020 which were given on lease for plying to GS
Transport Company on a fixed rate of Rs.5,000 p.m. per vehicle for whole year. He had opted to
pay tax as per section 44AE of the Income Tax Act. The amount of income which shall be taken
for all such trucks for the purpose of tax for A.Y.2020-21 is ……………………

4. [Link] is in the business of operating goods vehicles. As on 01.04.2019, he had the

following vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f.y. 2019-20
A 8500 2.4.2018 yes
B 13000 15.05.2018 yes
C 12000 4.08.2018 no (as under repairs)

During P.Y.2019-20, he purchased the following vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f.y. 2019-20
D 11000 30.04.2019 10.05.2019
E 15000 15.05.2019 18.05.2019

Compute his income under section 44AE for A.Y.2020-21.

5. Mr.R gives you the following information for the year ended 31.03.2020:

Owns 5 light goods carriages & 1 heavy goods vehicle (15,000 kilograms – 15 tons) throughout
the financial year 2019-20. Retail trade turnover Rs.90,00,000 (entire turnover received
through on-line).

Has eligible brought forward depreciation of the A.Y.2018-19 Rs.60,000 relating to retail trade.
Deposited Rs.1,50,000 in PPF account and Rs.15,000 in Suganya Samridhi Scheme.

Assume that he wants to offer income by opting for section 44AD and 44AE. Compute his total
income for the assessment year 2020-21.
89

SECTION 40 (b): REMUNERATION AND INTEREST TO PARTNERS:

1. Maximum remuneration allowed u/s.40 (b) is as follows:

On first Rs.3,00,000 of book profit: 90% of book profit or Rs.1,50,000 (weh)
On the balance of book profit: 60% of book profit

“BOOK-PROFIT” is computed after deducting all admissible expenses, depreciation and

interest on capital to the extent allowed (i.e. 12%) but before remuneration.

Remuneration should be paid only to working partner.

Remuneration should be authorized by the partnership deed.

2. Interest on capital to partners will be allowed subject to a maximum of 12% p.a.

Interest can be paid to any partner but should be authorized by the partnership deed.

Salary received by partners & interest on capital (to the extent allowed in the hands of the
firm) shall be taxed in the hands of the partners under the head “business or profession”.
(refer sum no.1 below)

The firm pays tax on its total income and therefore, share of profit received by each partner
is EXEMPT from tax u.s.10(2A). (refer sum no.1 below)

1. The profit and loss account of ABC & Co. (a firm of chartered accountants & LLP) for the year
ended 31st March, 2020 is given below:

Expenses 3,00,000 Receipts from clients and audit fees 14,36,000

Depreciation 60,000 Dividend from companies 45,000

Remuneration to partners
Partner X 4,20,000
Partner Y 2,80,000

Interest to partners
Partner X @ 15% 60,000
Partner Y @ 15% 45,000

Net profit 3,16,000

Other information:
a) Depreciation as per IT Rules is Rs.52,000.
b) Payment to partners (remuneration and interest) are authorized by the deed
c) Other incomes of the partners: X: Rs.12,00,000 and Y: Rs.8,00,000

Compute the total income of the firm and its partners clearly indicating the tax treatment of
partner’s salary, interest on capital and share of profit received.
90

2. Salary received by a working partner is taxable in the hands of the partner under the head
………………………

3. Share of profit received by a partner is …………………………..u.s.10(2A) of the IT Act.

4. In case of loss suffered by a partnership firm, amount of deduction admissible for remuneration of
working partners is:
A. Rs.50,000 B. Rs.75,000 C. Rs.1,00,000 D. Rs.1,50,000

5. A firm has paid Rs.7,50,000 as remuneration to its partners for the previous year 2019-20, in
accordance with its partnership deed and it has a book profit of Rs.10,00,000. What is the
remuneration allowable as deduction? (sum no.15 page: 4.272)

6. Profit of a partnership firm is Rs.4,00,000 after charging interest on capital at 20% of its total
capital of Rs.8,00,000. How much remuneration is allowable under section 40(b) to its partners?

7. Rao and 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 working partners of the firm (as authorized
by the deed of partnership)
b. Depreciation on plant and machinery computed under section 32: Rs.1,50,000
c. Interest on capital @ 15% p.a. (as per the deed of partnership). The amount of capital
eligible for interest Rs.5,00,000.

Compute book-profit u.s.40(b) and allowable working partner salary for the A.Y. 2020-21.
(sum no.16 page: 4.273)

8. Brindavan & Co. is a partnership firm consisting of 4 partners viz., Ram, Rahim, Robert and
Rakesh. The firm made turnover exceeding Rs.100 lakhs and the net profit of firm was
Rs.9,50,000 before considering the following items:

a. Shop rent paid for premises to partner Ram Rs.17,500 p.m. No tax was deducted at source.
b. Depreciation as per Income-tax Rules Rs.1,50,000.
c. Interest on capital to partners @15% Rs.1,50,000, as authorized by the deed of partnership.
d. Working partner salary to each partner Rs.15,000 p.m., as per partnership deed.

You are required to compute the income of the firm for the assessment year 2020-21.

9. Tulip & Co. is a partnership firm of two partners. Total turnover of the firm during the financial
year 2019-20 is Rs.160 lakhs inclusive of Rs.60 lakhs made through account payee cheques and
ECS. The partnership deed provided for monthly working salary of Rs.30,000 to each of the
partners. The income of the firm by applying section 44AD for AY 2020-21 would be ………….
91

SECTION 40A(3): PAYMENT EXCEEDING Rs.10,000 BY WAY OF CASH

Any payment exceeding Rs.10,000 by way of cash or bearer cheque or crossed cheque will be fully
disallowed. Payment should be made only by an account payee cheque or by an account payee
bank draft or use of ECS through a bank account.

Payment exceeding Rs.10,000 in aggregate in a day to a person against an expenditure shall also
be disallowed.

The limit of Rs.10,000 has been increased to Rs.35,000 in the case of payment made to transport
operators for plying, hiring or leasing goods carriages.

Deduction allowed on ‘due’ basis for which cash payment is made in a subsequent year:
Any payment made by cash exceeding Rs.10,000 for which deduction was already allowed on
accrual basis in any previous year, the payment so made in a subsequent year shall be deemed as
income in the year in which such payment is made.

Cases where payment can exceed Rs.10,000 by way of cash: Rule 6DD Exceptions

1. Payment made to Banks, LIC

2. Payment made to Government which is required to be made in legal tender

3. Payment through the banking system, i.e. use of credit card or debit card or use of ECS, etc.
4. Payment by book entry (adjustment in accounts)

5. Payment made for purchase of agricultural or forest produce or produce of animal husbandry
or dairy or poultry farming or fish or fish products to the cultivator, grower or producer.

6. Payment is made for the purchase of products manufactured or processed without the aid of
power in a cottage industry, to the producer of such products;

7. Payment to a person in a village not served by any bank

8. Payment required to be made on a day on which the banks were closed either on account of
holiday or strike

9. Payment of retirement benefits (e.g. gratuity) provided such payment < Rs.50,000

10. Where the payment is made by way of salary to an employee after tds and when such employee
is temporarily posted for a continuous period of 15 days or more in a place other than his
normal place of duty or on a ship; and does not maintain any bank account at such place or ship.

Note: Section 40A (3) is attracted where: bill amount exceeds Rs.10,000 and payment also
exceeds Rs.10,000 at a time.
92

1. An assesse has incurred an expenditure of Rs.14,000 for purchase of raw material from Mr.B. He
makes separate payments of Rs.3,000; Rs.5,000 and Rs.6,000 all by cash in a single day. Advice
whether the above are admissible.

2. A bill is raised for an expenditure of Rs.32,000.

Cash payment is made as follows:

1.11.19 5,000
2.11.19 5,000
3.11.19 5,000
4.11.19 5,000
5.11.19 12,000

What will be the amount of disallowance under section 40A (3)

3. Bill raised for Rs.65,000 by a transporter for hiring of trucks for carriage of goods. Payments
made to him in cash as under: What would be the amount of disallowance?

1.12.19 38,000
2.12.19 12,000
3.12.19 15,000

4. Where an assessee incurring business expenditure in respect of which payments made to a person
in a day exceeds Rs.10,000 should be paid through account payee cheque or demand draft to claim
deduction for such expenditure. This restriction does not apply to:

a. Payments made to RBI

b. Payment of terminal benefits to employees not exceeding Rs.50,000
c. Payments made to cultivators
d. All of the above

5. When a cash payment of Rs.15,000 is made on 10.11.2019 towards purchase of raw material
effected in the earlier year, i.e., on 5.2.2019, the amount liable for disallowance would be………

a. Nil c. 20% of such payment

b. 100% of payment d. 30% of such payment

6. Patel, a textile dealer, purchases goods worth Rs.65,000 from Anand and made the payments:

i. Rs.12,000 by account payee cheque on 5.6.2019

ii. Rs.8,000 by cash on 16.08.2019
iii. Rs.15,000 by bearer cheque on 7.11.2019; and
iv. Rs.30,000 by ECS on 21.03.2020.

The amount of expenditure not allowable as per provisions of section 40A(3) would be …………
93

7. The following are details of Mr.X, state whether the following payments are admissible or not?

• Rs.40,000 paid towards freight to Railways by cash

• Purchase of oil seeds of Rs.50,000 in cash from a farmer on a banking day
• X purchases goods in cash for Rs.14,000 from R, a villager and makes payment to R in his
village where no banking facility is available.
• Purchase of stock amounting to Rs.67,000 due for payment on the day when the banks were
closed due to floods in Chennai
• Payment of Rs.12,000 and Rs.13,000 in cash on 03.12.19 and 10.12.19 respectively for
purchase of crabs, lobster & squid to Mr.R, a fisherman and Mr.K, a middleman for these
products respectively.
• On 05.06.2019 Rs.7 lakhs (due to cash demanded by supplier)
• On 30.09.2019 Rs.10 lakhs (half yearly closing for bank; a bank holiday)

8. U/s.40A(3) which of the following payment for an expenditure incurred would not be admissible
as deduction from business income:-

a. Rs.15,000 paid in cash to a transporter

b. Rs.5,000 paid in cash to a dealer in the morning and Rs.5,000 paid in cash to the same
dealer in the evening
c. Rs.40,000 sent through NEFT to the bank account of the dealer for goods purchased
d. Rs.19,000 paid through bearer cheque to the dealer for goods purchased

9. [Link], a sales executive stationed at HO at Delhi, was on official tour to Goa from 31.05.2019
to 18.06.2019 for business development. The company has paid [Link]’s salary in cash, from
its local office at Goa for the month of May, 2019 (payable on 1st June) amounting to Rs.75,000
(net of TDS), as Sandeep has no bank account at Goa. This was included in the amount of “salary”
debited to P and L A/c.

Answer: Where the payment is made by way of salary to an employee after tds and when such employee is
temporarily posted for a continuous period of 15 days or more in a place other than his normal place of
duty & does not maintain any bank account at such place. EXPENDITURE SHALL BE ALLOWED – Rule 6DD
94

SECTION 35 D: AMORTISATION OF PRELIMINARY EXPENSES:

To whom allowed: Indian companies and resident non-corporate assessees

Purpose: Expenses incurred before commencement of business;

Expenses in connection with extension of an existing business

Meaning: Expenditure in connection with preparation of feasibility report,

project report, conducting market survey, engineering services, legal
charges for drafting and printing of memorandum and articles of
association, registration fees, expenses incurred on issue of shares or
debentures, underwriting commission, brokerage and expenditure on
printing and advertising of prospectus.

Amount of deduction: FIVE equal installments

Amount that qualifies for deduction:

A. Non-corporate assessee: Actual preliminary expenses (or) 5% of cost of project

whichever is less will qualify

B. Indian Company: Actual preliminary expenses

(or)
5% of (cost of project or capital employed)
at the option of the assessee
(whichever is less will qualify)

“Cost of project” means cost of fixed assets as on the last day of the previous year in which the business
commences.

“Capital employed” means the aggregate of share capital, debentures and long term borrowings (LTB –
repayment period > 7 years) as on the last day of the previous year in which the business commences.

1. J Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the following
expenditure in connection with the new unit:

Preparation of project report Rs.1,00,000

Market survey expenses Rs.1,00,000
Legal and other charges for issue of additional
capital required for the new unit Rs.1,00,000

Cost of the project Rs.30,00,000

Capital employed in the new unit Rs.40,00,000

What is the deduction admissible to the company under section 35 D.

2. X Ltd. is incorporated in Bangalore on September 6, 2019. It commences production on March 15,

2020. The following expenses are incurred by the company before commencement of business:

• expenses on incorporation, issue of shares, etc. Rs.92,000

• preparation of feasibility report, project report and market survey expenses Rs.1,40,000

Determine the amount of deduction under section 35 D with the help of the following:

Cost of fixed assets Rs.55,00,000

Share capital Rs.40,00,000
Debentures Rs.12,00,000
Long-term borrowing from a financial institution Rs.8,00,000

3. Deccan Ltd. incurred an amount of Rs.16 lakhs as preliminary expenses for setting up a project
costing Rs.100 lakhs during the financial year 2019-20. The amount of amortization available as
deduction during the A.Y.2020-21 for the preliminary expenses would be …………….

SECTION 40 (a) (ia): Payment to residents without tds:

Any payment made to a RESIDENT shall be disallowed to the extent of 30% of the expenditure if:

DEFAULT ONE: Failure to deduct tax at source before the end of the previous year

DEFAULT TWO: Tax has been deducted at source before the end of the previous year but
not paid before the due date of filing ROI.

Note: If these payments are made after the due date, the assessee can claim 30% of such expenditure
as deduction only in the year of payment.

Note: No disallowance shall be made if the following conditions are satisfied:

a. The resident payee has taken into account such receipts in computing his total income;
b. The resident payee has paid tax due on such income;
c. The resident payee has filed his return of income within the due date; and
d. The payer (assessee) furnishes a certificate to this effect from a Chartered Accountant

Note: In case of an Individual-assessee (e.g. Mr.X), tds provisions are applicable only if the
assessee was subject to Tax Audit u.s.44 AB during the immediately preceding previous year.
96

1. State whether disallowance u/s.40 (a) (ia) is attracted in the following cases:

▪ X Ltd pays a sum of Rs.7,20,000 as rent of office building during the previous year 2019-20.
No tax is deducted at source.

▪ K Ltd pays salary Rs.10,00,000 to an employee after deduction of tax at source. However,
tax was not deposited by K Ltd with the Government before 30.09.2020.

▪ A consultancy fees of Rs.40,000 is credited by Y Ltd to the account of payee on 01.10.2019

without deduction of tax at source. Tax is not deducted up to 31.03.2020. Tax is deducted
on 05.04.2020 and deposited on 05.05.2020.

▪ Interest of Rs.80,000 on company deposit is credited by Z Ltd to the account of payee on

10.12.2019. Tax is deducted on the same day. Tax is deposited with the Government
through internet banking on 10.08.2020. Due date of filing return of income is 30.09.2020.

2. Varun Ltd paid fees for technical services of Rs.6 lakhs, omitted to deduct tax at source and such
omission continued till the ‘due date’ for filing the return of income specified in Section 139(1).
The amount of expenditure liable for disallowance would be ………………………

3. Andhra Traders a partnership firm paid Rs.80,000 as contract charges to AKP & Co (firm). No tax
was deducted at source for the above said payment. The amount liable for disallowance
u.s.40(a)(ia) for the A.Y.2020-21 is………………………….

4. Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2020 without deduction of tax at source. What would be the consequence of non-deduction of tax
at source by Delta Ltd. on these amounts during the financial year 2019-20, assuming that the
resident payees in all the cases mentioned below, have not paid the tax, if any, which was required
to be deducted by Delta Ltd.?

Particulars Amount
• Salary to its employees (credited and paid in March, 2020) Rs.12,00,000
• Directors’ remuneration (credited in March, 2020 and paid in
April, 2020) Rs.28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April,
2020 at the time of payment and remitted the same in July, 2020? (sum no.13 page: 4.265)
97

Answer:

Salary to employees:
Liability to deduct tax only at the time of payment. Salary is paid in the month of March, 2020. Tax is
required to be deducted at source. Since the company has not deducted tax, 30% of the expenditure shall
be disallowed. Amount of disallowance Rs.3,60,000.

Directors’ remuneration:
Liability to deduct tax arises at the time of credit of such remuneration. Remuneration is credited in the
month of March, 2020. Tax is required to be deducted at source. Since the company has not deducted tax,
30% of the expenditure shall be disallowed. Amount of disallowance Rs.8,400.

If Delta Ltd. had deducted tax on directors’ remuneration and remitted the same in April, 2020, the
expenditure that was disallowed Rs.8,400 during the previous year 19-20, shall be allowed as deduction
while computing business income of Assessment Year 21-22.

SECTION 43CA: SALE OF IMMOVABLE PROPERTY FOR

INADEQUATE CONSIDERATION

Land or Building held as stock in trade:

Where the actual sale price of land or building by the seller is less than the stamp duty value
(guideline value), SDV shall be deemed to be the full value of the consideration.

From A.Y.2019-20: If SDV does not exceed 105% of actual sale price, the actual sale price shall
be taken as the full value of consideration.

SDV on the date of agreement and on the date of registration are not same:
Normally, stamp duty value on the date of registration shall be considered for computing business
income. However, stamp duty value as on the date of the agreement can be opted by the assessee:

if a part of the consideration has been received by way of an account payee cheque or account
payee bank draft or use of ECS on or before the date of the agreement.

1. R Ltd. a developer of real estate, sold a residential house property to Mr.S for Rs.40,00,000
whereas its stamp duty value is Rs.48,00,000. The cost of the residential property is Rs.36,00,000.
Compute the business income of R Ltd.

2. Kant, is engaged in the business of purchase and sale of pieces of various lands. During the
financial year 2019-20, he sold pieces of lands for Rs.32 lakhs. All these sales were made through
cheques and ECS. The valuation of these pieces of lands for stamp duty purpose was Rs.41 lakhs.
He wants to pay tax on the income as per section 44AD. The income as per this section for AY
2020-21 shall be …………………
98

3. [Link], a property dealer, sold a building in the course of his business to his friend Rajesh, who is
a dealer in automobile spare parts, for Rs.90 lakh on 1.1.2020, when the stamp duty value was
Rs.150 lakh.

The agreement was, however, entered into on 1.9.2019 when the stamp duty value was Rs.140
lakh. [Link] had received a down payment of Rs.15 lakh by A/c payee bank draft from Rajesh on
the date of agreement.

Discuss the tax implications in the hands of Hari assuming that [Link] had purchased the
building for Rs.75 lakh on 12th July, 2018.

Answer:

Tax implications in the hands of [Link] (a property dealer)

Sale value of building (as per section 43CA) 140 lakhs
Less: Cost of building purchased by Hari 75 lakhs
Business profits 65 lakhs

Note: Actual sale price by [Link] is Rs.90 lakhs

Stamp duty value on the date of sale/registration is Rs.150 lakhs
Stamp duty value on the date of agreement is Rs.140 lakhs

[Link] had received a down payment of Rs.15 lakh by A/c payee bank draft from Rajesh on the
date of agreement, hence stamp duty value on the date of agreement is considered for computing
business profits.
99

SECTION 43 B: DEDUCTION ONLY ON “PAYMENT” BASIS

The following items of expenditure shall be allowed as deduction only on “PAYMENT” basis.

a) Any sum payable by way of tax, duty, cess payable to Government

b) Employer’s contribution towards provident fund, approved gratuity fund
c) Bonus or commission or leave salary payable to employees
d) Interest on loan borrowed from any public financial institution, banks
e) Any sum payable by the assesse to the Indian Railways for the use of Railway assets

Note: Payment should be made before the due date of filing income-tax return. If payment is
made after the due date, then deduction will be allowed only in the year of payment.

Note: If any sum payable by an assessee by way of interest on any loan, is subsequently
converted by the bank or the public financial institution into a fresh loan, the interest so
converted shall not be deemed as ‘actual payment’ and no deduction is allowed.

1. X Ltd is a manufacturing company. P & L A/c for the year ending 31.03.2020 is given below:

Sales tax 50,000 Sales 25,00,000

Other expenses 14,15,000
Net Profit 5,45,000

Out of sales tax of Rs.50,000 only Rs.47,000 is paid. The payment is made as follows:
a) Rs.40,000 on 02.12.19
b) Rs.4,000 on 05.09.20
c) Rs.3,000 on 01.11.20

Return of income is submitted on 10.11.2020.

During the previous year 19-20, the following payments are made in respect of expenses
pertaining to earlier years:

• Bonus to employees pertaining to the previous year 17-18 is paid on 30.04.19 Rs.15,000
• Customs duty pertaining to the previous year 17-18 is paid on 01.12.19 Rs.25,000
• Electricity bill payable to TNEB pertaining to previous year 17-18 is paid on 03.05.19 Rs.35,000
• Interest on bank loan pertaining to the previous year 18-19 is paid on 20.05.19 Rs.40,000

These payments do not pertain to the previous year 19-20. Consequently, these are not recorded
in the profit and loss account. Compute net income of X Ltd.

2. Saraswathi Ltd made provision of Rs.12 lakhs for bonus payable for the year ended 31.03.2020. It
paid Rs.7 lakhs on 31.07.2020; Rs.3 lakhs on 30.09.2020 and Rs.2 lakhs on 15.12.2020. The
amount eligible for deduction u.s.43B would be …………………..
100

3. Appu Ltd contributed Rs.8,70,000 towards provident fund of its employees. It actually remitted
Rs.5,00,000 up to 31st March and Rs.2,50,000 up to the due date for filing the return specified in
section 139(1). The amount liable for disallowance would be……………………

4. Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation and
Indian Bank and has not paid interest as detailed hereunder:-

i. Andhra Pradesh State Financial Corporation (P.Y.2018-19 & 2019-20) 15,00,000

ii. Indian Bank (P.Y.2019-20) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2019-
20, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments.

During the year ended 31.03.2020, Hari paid 5 installments to APSFC and 3 installments to Indian
Bank. Hari claimed the entire interest of Rs.45,00,000 as an expenditure while computing the
income from business.

Discuss whether his claim is valid and if not what is the amount of interest, if any,
allowable. (sum no.17 page: 4.287)

Answer: Conversion of unpaid interest in to a fresh loan cannot be treated as actual payment for the
purpose of section 43B. The amount of unpaid interest so converted as loan shall be allowed only in the
year in which the converted loan is actually paid. Hence the claim made by [Link] is not valid.

Deduction shall be allowed to the extent of installments paid by [Link]. Deduction for A.Y.20-21 is
computed as shown below:

APSFC (15 lacs / 60 x 5) 1,25,000

Indian bank (30 lacs / 60 x 3) 1,50,000
Amount allowed as deduction 2,75,000
101

SECTION 35 AD: TAX INCENTIVES FOR SPECIFIED BUSINESS:

1. List of Specified Business:

a) Setting-up and operating a cold chain facility

b) Setting-up and operating a warehousing facility for storing agricultural produce

c) Laying and operating pipeline network for distribution including storage of:
i. natural gas; ii. crude; iii. petroleum

d) Building and operating, anywhere in India, a hospital with at least 100 beds for patients

e) Building and operating, anywhere in India, a hotel of two star or above category

f) Developing and building a housing project under a scheme for Slum Redevelopment or
Rehabilitation framed by the Central or State Government.

g) Developing and building a housing project under a scheme for affordable housing framed by
the Central Government or State Government.

h) Production of fertilizer in India

i) Setting up and operating an Inland Container Depot or a Container Freight Station notified
under the Customs Act, 1962.

j) Bee-keeping and production of honey and beeswax.

k) Setting up and operating a warehousing facility for storage of sugar.

l) Laying and operating a slurry pipeline for the transportation of iron ore

m) Setting up and operating a semiconductor wafer fabrication manufacturing unit.

n) Developing or maintaining and operating or developing, maintaining and operating a new

infrastructure facility.

II. AMOUNT OF DEDUCTION:

100% of any expenditure of CAPITAL NATURE shall be allowed as deduction.

However, any expenditure incurred prior to commencement of operations, such expenditure shall
be allowed in the year of commencement of such operations provided such expenditure is capitalized
in the books of account as on the date of commencement of operations.

Note: No deduction for expenditure incurred on LAND, GOODWILL OR FINANCIAL INSTRUMENT.

102

Note: Any capital expenditure in respect of which payment exceeding Rs.10,000 made by
cash/bearer cheque would not be eligible for deduction.

Note: Assessee cannot claim any deduction u.s. 10AA or under chapter VI A under the heading “C.-
Deductions in respect of certain incomes” for the year or any other AY.

Note: Loss from a specified business can be set-off only against income from another specified
business.

Note: Where an assessee builds a star hotel and, subsequently, while CONTINUING TO OWN the
hotel, TRANSFERS THE OPERATION thereof to another person (say under an outsourcing
arrangement), the assessee shall be deemed to be carrying on the specified business and is
eligible for section 35AD benefit.

1. R Ltd. constructed a building and started operating a hotel of 3 star category w.e.f. 01.04.2019.
The company incurred the following expenditure in this connection:

a. Capital expenditure (including cost of land Rs.50 lakhs) incurred during December, 2018 to
March 2019 which were capitalized in the books of account as on 31.03.2019
Rs.1,10,00,000

b. Capital expenditure incurred during the previous year 2019-20 (it includes Rs.20 lakhs
paid for Goodwill) Rs.1,40,00,000

Compute the deduction available under section 35AD in the A.Y.2020-21.

Answer:

Amount of deduction u.s.35AD is computed as follows:

A. Expenditure incurred prior to commencement of operations

and capitalized in books of account excluding land Rs.60 lakhs

B. Capital expenditure incurred during the previous year 2019-20

excluding payment for goodwill Rs.120 lakhs
Amount of deduction u.s.35AD Rs.180 lakhs
103

2. [Link], commenced operations of the business of a new three-star hotel in Chennai on

April 1, 2019. He incurred capital expenditure of Rs.50 lakhs during the period January
2019 to March 2019 exclusively for the above business and capitalized the same in his
books of account as on 01.04.2019.

Further, during the previous year 2019-20, he incurred a capital expenditure of Rs.2 crore
(out of which Rs.1.5 crore was for acquisition of land) exclusively for the above business.

Compute the income under the head “Profits and Gains of business or profession” for the
assessment year 2020-21, assuming that he has fulfilled all the conditions specified for
claim of deduction under section 35AD and has not claimed any deduction under Chapter
VI-A under the head “C.- Deductions in respect of certain incomes”.

The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the assessment year 2020-21 is Rs.25 lakhs.

Assume that he also has another existing business of running a four-star hotel in
Coimbatore, which commenced operations twelve years back, the profits from which was
Rs.120 lakhs for assessment year 2020-21. Also, assume that expenditure incurred were
paid by account payee cheque or use of ECS. (sum no.10 page: 4.239)

Answer:

Computation of profits and gains of business or profession for A.Y.2020-21

A. Profit from the existing business of running a hotel in Coimbatore 120 lakhs

B. New three-star hotel in Chennai:

Profit before claiming deduction u.s.35AD 25 lakhs
Less: Deduction u.s.35AD (see note below) 100 lakhs 75 lakhs

Income from business after set-off of losses of specified business

against profits of another specified business 45 lakhs

Note: Deduction u.s.35AD in respect of the new hotel:

Expenditure incurred prior to commencement of business
and capitalized in the books of account 50 lakhs

Capital expenditure incurred during the previous year 19-20

excluding land 50 lakhs

Amount of deduction u.s.35AD for A.Y.2020-21 100 lakhs

104

Asset shall be used only for Specified Business:

Any asset in respect of which a deduction is claimed and allowed shall be used only for the
specified business for a period of 8 years beginning with the previous year in which such
asset is acquired.

If the above condition is violated:

In case the asset is used for a purpose other than the specified business within the period of
8 years, the total amount of deduction so claimed and allowed as reduced by the amount of
depreciation u.s.32 shall be deemed to be the income under the head “Profits and gains of
business or profession” of the previous year in which the asset is so used.

3. [Link] is a proprietor having two units – Unit A carries on specified business of setting
up and operating a warehousing facility for storage of sugar; Unit B carries on non-
specified business of operating a warehousing facility for storage of edible oil.

Unit A commenced operations on 1.4.2018 and it claimed deduction of Rs.100 lacs incurred
on purchase of two buildings for Rs.50 lacs each (for operating a warehousing facility for
storage of sugar) under section 35AD for A.Y.2019-20. However, in February, 2020, Unit A
transferred one of its buildings to Unit B. Examine the tax implications of such transfer in
the hands of [Link] and what shall be the cost for the purpose of claiming depreciation
for A.Y.20-21. (sum no.11 page: 4.232)

Answer:
Since the capital asset, in respect of which deduction of Rs.50 lacs was claimed u.s.35AD, has been
transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in
the previous year 19-20, the tax implication is as under:

Deduction allowed u.s.35AD for A.Y.2019-20 50 lakhs

Less: Depreciation allowable u.s.32 for A.Y.2019-20 (50 lacs x 10%) 5 lakhs
Balance to be treated as income 45 lakhs

[Link] can claim depreciation on the building transferred to unit B for A.Y.2020-21. The actual
cost of the building would be:

Actual cost to the assessee 50 lakhs

Less: Depreciation allowable u.s.32 for A.Y.19-20 (10% of 50 lacs) 5 lakhs
Actual cost of the building for claiming depreciation for A.Y.20-21 45 lakhs

4. DAS Pvt Ltd. fulfilling all the conditions as being specified in section 35AD of the Income Tax Act,
1961 has incurred capital expenditure of Rs.30 lakhs on purchase of land, Rs.80 lakhs (Rs.75 lakhs
by cheque and Rs.5 lakhs in cash) on construction of building and Rs.10 lakhs on the plant and
machinery during the previous year 2019-20 for setting up and operating a warehouse for the
storage of sugar. The warehouse became operational on 01st March, 2020. The amount of
deduction which the company can claim for such capital expenditure as per section 35AD in AY.
2020-21 shall be …………………..
105

SECTION 35: EXPENDITURE ON SCIENTIFIC RESEARCH:

Scientific research may be carried on:
a. by the assessee himself, relating to his business (in-house research); or
b. by making payment to outside agencies engaged in scientific research work

A. Revenue expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure shall be allowed as deduction

Revenue expenditure incurred BEFORE COMMENCEMENT OF BUSINESS on:

a. salary to employees excluding perquisites; and
b. purchase of raw materials used in scientific research

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business. Deduction is allowed to the extent these are
approved by the prescribed authority.

B. Capital Expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure (excluding land) shall be allowed as
deduction

Capital expenditure (excluding land) incurred BEFORE COMMENCEMENT OF BUSINESS

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business.

Note: Since entire cost is allowed as deduction, depreciation is not allowed.

C. Weighted deduction for Companies engaged in Biotechnology, etc:

In case of a COMPANY engaged in the business of BIOTECHNOLOGY or engaged in
MANUFACTURING activities (not being articles listed in Eleventh Schedule):

i. Revenue expenditure: 150% of expenditure shall be allowed as deduction

ii. Capital expenditure: 150% of such expenditure (excluding land & building)
shall be allowed as deduction. Expenditure on building
qualifies for 100% deduction (not 150%)
106

D. Contribution to RESEARCH ASSOCIATIONS engaged in research activities:

Section Contribution made to Type of research % of deduction

35(1)(ii) Research Association Scientific Research 150

35(2AA) National Laboratory, Programmes in 150

University or IIT. scientific research

35(1)(iia) Company (registered in Scientific research 100

India and having research
as its main object)

35(1)(iii) Research Association Social science or

Statistical research 100

Note: A ‘research association’ can be a university or a college or any other institution

approved by prescribed authority.

Note: The Research carried on by the Institution need not be related to the business of the
assessee.

Note: Where an assessee avails deduction @ 100% by contributing to a company which is

engaged in scientific research, such research company shall not claim another
weighted deduction in respect of expenditure it incurs for scientific research.

1. XYZ Ltd. has contributed the following amounts to various research institutions. The
research carried on by the institutions are not related to the business of the assesse (XYZ
Ltd). Compute the amount of deduction u.s.35.

a. The company pays Rs.80,000 to the Indian Agricultural Research Institute, being an
approved research institution for the purpose of carrying out scientific research in
natural science.

b. The company also pays Rs.70,000 to the Indian Institute of Management, Ahmedabad,
being an approved institute for the purpose of carrying out research in social or
statistical science.

c. The company also pays Rs.46,000 to an approved National Laboratory for carrying
out programmes of scientific research.
107

2. Compute the amount deductible in the following cases u/s.35:-

a. XY & Sons, a partnership firm donates an amount of Rs.1,00,000 to ABC Ltd (a

company registered in India and having its main objects as scientific research
approved by the prescribed authority u/s.35)

b. Contribution of Rs.2.50 lakhs to IIT with a specific direction that the amount should be
used for scientific research programme approved by the prescribed authority.

3. Where the assessee does not himself carry on scientific research but makes contributions
to an approved university, college or institution, to be used for scientific research related or
unrelated to the business of assessee, then the amount of deduction from income of
business shall be allowed on such contribution to the extent of ………….%

4. X Ltd paid Rs.10 lakhs to an approved college to be used for scientific research unrelated to
its business. Amount eligible for deduction u.s.35(1)(ii) is …………………..

5. Mr.A furnishes the following particulars for the previous year 2019-20. Compute the
deduction allowable under section 35 for A.Y.2020-21, while computing his income under
the head “business or profession”.

a. Amount paid to notified approved Indian Institute of Science, Bangalore, for

Scientific Research Rs.1,00,000

b. Amount paid to IIT, Delhi for an approved scientific research programme

Rs.2,50,000

c. Amount paid to X Ltd., a company registered in India which has as its main object of
scientific research, as is approved by the prescribed authority Rs.4,00,000

d. Expenditure incurred on in-house research and development facility as approved by

the prescribed authority:
• Revenue expenditure on scientific research Rs.3,00,000
• Capital expenditure (including cost of acquisition of land
Rs.5,00,000)on scientific research Rs.7,50,000

(sum no.8 page: 4.229)

108

SALE OF AN ASSET USED FOR SCIENTIFIC RESEARCH:

A. Sold without having been used for other purposes:

The sale price to the extent of deduction allowed u.s.35 shall be treated as business
income & the sale price in excess of business income shall be treated as capital gains

B. Sold after having been used for business:

The actual cost of such asset shall be taken as nil. If sold later, the sale value shall be
treated as income.

6. Where an asset used for scientific research for more than three years is sold without having
been used for other purposes, then the sale proceeds to the extent of the cost of the asset
already allowed as deduction u.s.35 in the past shall be treated as:

a. Business income c. Long-term capital gain

b. Short-term capital gain d. Exempted income

7. Rosy Ltd engaged in manufacture of bio-medicines in August, 2019 converted one

equipment which was used for scientific research purposes previously, for regular business
use. The original cost of the plant is Rs.15 lakhs which was acquired in April, 2018. The
company had claimed deduction at 150% under section 35 (2AB) in the assessment year
2019-20. The plant used for scientific research would be included in the block of assets
now at a value of:

a. Nil c. Rs.30,00,000
b. Rs.15,00,000 d. Rs.12,75,000

Additional objective type questions:

8. A company incurred capital expenditure on scientific research viz., (i) land Rs.5 lakhs (ii)
building Rs.10 lakhs (iii) equipments Rs.7 lakhs. The amount of expenditure eligible for
deduction under section 35 would be ………………………

a. Rs.22 lakhs c. Rs.15 lakhs

b. Rs.17 lakhs d. Rs.5 lakhs

9. XYZ Ltd paid Rs.5 lakhs on 22.01.2020 to a national level laboratory for carrying scientific
research unrelated to the business of the company. The amount of deduction eligible under
section 35(2AA) of the Income-tax Act, 1961 is ……………………….
109

OTHER SECTIONS IN BUSINESS INCOME:

Section 35CCC: Expenditure on notified agricultural extension project

Section 35CCD: Expenditure on notified skill development project

Section 35DDA: Expenditure incurred on VRS

Section 36(1)(iii): Interest on borrowed capital

Section 36(1)(iiia): Discount on zero coupon bonds

Section 36(1)(iva): Employer’s contribution to notified pension scheme

Section 36(1)(va): Employee’s contribution to provident fund

Section 36(1)(vii): Bad debts

Section 36(1)(ix): Family planning expenditure

Section 36(1)(xv): Securities transaction tax

Section 36(1)(xvi): Commodities transaction tax

Section 37(1): General deduction

Section 40(a)(i): Payment to a non-resident without tds

Section 41: Profits chargeable to tax (Deemed income)

Section 35 DDA: Expenditure incurred on VRS:

Where an assessee incurs any expenditure in any previous year in respect of the above, such
expenditure is deductible in FIVE equal installments from the year in which the PAYMENT is
made.
110

Section 36(1)(iii): Interest on borrowed capital

‘Interest on bank loan’ shall be allowed only if such interest is paid before ‘due date’ of
furnishing return of income. Section 43B
Interest charged on own capital (notional) shall not be allowed
Interest paid by a firm to its partner is allowed to the extent of 12%. Section 40(b)
Interest on capital borrowed for acquiring a capital asset:
Interest paid up to the date the asset is first put to use shall be capitalized and added to the
cost of the asset. Interest paid after the asset is put to use is an admissible expenditure.

Section 36(1)(iiia): Discount on zero coupon bond:

Amount of deduction: Allowed over the period of life of such bond (pro rata basis)

‘Discount’ means the difference between the amount payable at the time of maturity or
redemption of bonds and amount received on issue of such bonds by the infrastructure capital
company.

A zero-coupon bond is a debt security that doesn't pay interest but is traded at a deep discount,
rendering profit at maturity when the bond is redeemed. Zero-coupon bond holders gain on the
difference between what they pay for the bond and the amount they will receive at maturity.

Section 36 (1) (iva): Employer’s contribution to notified pension scheme:

Amount of deduction: 10% of salary of employees

Note: Excess contribution made by the employer shall be disallowed

while computing business income u.s.40A(9)

Note: Salary = Basic + dearness allowance (forming)

Section 36 (1) (va): Employees’ contribution towards provident fund:

Amount recovered towards PF: First treated as INCOME in the hands of the Employer

At the time of deposit by the The same shall be allowed as deduction while computing
Employer before “due date”: business income of the assessee.

For this purpose “due date” means the date by which the employer is required to deposit such
contribution under the Provident Fund Act. (15 days from the end of the month)
111

Section 36 (1) (xv): Securities Transaction Tax

STT shall be allowed as deduction like any other business expenditure only if:
a. Securities are held as stock-in-trade; and
b. Profit on sale of such securities is taxed as business income

Section 36 (1) (xvi): Commodities Transaction Tax

Commodities transaction tax (CTT) shall be allowed as deduction while computing income
from the business of purchase and sale of commodities in a commodities exchange.

Section 36 (1) (vii): Bad debts:

The following conditions are to be satisfied for claiming deduction:

a. There must be a debt

b. The debt must be incidental to the business of the assessee
c. The debt must have been taken into account while computing the income of the assessee.
d. Debt must be written off in the books of account of the assessee

Note: It is not necessary for the assessee to establish that the debt, has become irrecoverable. SC
Note: Condition ‘c’ is not applicable for an assessee engaged in money-lending business.

Section 37(1): GENERAL DEDUCTION

1. The following conditions are to be fulfilled for the allowability of an expenditure: -

• The expenditure should not be covered by any of the section between 30 to 36;
• Should have been spent wholly and exclusively for the purpose of business;
• Should not be in the nature of personal expenditure of the assesse;
• Should not be in the nature of a capital expenditure;

Explanation 1:
• Should not be incurred for any purpose which is an offence or prohibited by law.

Explanation 2:
• It is not an expenditure incurred by the assessee on CSR activities (corporate social
responsibility) referred to in section 135 of the Companies Act, 2013.

2. No deduction for an expenditure incurred on advertisement in any souvenir, brochure,

tract, pamphlet, etc. published by a political party – Section 37(2B)
112

Section 40 (a) (i): Payment made to a non-resident without tds

Failure to deduct tax at source on payment made to a non-resident:

Entire (100%) expenditure shall be disallowed. The same shall be allowed only in the year in
which such tax is remitted to the Government.

Section 36 (1) (ix): Family Planning Expenditure

To whom available: Only for company-assessee

Amount of deduction: Revenue expenditure is fully allowed

Capital expenditure is allowed in five equal installments

Section 35 CCC: Expenditure on Agricultural Extension Project:

To whom available: Any assessee

Nature of expenditure: Any expenditure (not being land or building) on Agricultural

Extension Project notified by the Board.

Amount of deduction: 150% of such expenditure

Section 35 CCD: Expenditure on Skill Development Project:

To whom available: Only for companies

Nature of expenditure: Any expenditure (not being land or building) on any Skill
Development Project notified by the Board.

Amount of deduction: 150% of such expenditure

Section 41: Deemed Income

Where any deduction was allowed in respect of a loss or expenditure or trading liability for any
year and subsequently during any previous year the assessee or successor of the business:

has obtained any amount in respect of such loss or expenditure or some benefit in respect
of such trading liability by way of remission or cessation thereof,

the amount obtained or the value of benefit accrued shall be deemed to be income.
113

PROBLEMS:

Section 35DDA: Expenditure on VRS comepensation:

1. X Co. Ltd paid Rs.120 lakhs as compensation as per approved Voluntary Retirement Scheme
(VRS) during the financial year 2019-20. How much is deductible under section 35DDA for the
assessment year 2020-21?

2. Under section 35DDA, amortization of expenditure incurred under eligible voluntary

retirement scheme at the retirement alone, can be done. State whether true or false.

Answer:
The statement is false. Amortization of expenditure under VRS can be done only in the year in
which the payment is made.

Section 36(1)(iii): Interest on borrowed capital:

3. X Ltd., purchased a machinery on 01.04.2019 for Rs.10 lakhs by availing a 80% loan facility
from Bank. This machinery was put to use on 01.01.2020 into effective production. The
interest on loan works out to 10% p.a. Advise X Ltd, on the treatment of interest payments
made on this loan.

4. Swan Pvt Ltd acquired machinery for Rs.5,75,000 which included GST of Rs.75,000 eligible for
input tax credit. It borrowed Rs.3,00,000 from a bank for purchase of the said machine.
Interest on the bank loan up to the date of usage of machine was ascertained as Rs.25,000. The
machine was put to use from 15th September, 2019. Assume the rate of depreciation at 15%.
The eligible amount of depreciation will be ………………

Section 36(1)(iiia): Discount on zero coupon bond:

5. On 01.10.2019, an infrastructure financing company issued zero coupon bonds aggregating
Rs.10,00,000. The maturity date and maturity value of the bonds are 30.09.2029 and
Rs.20,80,000 respectively. Determine the amount of discount to be allowed as deduction for
the A.Y. 2020-21 and 2021-22.

Section 36(1)(iva): Employer contribution to Notified Pension Scheme:

6. X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness allowance is 40% of basic salary and it forms part of
pay of the employees.

Compute the amount of deduction allowable u.s. 36(1)(iva), if the basic salary of the employees
aggregate to Rs.10,00,000. Would disallowance u.s. 40A(9) be attracted, and if so, to what
extent? (sum no.12 pg.4.255)
114

Section 36(1)(va): Employee’s contribution to Provident Fund:

7. The profit and loss account of Mr.X for the year ending March 31, 2020 is as follows:

Cost of goods sold 75,000 Sale proceeds of goods 2,30,000

Salary to employees 99,000
Other expenses 10,000
Net profit 46,000

The salary of Rs.99,000 comprises Rs.9,000 as employee’s contribution towards recognized

provident fund. Out of Rs.9,000, Rs.6,000 is credited in the employees’ provident fund within
“due date” and Rs.3,000 is credited after “due date”. Compute net income of X.

8. Employees contribution to EPF of Rs.3 lakhs recovered from their salaries for the month of
March 2020 and shown in the balance sheet under the head sundry creditors was remitted on
31.05.2020. Discuss the admissibility.

Section 36(1)(vii): Bad debts:

9. Sameer sold goods worth Rs.50,000 at credit on 1st April, 2018. However, he has written off
Rs.10,000 as bad debts and claimed deduction for the same during the year 2018-19. On 10th
October, 2019, the defaulting debtor made payment of Rs.45,000. The taxable amount of bad
debts recovered for the year 2019-20 would be:………………

10. Malick & Co engaged in trading activity could not recover Rs.5 lakhs from a customer. It
claimed the entire amount as bad debt by writing off in the books of account. The aggregate
sale made during the year to the party amounts to Rs.30 lakhs. The amount eligible for
deduction by way of bad debt is:

a. Nil c. Rs.5 lakhs

b. Rs.3 lakhs d. Rs.60,000

11. It is a condition precedent to write off in the books of account, the amount due from debtor to
claim deduction for bad debt. State whether the statement is true or false.

Answer: The statement is true. Bad debts shall be allowed as deduction while computing
business income only if it is written off in the books of account of the assessee.

Section 36(1)(xv): Securities Tranaction Tax

12. State with reasons, whether the following statement is true or false:
For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.
115

Section 37(1): General Deduction:

13. Discuss the admissibility of the following expenses:

a. Purchase of computer for office use

b. Expenses on Corporate Social Responsibility activities
c. Advertisement in a souvenir published by a Political Party
d. Fine paid for violation of provisions of GST Act
e. Printing & stationery, telephone expenses and electricity charges
f. Household expenses

14. Sakshita Pvt Ltd., has spent a sum of Rs.30 lakhs towards meeting its Corporate Social
Responsibility (CSR) obligation. The amount of deduction available while computing the
business income is Rs………………..

Section 36(1) (ix); Family Planning Expenduture:

15. When ABC Ltd incurred Rs.10 lakhs in financial year 2019-20 as capital expenditure for the
purpose of family planning amongst the employees, the expenditure allowable for the
A.Y.2020-21 would be:……………..

Section 35CCD: Expenditure on notified skill development project:

16. XYZ Ltd., engaged in manufacture of a product, has incurred an expenditure of Rs.3 lakhs on
notified skill development project u.s.35CCD. The deduction available for such expenditure is
………………….. lakhs.

Section 41: Deemed Income:

17. Mr.G, a businessman, paid sales tax of Rs.1,50,000 in financial year 2015-16 and the entire
amount was allowed as deduction. In October 2015, he died and the business was continued to
be carried on by his wife Ms.S. In April 2019, she is refunded Rs.60,000 by the Commercial
taxes department being the excess of sales tax paid by her husband. Assessing Officer wants to
treat the amounts as taxable. Is he correct in doing so?

Answer:
Yes. The Assessing Officer is correct in treating the sum of Rs.60,000 as taxable income in the case
of Ms.S as the provisions of Section 41(1) apply even to the successor of the business.

18. Raju succeeded to the business of his father Ramu consequent to demise of Ramu on
01.02.2020. Raju recovered Rs.30,000 due from a customer which was written off by late
Ramu as bad debt and allowed in the A.Y.2017-18. The amount recovered is:

a. Exempt from tax

b. Fully taxable as business income
c. Rs.15,000 being 50% taxable as business income
d. To be set off against current year bad debts
116

Trade liability allowed as deduction earlier; now partial waiver (remission):

19. Sundry creditors include an amount of ₹ 50 lakhs payable to A & Co, towards supply of raw
materials, which remained unpaid due to quality issues. An agreement has been made on 31-03-
2020, to settle the amount at a discount of 75% of the outstanding. The amount waived is
credited to Profit and Loss account.

Answer:
Remission or cessation of trade liability: Rs.37,50,000 to be treated as deemed income under
section 41(1), hence taxable.

Loss allowed as deduction earlier; now recovered:

20. Mr.X was forced to shutdown his furniture business in the year 2017 as his accountant
absconded with cash of Rs.5 lakhs and was fully allowed in that year. Rs.4 lakhs was received as
insurance compensation on 31.03.2020 for the cash theft. Is the amount received subject to tax?

Answer:
Rs.4 lacs received from the insurance company is now taxable as deemed income u.s.41.

Loss allowed as deduction earlier; now recovered:

21. Bad debts of Rs.50,000 written off and allowed in the financial year 2018-19 recovered in
financial year 2019-20. Is the amount recovered now taxable?

Answer:
Now taxable as deemed income u.s.41.
117

ADDITIONAL PROBLEMS:

1. [Link], engaged in manufacture of chemicals, furnishes his Manufacturing, Trading

and Profit & Loss Account for the year ended 31st March, 2020 as under:

To Opening stock 3,40,000 By Sales 1,14,00,000

To Purchases 1,00,20,000 By Closing stock 19,00,000
To Manufacturing expenses 10,40,000
To Gross Profit 19,00,000
1,33,00,000 1,33,00,000

To Salary 4,30,000 By Gross Profit 19,00,000

To Bonus 80,000 By Discount 25,000
To Bank term loan interest 90,000 By Agricultural Income 1,50,000
To Factory rent 1,20,000 By Dividend from
To Office rent 2,70,000 Indian Companies 75,000
To Administration expenses 3,30,000
To Net Profit 8,30,000 ______
21,50,000 21,50,000

Additional Information:

i. The total turnover of [Link] for the financial year 2018-19 was Rs.132 lakhs.

ii. Salary includes Rs.1,80,000 paid to his daughter. The excess payment considering her
qualification and experience is ascertained as Rs.40,000.

iii. Factory rent was paid to his brother. Similar portions are let out to others by him for
a rent of Rs.96,000 per annum.

iv. No tax was deducted at source from the office rent paid during the year.

v. Purchases include Rs.70,000 paid by cash to an agriculturist for purchase of grains

being raw material.

vi. Depreciation allowable u.s.32 of the Income-tax Act, 1961 amounts to Rs.45,000 for
assets held as on 01.04.2019. During the year, a machinery costing Rs.5,00,000 was
acquired on 01.07.2019 and was put to use from 15.10.2019.

vii. Administration expenses include commission paid to a purchase agent of Rs.12,000 for
which no tax was deducted at source.
118

viii. The following expenses debited above were not paid till 31.03.2020 and up to the 'due
date' for filling the return specified in section 139(1):

I. Term loan interest of Rs.35,000;

II. Demurrages to Indian Railways for using their clearing yard beyond stipulated
hours (disputed by the assessee), forming part of manufacturing expenses
Rs.30,000.

Compute the income of [Link] chargeable under the head "Profits and gains of
business or profession" for the Assessment Year 2020-21.

2. [Link], a retail trader of Cochin gives the following Trading and Profit and Loss Account
for the year ended 31st March, 2020:

Trading and Profit and Loss Account for the year ended 31.03.2020

To Opening stock 90,000 By Sales 1,12,11,500

To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross profit 3,03,600 By Gross profit b/d 3,03,600
To Salary 60,000 By Income from UTI 2,400
To Rent and rates 36,000
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing and stationery 23,200
To Postage and telegram 1,640
To Loss on sale of shares 8,100
To Other general expenses 7,060
To Net Profit 50,000

Additional information:

a. It was found that some stocks were omitted to be included in both the opening and closing
stock, the values of which were:

Opening stock Rs.9,000

Closing stock Rs.18,000

b. Salary includes Rs.10,000 paid to his brother, which is unreasonable to the extent of
Rs.2,000

c. The whole amount of printing and stationery was paid in cash by way of one-time payment.

d. Rent and rates includes GST liability of Rs.3,400 paid on 07.04.2020.

119

e. The depreciation provided in P&L A/c. was based on the following:

The w.d.v. of plant and machinery is Rs.4,20,000 as on 01.04.2019. A new plant falling
under the same block of depreciation was brought on 01.07.2019 for Rs.70,000. Two old
plants were sold on 01.10.2019 for Rs.50,000.

f. Other general expenses include Rs.2,000 paid as donation to a Public Charitable Trust.

You are required to compute the profits and gains of [Link] under presumptive taxation
under section 44AD and profits and gains as per the normal provisions of the Act. Assume
that the whole of the turnover is received by account payee cheque or use of electronic
clearing system through bank account during the previous year. (Sum no.7; page no.4.325)

3. Mr.P, resident individual, aged 45 years, is a CA in Practice. He maintains his accounts on cash
basis. His P & L account for the year ended 31st March, 2020 is as follows:

Profit & Loss for the year ending March 31, 2020

Expenditure: Income:
Staff salary 18,25,000 Audit 23,00,000
Rent of office premises 6,00,000 Taxation 14,50,000
Administrative expenses 5,75,000 Consultancy services relating to
Stipend to Articled clerks 1,85,000 syndication of loan from
Meetings, seminars and financial Institution 10,00,000
conferences 36,500 Gift 1,00,000
Depreciation 55,000 Dividend from Indian companies 12,00,000
Printing & stationery 8,75,000 Interest on deposit certificates
Net profit 19,13,500 issued under Gold Monetization
Scheme, 2015 15,000

Other information:
a. Depreciation allowable under Income Tax Act Rs.1,25,000

b. Administrative expenses include Rs.55,000 paid to tax consultant in cash for assisting Mr.P in
one of the professional assignments.

c. Gifts represent fair market value of a LED TV which was given by one of the clients for successful
presentation of case in the Income Tax Appellate Tribunal.

d. Last month’s rent of Rs.50,000 was paid without deduction of tax at source. Assume Mr.P was
subject to Tax Audit for the preceding f.y.2018-19.

Compute business income of Mr.P for A.Y.2020-21, assuming that Mr.P does not want to opt for
presumptive taxation scheme under section 44ADA.
120

4. Mrs.M, a resident individual, aged 63 years is a qualified medical practitioner. She runs her own
clinic. Income & Expenditure A/c. of Mrs.M for the year ending 31.03.2020 is as under:

Expenditure Income
To Salary to staff 1,20,000 By Consultation fees 12,00,000
To Administrative exp 2,90,000 By Salary received from
To Conveyance expenses 24,000 True Care Hospitals 1,80,000
To Power & fuel 24,000 By Rental income from
To Interest on housing loan 1,00,000 house property 78,000
To Interest on education loan By Dividend from
for son 26,000 foreign companies 10,000
To Amount paid to scientific
research association
approved u.s.35 25,000
To Net profit 8,59,000

She is working part-time with True Care Hospitals (P) Ltd. Her salary details are as under:
Basic pay Rs.13,000 p.m.; Transport allowance Rs.2,000 p.m. Further, during p.y.19-20, her son
had undergone a medical treatment in True Care Hospitals (P) Ltd. free of cost. The hospital
would have charged a sum of Rs.60,000 for a similar treatment to unrelated patients.

She owns a residential house. Ground floor of the house is self-occupied by her while first floor
has been rented out since 01.10.2019. The reconstruction of the house was started on
01.04.2019 and was completed on 30.09.2019. The monthly rent is Rs.10,000. The tenant also
pays Rs.3,000 p.m. as power back-up charges. She took a housing loan of Rs.12 lakhs on
01.04.2019. Interest on housing loan for the period 01.04.2019 to 30.09.2019 was Rs.60,000
and for the period 01.10.2019 to 31.03.2020 was Rs.40,000. During the year, she also paid
municipal taxes for the f.y. 2018-19 Rs.5,000 and for f.y.2019-20 Rs.5,000.

Other information:
a. Conveyance expenses include a sum of Rs.12,000 incurred for conveyance from house to True
Care Hospitals (P) Ltd. and vice-versa in relation to her employment.

b. Power & fuel expenses include a sum of Rs.6,000 incurred for generator fuel for providing
power back-up to the tenant.

c. Administrative expenses include a sum of Rs.10,000 paid as municipal taxes for her house.

d. Clinic equipments details are:

Opening w.d.v. of clinic equipments as on 01.04.2019 was Rs.1,00,000 and fresh purchase made
on 28.08.2019 is Rs.25,000 which was paid in cash.

e. She availed a loan of Rs.8,00,000 from bank for higher education of her son. She repaid
principal of Rs.50,000 and interest of Rs.26,000 during p.y.2019-20.

You are required to compute her net taxable income and net tax liability for the A.Y.2020-21.
121

5. [Link], a resident individual, provides consultancy services in the field of accountancy. His
income and expenditure account for the year ended 31st March, 2020 is as follows:

Expenditure Income
To Salary 3,00,000 By Consultancy fees 8,00,000
To Motor car expenses 58,000 By Share of profit from HUF 25,000
To Depreciation 47,500 By Interest on savings
To Medical expenses 70,000 bank deposits 15,000
To Purchase of computer 80,000 By Interest on income
To Bonus 10,000 tax refund 8,000
To General expenses 55,000
To Administrative expenses 75,000
To Excess of income over
expenditure 1,52,500

The following other information relates to the financial year 2019-20:

a. Salary includes a payment of Rs.12,000 p.m. to his brother-in-law who is in-charge of the
marketing department. However, in comparison to similar business, the reasonable salary of a
marketing supervisor is Rs.10,000 p.m.

b. Written down value of the assets as on 01.04.2019 are as follows:

Motor car (40% used for personal use) Rs.2,00,000
Furniture and fittings Rs.50,000

c. Medical expenses includes:

a. Family planning expenditure Rs.15,000 incurred for the employees which was revenue in
nature.
b. Medical expenses for his father Rs.35,000. (father’s age is 65 years)

d. The computer was purchased on 5th June, 2019 on credit. The total invoice was paid in the
following manner:
a. Rs.18,000 paid in cash as down payment on the date of purchase.
b. Remaining amount was paid through account payee cheque on 10th August, 2019

e. Bonus was paid on 31st July, 2020.

f. General expenses include commission payment of Rs.22,000 to [Link] for the promotion of
business on 17th September, 2019 without deduction of tax at source.

Hint: “relative” means husband, wife, brother or sister or any lineal ascendant or descendant of that
individual. Section 2 (41)
122

6. [Link] is a businessman. During the year ended 31-03-2020, he was engaged in the
business of Hypermarket and Supermarket. He maintains proper books of accounts for both
businesses in Mercantile system. Sales from Hypermarket achieved a turnover of Rs.75
lakhs and all receipts were in cash. However, supermarket business is through online and
entire receipts of Rs.50 lakhs during the year were received online in his bank account. The
expenses were incurred in the ratio 65:35

Following additional information is furnished:

Rs.
To Salary 10,00,000
To Repairs on building 1,81,000
To Interest 1,10,000
To Travelling 1,30,550
To Depreciation 8,12,000
To Net profit 3,93,950

a) In addition to the above, repairs of Rs.1,00,000 was incurred for building a new room
which was debited to P &L A/c.

b) Depreciation as per Income-tax Act, 1961 is Rs.7,17,000.

c) Rs.75,000 was paid in cash on 30-09-19 to [Link], accountant for the preparation of
the accounts for the year ended 31-03-2019 and adjusted under the head “expenses
payable” account.

d) He was forced to shutdown his furniture business in the year 2017 as his accountant
absconded with cash Rs.5 lakhs and was fully allowed in that year. Unabsorbed
business loss of furniture business is Rs.3 lakhs. Rs.4 lakhs was received as insurance
compensation on 31-03-2020 for the cash theft.

e) [Link] wants to declare income under “presumptive income” basis.

Compute the income chargeable under the head “profits and gains of business or
profession” of [Link] under presumptive income scheme under section 44AD and his
total income for the year ended 31-3-2020.

7. State with reasons, the allowability of the following expenses incurred by [Link], a
wholesale dealer of commodities, under the Income Tax Act, 1961 while computing Profits
& Gains from business or profession for the Assessment Year 2020-21:

a. Construction of school building in compliance with CSR activities amounting to

Rs.5,60,000
123

b. Purchase of building for the purpose of specified business of setting up and operating
a warehousing facility for storage of food grains amounting to Rs.4,50,000

c. Interest on loan paid to Mr.X (a resident) Rs.50,000 on which tax has not been
deducted. The sales for the previous year 2018-19 is Rs.202 lakhs

d. Commodity transaction tax paid Rs.20,000 on sale of bullion. Sum no.3; page no.4.319

8. During the financial year 2019-20, the following payments/expenditure were made/
incurred by [Link] Raja, a resident individual (whose turnover during the year ended
31.3.2019 was Rs.99 lacs):

a. Interest of Rs.45,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;

b. Rs.3,00,000 was paid as salary to a resident individual without deduction of tax at

source;

c. Commission of Rs.16,000 was paid to [Link] on 2.12.2019 without deduction of

tax at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of
the IT Act, 1961 assuming that the payees in all the cases mentioned above, have not paid
the tax, if any, which was required to be deducted by [Link]? (Sum no.14; page no.4.268)

9. [Link] is engaged in the business of plying goods carriages. On 01.04.2019, he owns 10

trucks (out of which 6 are heavy goods vehicles, the gross vehicle weight of such goods is 15,000
kg each). On 02.05.2019, he sold one of the heavy goods vehicles and purchased a light goods
vehicle on 06.05.2019. This new vehicle could however be put to use only on 15.06.2019.

Compute the total income of [Link] for AY. 2020-21, taking note of the following data:

Particulars Rs. Rs.

Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non- business income 70,000

(Sum no.8; page no.4.328)

124

10. X Ltd. is engaged in manufacture of medicines (pharmaceuticals). It furnishes the

following information for the year ending March 31, 2020:

Municipal tax relating to office building Rs.51,000, not paid till September 30, 2020

Patent acquired for Rs.20,00,000 on September 1, 2019 and used from the same month

Capital expenditure on scientific research Rs.10,00,000 which includes cost of land Rs.2,00,000

Amount due from customer Y outstanding for more than 3 years written off as bad debts in the
books Rs.5,00,000

Employees contribution to EPF of Rs.3 lakhs recovered from their salaries for the month of
March 2020 and shown in the balance sheet under the head sundry creditors was remitted on
31.05.2020.

Expenditure towards advertisement in souvenir of a political party Rs.1,50,000

Refund of sales tax Rs.75,000 received during the year, which was claimed as expenditure in an
earlier year.

Income-tax paid Rs.90,000 by the company in respect of non-monetary perquisites provided to

its employees.

Gain due to change in the rate of exchange of foreign currency Rs.1,00,000 related to import of
machinery. The machinery was acquired two years ago and put to regular use since then.

State with reasons whether the aforesaid items are taxable or deductible.
125

Problem no.2

A. Computation of business income as per normal (regular) provisions:

Net Profit as per P & L A/c 50,000
Add: Closing stock 18,000
Less: Opening stock 9,000
59,000
Add: Disallowances:
Payment to brother (unreasonable amount) 2,000
Payment in cash 23,200
Loss on sale of shares 8,100
General expenses (donation) 2,000
Depreciation 1,05,000
1,99,300
Less: Incomes considered separately (income from UTI) 2,400

Less: Depreciation as per IT Rules

(Rs.4,20,000 + Rs.70,000 – Rs.50,000) * 15% 66,000

Income from business (as per normal provisions) 1,30,900

Note: GST paid before ‘due date’ is allowed as deduction

Note: Additional depreciation is not allowed as assessee is not engaged in any manufacturing
activities.

B. Computation of business income as per presumptive provisions u.s.44AD:

Turnover Rs.1,12,11,500
Presumptive rate 6%
Income from business Rs.6,72,690

3. Income from business:

Net profit as per profit and loss account 19,13,500

Add: Disallowances
Depreciation 55,000
Cash payment > Rs.10,000 55,000
Gift in appreciation of professional services 1,00,000
Rent paid without tds (30%) 15,000
21,38,500
Less: Incomes considered separately
Dividend 12,00,000
Interest on deposit certificates 15,000

Less: Depreciation as per IT Rules 1,25,000

Income from business 7,98,500

126

Problem no.4:

A. Income from Salary:

Basic (13,000 x 12) 1,56,000
Transport allowance (fully taxable) 24,000
Gross salary 1,80,000
Less: Section 16(ia) 50,000 1,30,000

Note: Medical treatment in a hospital maintained by

employer is exempt

Note: Conveyance expenses of Rs.12,000 incurred for

conveyance from house to True Care Hospitals (P) Ltd.
and vice-versa is not relevant

B. Income from House property:

Ground floor (50% portion is self-occupied)

Annual value nil
Less: Section 24
Interest on loan for reconstruction
(Rs.1,00,000 / 2 = Rs.50,000) (max) 30,000 (30,000)

First floor (50% portion is let out)

Gross Annual Value (10,000 x 6) 60,000
Less: Municipal tax (p.y.18-19 & p.y.19-20) 10,000
Net Annual Value 50,000
Less: Section 24
Standard deduction 15,000
Interest on loan (50% of 1 lakh) 50,000 (15,000) (45,000)

Note: Power back-up charges received from the tenant

is taxable as ‘income from other sources’

Note: Composite Rent (13,000 x 6) Rs.78,000

Less: Power back-up (3,000 x 6) Rs.18,000
House rent Rs.60,000

C. Income from business:

Net profit as per Income and Expenditure A/c 8,59,000

Add: Disallowances:
Administrative expenses (m tax) 10,000
Conveyance expenses 12,000
Power and fuel (personal) 6,000
Interest on housing loan 1,00,000
Interest on education loan for son 26,000
Amount paid to scientific research association 25,000
127

10,38,000
Less: Incomes considered separately:
Salary received 1,80,000
Rental income 78,000
Dividend 10,000

Less: Depreciation
(1,00,000 x 15%) + (25,000 x 0%) 15,000

Less: Deduction u.s.35 (25,000 x 150%) 37,500 7,17,500

Note: Asset purchased by way of cash > Rs.10,000;

does not qualify for depreciation

D. Income from other sources:

Dividend from foreign companies 10,000
Power back-up charges received from tenant 18,000
Less: Expenses incurred 6,000 12,000 22,000

Gross Total Income 8,24,500

Less: Chapter VI-A deductions:

Section 80 E (interest on education loan) 26,000

Total Income 7,98,500

Note: Principal repayment of loan taken for education does not qualify
for deduction u.s.80E

E. TAX COMPUTATION:
Tax on the above (7,98,500 – 5,00,000) x 20% + 12,500 + 4% cess Rs.75,090

5. Income from business:

Net Income as per Income and expenditure a/c. 1,52,500

Add: Disallowances:
Salary paid to brother-in-law (not a relative) allowed
Car expenses (40% personal use) 23,200
Depreciation 47,500
Medical expenses
Family planning expenditure 15,000
Medical expenses for his father 35,000
Purchase of computer 80,000
Bonus paid before ‘due date’ allowed
Commission paid without tds (30%) 6,600
3,59,800
128

Less: Incomes considered separately:

Share of profit from HUF 25,000
Interest on saving account 15,000
Interest on income-tax refund 8,000

Less: Depreciation as per IT Rules

On Car (2,00,000 x 15% x 60%) 18,000
On Furniture (50,000 x 10%) 5,000
On Computer (62,000 x 40%) 24,800

Income from Business 2,64,000

Income from other sources:

Share of profit received from HUF as a member exempt u.s.10(2A)
Interest on savings bank account 15,000
Interest on income-tax refund 8,000 23,000

Gross Total Income 2,87,000

Less: Chapter VI-A deductions
Section 80TTA 15,000
Total Income 2,72,000

“Relative” means husband, wife, brother or sister or any lineal ascendant or descendant of that
individual. Section 2 (41)

Problem no.7:

a. Any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135
of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business
and hence, shall not be allowed as deduction u.s.37.

b. [Link], would be eligible for investment-linked tax deduction under section 35AD @ 100% in
respect of Rs.4,50,000 invested in purchase of building for setting up and operating a warehousing
facility for storage of food grains. Therefore, deduction u.s.35AD Rs.4,50,000.

c. [Link], being an individual is required to deduct tax at source on the amount of interest on loan
paid to Mr.X, since his turnover during the previous year 2018-19 exceeds the monetary limit of
Rs.100 lakhs. Therefore, Rs.15,000, being 30% of Rs.50,000, would be disallowed under section
40(a)(ia) while computing the business income of [Link] for non-deduction of tax at source.

d. CTT paid in respect of taxable commodities transactions entered into the course of business during
the previous year is allowed as deduction, provided the income arising from such taxable
commodities transactions is included in the income computed under the head “Profits and gains of
business or profession”.
129

10. Disallowed: As per section 43B, municipal tax is not deductible for A.Y.2020-21 since it is not
paid on or before 30.09.2020, being the due date of filing the return for A.Y.2020-21.

Patent is an intangible asset eligible for depreciation @ 25% u.s.32. Since it has been acquired and
put to use for more than 180 days during the previous year 2019-20, full depreciation of
Rs.5,00,000 is allowed.

Deduction @ 150% is available u.s.35 in respect of expenditure incurred by a company engaged in

manufacturing activities on scientific research as approved by prescribed authority. However, cost
of land is not eligible for deduction. Deduction u.s.35 @ 150% is Rs.12 lacs

Bad debts written off in the books of account as irrecoverable is deductible u.s.36(i)(vii), provided
the debt has been taken into account while computing the income of the assessee.

Employees’ contribution to provident fund is first treated as income in the hands of the company.
As per section 36((1)(va), provident fund contribution of employees is deductible only if such sum
is credited to the employee’s provident fund account on or before the due date as given under the
Employees’ Provident Fund Act. In this case, since it is remitted after the due date under the said
Act, it is not deductible.

Expenditure towards advertisement in souvenir of a political party is disallowed u.s.37(2B) while

computing business income. However, the same is deductible u.s.80GGB from gross total income
provided the payment is not made by cash.

Refund of an expenditure is taxable, if deduction in respect of such expenditure was allowed in an

earlier year. Since sales tax was claimed as expenditure in an earlier year, refund of the same
during the year would be taxable under section 41(1) – Deemed income.

As per section 40(a)(v), income-tax of Rs.90,000 paid by the company in respect of non-monetary
perquisites provided to its employees, (exempt in the hands of employee), is not deductible while
computing business income of the employer-company.

Gain of Rs.1,00,000, arising at the time of making payment, due to change in rate of exchange, has to
be reduced from the actual cost of machinery, and depreciation would be computed on such
reduced cost.
130

CHAPTER – 10 INCOME UNDER THE HEAD “CAPITAL GAINS”

CAPITAL GAINS: Any GAIN arising from TRANSFER of a CAPITAL ASSET shall be chargeable
to tax in the year in which TRANSFER TOOK PLACE.

CAPITAL ASSET - Section 2 (14):

“Capital asset” means: -

a. property of any kind held by an assessee, whether or not connected with his business or
profession;

b. Securities held by a Foreign Institutional Investor (FIIs).

ASSETS NOT REGARDED AS CAPITAL ASSETS:

a. Stock-in-trade held by an assesse for the purposes of his business;

b. Personal effects (excluding jewellery; immovable property; paintings; drawings;

archaeological collections; sculptures and any work of art)

c. Agricultural land in rural area in India

d. Gold Deposit Bonds, 1999 or deposit certificates issued under Gold Monetisation
Scheme, 2015 notified by the Central Government

MEANING OF RURAL AGRICULTURAL LAND:

a. If situated within municipality limits and having a population of less than 10,000;

b. If situated outside the limits of a municipality:

Shortest aerial distance from the local Population according to the last
limits of a municipality preceding census

Up to 2 kms from the local limits < 10,000

Above 2 kms and up to 6 kms < 1,00,000
Above 6 kms and up to 8 kms < 10,00,000
Above 8 kms Rural Area (not a capital asset)
131

TRANSACTIONS REGARDED AS TRANSFER:

• Sale
• Exchange
• Relinquishment
• Extinguishment of rights
• Compulsory acquisition under any law
• Conversion of capital asset into stock-in-trade
• Maturity or redemption of a zero-coupon bond

TRANSACTIONS NOT REGARDED AS TRANSFER:

• Gift, Will, Inheritance

• Distribution of assets by a HUF. to its members in kind at the time of partition

• Distribution of assets by a company to its shareholders at the time of liquidation

• Transfer of capital assets by a holding company to its wholly owned Indian subsidiary company
• Transfer of capital asset by a wholly owned subsidiary company to its Indian holding company

• Any transfer in the scheme of amalgamation

• Any transfer in the scheme of demerger

• Transfer of capital asset in the case of conversion of proprietary concern or firm into a company
• Transfer in the case of conversion of a company into a limited liability partnership

• Conversion of bonds or debentures of in to shares or debentures.

• Conversion of preference shares into equity shares of that company

• Transfer of asset under notified reverse mortgage scheme

• Transfer of Sovereign Gold Bond Scheme by way of redemption

TYPES OF CAPITAL ASSETS:

a. Short term capital asset
b. Long term capital asset

MEANING OF LONG TERM CAPITAL ASSET:

Any capital asset held for more than 36 months is a long-term capital asset. Any capital asset
held for less than or equal to 36 months is a short-term capital asset.

However the period of holding is 12 months in the case of the following assets:
a) a security including listed shares
b) a unit of an equity oriented fund (36 months for debt oriented mutual fund)
c) a zero coupon bond

Note: In the case of IMMOVABLE PROPERTY (being land or building) & UNLISTED SHARES
the period of holding (POH) is 24 months.
132

Note: Any capital asset acquired by way of gift, will, inheritance, etc. the period of holding
by the previous owner shall also be taken into consideration.

Note: Any asset on which depreciation is claimed by the assessee, such asset shall always be a
short-term capital asset irrespective of period of holding.

Difference between short term and long term capital gain:

Particulars Short term Long term

Tax rate Normal rates Flat rate of 20% or 10%
Deductions under chapter VIA Available Not available
Indexation benefit Not available Available
Sec.54, 54B, 54EC, 54EE, 54F Not available Available

Computation of short-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Cost of acquisition xxx
Less: Cost of improvement xxx
Short-term capital gains xxx

Computation of long-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Indexed cost of acquisition xxx
Less: Indexed cost of improvement xxx
Long-term capital gains xxx

Year Index Year Index Year Index Year Index

01-02 100 02-03 105 03-04 109 04-05 113
05-06 117 06-07 122 07-08 129 08-09 137
09-10 148 10-11 167 11-12 184 12-13 200
13-14 220 14-15 240 15-16 254 16-17 264
17-18 272 18-19 280

19-20: 289

Meaning of Indexed Cost of Acquisition:

COST
Indexed cost = --------------------------------------------------------------- x Index of the year of transfer
2001-02 (or) the first year of the current
assessee who held the asset
(whichever is later)
133

Indexation: However, the Courts have held that indexed cost of acquisition has to be computed
with reference to the year in which the previous owner first held the asset and not the year in
which the current assessee became the owner of the asset.

Meaning of the term “COST”:

a. If the asset was acquired before 1.4.2001:

Purchase price (or) fair market value as on 1.4.2001
shall be the cost according to the choice of the assessee.

b. If the asset was acquired on or after 1.4.2001:

Purchase price shall be the cost.

Meaning of indexed cost of improvement:

Any improvements before 1.4.2001 shall be ignored. In other words improvements on or after
1.4.2001 is to be considered for indexation.

COST OF IMPROVEMENT
ICOI = --------------------------------------------------------- x Index of the year of transfer
Index of the year during which
improvement took place

Problems: Meaning of Capital Asset:

1. State whether the following are capital assets are not:
Property held by a dealer in property; Gold held by a jeweller; Personal car and air conditioner;
Residential house for personal use; Personal mobile phone; Loose diamonds; Gold and silver
coins used for puja; Furniture held for personal use; Furniture in the office of a chartered
accountant; Shares held by a dealer in shares; Goodwill of a business (self-generated); Goodwill
of a profession (self-generated); Paintings and drawings; Statue of Lord Ganesh (sculpture);
Securities held by FII as stock in trade.

2. Miss D (an actress), has furnished the following details:

Sale proceeds on sale of BMW car for Rs.90,00,000 which was used exclusively for personal
purposes. This car was acquired for Rs.50,00,000.
Sale proceeds of Benz car used for her profession was sold for Rs.40,00,000. The w.d.v. of the
car as on 01.04.2019 was Rs.27.5 lakhs.
Sale of personal jewels made of platinum and paintings for Rs.1 crore which were acquired for
25 lakhs.
134

3. Mrs.X an individual resident woman wanted to know whether income tax is attracted on sale of
gold and jewellery gifted to her by her parents on the occasion of her marriage in the year 1993
which was purchased at a total cost of Rs.8,00,000?

4. Mr.A is the owner of a car. On 1.4.2019, he starts a business of purchase and sale of motor cars.
He treats the above car as part of the stock-in-trade of his new business. He sells the same on
31.03.2020 and gets a profit of Rs.1 lakh. Discuss the tax implication in his hands under the
head “capital gains”.

Answer: Since car is a personal asset, conversion of the same in to stock-in-trade does not
attract capital gains tax. However, profit on sale is taxed as business income.

5. State whether the agricultural land mentioned below is a capital asset or not:

S. no. Area Distance Population

from the local limits Answer
1. A 1 km 9,000 Not a CA
2. B 1.5 kms 12,000 CA
3. C 2 kms 11,00,000 CA
4. D 3 kms 80,000 Not a CA
5. E 4 kms 3,00,000 CA
6. F 5 kms 12,00,000 CA
7. G 6 kms 8,000 Not a CA
8. H 7 kms 4,00,000 Not a CA
9. I 8 kms 10,50,000 CA
10. J 9 kms 15,00,000 Not a CA

Short term or Long term Capital Assets (period of holding):

6. State whether the asset is short term or long term in the following cases:
X purchases a residential house on 10.3.2017 and sells it on 26.12.2019.
X purchases a land on 10.3.2018 and sells it on 26.12.2019.
Y purchases listed shares in an Indian Company on 10.3.18 and sells it on 6.6.2019.

R purchases shares in an unlisted company on 10.03.2018 and sells these shares on 20.11.2019
Z acquires units of an equity oriented mutual fund on 7.7.2018 and transfers it on 10.7.2019.
Zero coupon bonds of eligible corporation, held for 14 months

Mr.X (previous owner) purchases a house in 2004-05 and gifts it to his son Mr.Y (current
assessee) on 1.11.2019 and Mr.Y sells it to Mr.Z on 23.01.2020.

X Ltd. sells plant and machinery in 2019-20 after using the asset for 5 years.

Note: students are advised to go through sum no.1 & 9 on page 4.373 & 4.411 in the institute study material
135

Computation of Short Term Capital Gain:

7. X is a HUF. The family acquires a residential house at Chennai for Rs.62,10,000 on 1.4.19. The
family undergoes complete partition on 1.11.19 and the residential house is allotted to Y, a
member of the family. Y sells the house on 15.01.2020 for Rs.65,00,000. Expenses in connection
with sale is Rs.10,000. Compute taxable capital gains in the hands of Y.

Computation of Long Term Capital Gain:

8. Mr.A purchased a house property in 1992 for Rs.5,00,000. He sells the house in December 2019.
The fair market value of the house as on 1.4.2001 was Rs.18,30,000. Compute the indexed
cost of acquisition.

What would be your answer if:

Mr.A gifts the house to Mr.B, his son in April 2006 and Mr.B sells the house in December 2019.
What will be the indexed cost of acquisition in the hands of Mr.B. (CII: 2006-07: 122)

Government acquired the house from Mr.A in December 2018 but the compensation was paid in
December 2019. What will be the indexed cost of acquisition? (CII: 2018-19: 280)

9. X purchased a piece of land on 04.01.1995 for Rs.12,00,000. This land was sold by him on
15.12.2019 for Rs.70,00,000. The fair market value of the land as on 1.4.2001 was Rs.15,00,000.
Expenses on transfer were 2% of the sale price. Compute the capital gains.

10. X acquired the property in the year 2004-05 for Rs.4,75,000 and paid Rs.26,000 as registration
charges. X died on 15.9.2010 and the property was transferred to his son Y through inheritance.
The market value of the property as on 15.9.2010 was Rs.25,00,000. Y sold this property on
31.10.2019 for Rs.40,00,000. Compute capital gains. Also compute capital gains on the basis of
ruling given in Bombay and Delhi High Courts. (CII: 2004-05: 113 and 2010-11: 167)

11. X acquired land in 77-78 for Rs.2,00,000 and gifted it to his major son Y on 1.6.89, when the
market value of the land was Rs.2,50,000. The fair market value of that land as on 1.4.2001 was
Rs.16,00,000. Y sold the land on 15.01.2020 for Rs.51,00,000. Expenses in connection with
transfer Rs.1,00,000. Compute capital gains. (CII: 2019-20: 289)

12. Mr.C purchases a house property for Rs.1,06,000 on 15.5.1975. The following expenses are
incurred by him for making additions:

Cost of construction of the first floor in 82-83: Rs.3,10,000

Cost of construction of the second floor in 02-03: Rs.7,35,000
Reconstruction of the house in 12-13: Rs.5,50,000

FMV. of the property on 1.4.2001 is Rs.8,50,000. The house is sold by Mr.C on 10.8.2019 for
Rs.72,00,000 (expenses incurred on transfer Rs.2,00,000). (CII: 2002-03: 105 & 2012-13: 200)
136

13. X & sons, HUF, purchased a land for Rs.1,34,200 in the previous year 2002-03. In the previous
year 2006-07, a partition takes place when Mr.A, a coparcener, is allotted this plot value at
Rs.1,50,000. In the P.Y. 2007-08, he incurred expenses of Rs.2,58,000 towards fencing of the plot.
Mr.A sells this plot for Rs.15,00,000 in P.Y.2019-20 after incurring expenses to the extent of
Rs.20,000. Compute capital gains for A.Y.2020-21. (CII: 02-03: 105; 06-07:122; 07-08: 129)

14. R acquired land on 6.7.1998 for Rs.3,20,000. He constructed ground floor in the previous year
2004-05. Cost of construction was Rs.5,65,000. He further spends Rs.2,58,000 in the
construction of first floor which was completed in the previous year 2007-08. The entire house
property was sold on 21.02.2020 for Rs.71,00,000. Fair market value of the land as on
01.04.2001 was Rs.6,00,000. Compute capital gains. (CII: 2004-05: 113 & 2007-08: 129)

15. Mr.B purchased convertible debentures for Rs.5,25,000 during August 2002. The debentures
were converted into equity shares in September 2012. These shares were sold for Rs.15,00,000
in August, 2019. The brokerage expenses are Rs.50,000. You are required to compute the capital
gains in case of Mr.B for A.Y.2020-21. (CII: 02-03: 105 and 12-13: 200).

16. Mr.A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident.

The value of stock lost (total damaged) was Rs.6,50,000. Certain portion of the machinery could
be salvaged. The opening WDV of the block as on 1.4.2019 was Rs.10,80,000.

During the process of safeguarding machinery and in the fire fighting operations, Mr.A lost his
gold chain and a diamond ring, which he had purchased in April, 2004 for Rs.84,750. The market
value of these two items as on the date of fire accident was Rs.1,80,000.

Mr.A received the following amounts from the insurance company:

a. Towards loss of stock Rs.4,80,000

b. Towards damage of machinery Rs.6,00,000
c. Towards gold chain and diamond ring Rs.1,80,000

You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961. (CII: 2004-05: 113) (sum no.4 pg. no.4.452)
137

SECTION 54: Transfer of a residential house and purchase or construction of a

residential house:

Exemption under this section is available to Individuals and HUF only

The house transferred should be a residential house
The residential house transferred should be a long-term capital asset
A residential house should be purchased or constructed before the due date of filing ROI.

Amount of exemption: Amount invested is exempted from tax.

Where the amount of capital gains exceeds Rs.2 crores:

Exemption can be availed in respect of ONE residential house purchased or constructed in India

Where the amount of capital gains does not exceed Rs.2 crores (once in a life time):
Exemption can be availed in respect of TWO residential houses purchased or constructed in India

Scheme of deposit: If the new house is not purchased or constructed before the due date then
the same can be deposited under Capital Gain Account Scheme for claiming exemption.

Extension of time limit if deposit is made: The new house/houses should be purchased one
year before or two years after the date of transfer (three years for construction).

Withdrawal of exemption: The new residential house should not be transferred within a
period of three years from the date of its purchase or construction. If transferred, the exemption
previously granted shall be reduced from the cost of acquisition for computing capital gains.

Note: The unutilized deposit amount in the capital gain account scheme, in the case of an
assessee, who dies before the expiry of the two/three years stipulated period, cannot be taxed in
the hands of the deceased or the legal heirs.

SECTION 54 B: Transfer of an Agricultural land and purchase of an agricultural land

The agricultural land transferred should be a capital asset first (i.e. situated in urban area)
This section is available to Individuals and HUF only
The agricultural land must be used by the assessee or by his parents or HUF for agricultural purposes
at least for two years immediately preceding the date of transfer.

The agricultural land should be a long-term capital asset.

The new agricultural land (urban or rural) should be purchased within two years from the date of
transfer.

Exemption, Scheme of deposit and withdrawal of exemption are same as per Section 54.
138

Where an urban agricultural land is compulsorily acquired under any Law and compensation is
determined or approved by the Central Government (not State Government) or by RBI, the capital
gain on such acquisition is fully exempt u/s.10 (37).

SECTION 54 D: Transfer (on account of compulsory acquisition) of any land or building

used for industrial purposes and purchase of land or building for
industrial purposes.

This section is available to all assesses

The land or building should have been used for industrial purposes by the assessee at least for
two years immediately preceding the date of transfer.

The industrial land or building can be either a short term or a long term capital asset.
The new industrial land or building should be purchased within 3 years from the date of receipt
of compensation.

Amount of exemption, Scheme of deposit, Withdrawal of exemption are same as per section 54.

SECTION 54 EC: Transfer of land or building and investment in a “Specified Asset”

This section is available to all assessees.

The land or building transferred should be a long-term capital asset. (Such asset can also be a
depreciable asset held for more than 36 months – Supreme Court)

The assessee should invest in a “specified asset” within 6 months from the date of transfer.

Specified asset means bonds redeemable after 5 years issued by the National Highways Authority
of India (NHAI) or by the Rural Electrification Corporation Ltd (REC) or any other bond notified
by the Central Government.

The assessee should not transfer or convert or avail loan or advance on the security of such
bonds within a period of 5 years from the date of acquisition of such bonds.

Amount of exemption: Rs.50 lakhs (or) amount invested within 6 months (whichever is less)
139

SECTION 54 EE: Transfer of any Capital Asset and investment in notified units of
specified fund:

OBJECTIVE: TO RAISE MONEY TO FINANCE NEW START-UPS

This section is available to all assessees.

The asset transferred should be a long-term capital asset.
The assessee should invest within a period of 6 months from the date of transfer.
The above units should not be transferred or converted into money within a period of three years.
Amount of exemption: Rs.50,00,000 (or) Amount invested (whichever is less)

SECTION 54 F: Transfer of any capital asset (other than a residential house) but
purchase/construction of a residential house.

This section is available for Individual and HUF only

The capital asset transferred should be a long-term capital asset
A new residential house should be purchased in INDIA within one year before or two years after
from the date of transfer (3 years for construction)

The assessee should not own more than one residential house on the date of transfer

Amount of exemption:
a. If entire net consideration is invested, entire capital gain is exempt from tax

b. If part of net consideration is invested then amount exempt is:

Amount invested
---------------------------- (x) LTCG (before exemption)
Net consideration

Withdrawal of exemption:
a) If the new residential house is transferred within a period of three years; or
b) The assessee should not purchase or construct another house within the stipulated period.

17. Problems on Section 54:

Mr.R sold his residential house on 27.12.2019 which has resulted in a long-term capital gain of
Rs.1,50,00,000. For claiming exemption u.s.54 he purchases two residential houses in Chennai
for Rs.60,00,000 each within the time allowed. Compute taxable capital gains if has exercised
his option to claim exemption for two houses.

What will be your answer in the above case if the sale had resulted in a long-term capital gain of
Rs.2,25,00,000?
140

18. Determine the amount of exemption u/s.54 and taxable capital gains:

X sells a residential house in Agra for 73,00,000 on 23.12.2019 which was purchased by him on
20.4.05 for Rs.10,53,000. Selling expenses in this connection Rs.25,000. On 16.03.2020, he
purchases a house in Chennai for Rs.50,00,000.

On 18.11.2020, X sells the house in Chennai for Rs.53,00,000. Can he also claim exemption
under section 54 in respect of transaction ii. (CII: 05-06: 117)

19. X sold a residential house on 15.01.2020 for a consideration of Rs.95,74,000. Transfer expenses
incurred amounted to Rs.24,000. The said residential house was purchased on 05.06.1998 for
Rs.15,20,000 (FMV as on 01.04.2001 Rs.18,60,000). The due date for furnishing return of
income is July 31, 2020. Compute capital gains for Assessment Year 2020-21 if:

Case a. he invests Rs.40,00,000 for purchase of a new house on 15.07.2019.

Case b. he purchased land for construction of a house on 12.10.2019 for Rs.15,00,000 and
deposited Rs.20,00,000 in the Capital Gain Account Scheme on 20.07.2020 and a
further sum of Rs.10,00,000 on 30.11.2020.

Problems on Section 54B:

20. R purchased an agricultural land in 2004-05 for Rs.6,78,000. The land was being used for
agricultural purposes by him. This land is sold by him on 02.02.2020 for Rs.32,00,000. He has
spent Rs.8,50,000 for acquiring an agricultural land on 21.07.2020 and has deposited
Rs.6,00,000 under the Capital Gains Account Scheme on 31.07.2020.

Out of the amount deposited, he withdrew Rs.5,70,000 for purchasing agricultural land on
15.01.2022. Compute the taxable amount of capital gains for the assessment years 2020-21;
2021-22; 2022-23 and 2023-24; if:

A. The agricultural land which was sold is urban agricultural land;

B. The agricultural land which was sold is rural agricultural land (CII: 04-05: 113)

21. X is in possession of agricultural land situated within urban limits, which is used for agricultural
purposes during the preceding 3 years by his father. On 10.01.2020 this land was compulsorily
acquired by the Government of India on a compensation fixed and paid by it for Rs.10,00,000.
Advise X as to the tax consequences, assuming that the entire amount is invested in purchase of
shares.

22. State whether the following statement is True or False:

Where an urban agricultural land owned by an individual, continuously used by him for
agricultural purposes for a period of 2 years prior to the date of transfer, is compulsorily
acquired under law and the compensation is fixed by the State Government, resultant capital
gain is exempt.
141

Problems on Section 54EC:

23. On 02.01.2020, X sells land for Rs.90,00,000 (cost of acquisition on 10.3.2003: Rs.12,60,000). On
5.02.2020, he acquires bonds of National Highway Authority of India (investment being
Rs.45,00,000). Again on 03.05.2020 he further invested Rs.35,00,000 in these bonds. Find out
the amount of exemption under section 54 EC and taxable capital gains. (CII: 02-03: 105)

24. R acquired a land on 15.12.2008 for Rs.5,48,000 which was sold on 15.11.2019 for Rs.24,20,000.
Expenses of transfer were Rs.20,000. He invests Rs.10,00,000 in the bonds of Rural
Electrification Corporation Ltd on 16.04.2020. Compute capital gains for the A.Y. 2020-21.

State the period for which the bonds should be held by the assessee. What will be the
consequences if such bonds are sold within the specified period? What will be the consequences
if R takes a loan against the security of such bonds? (CII: 08-09: 137)

Problems on Section 54F:

25. X sells jewellery on 10.7.2019 for Rs.42,50,000 (cost on 15.6.04 Rs.6,78,000 and selling
expenses Rs.50,000). On 10.7.2019, he owns one residential house property. To get
the benefit of exemption under section 54F, X deposits on 30.5.2020 Rs.33,60,000 in
Capital Gains Deposit Scheme. By withdrawing from the Deposit Account he purchases a
residential house property at Delhi on 16.12.2020 for Rs.30,24,000. (CII: 04-05: 113)

Ascertain:--
• the amount of capital gain chargeable to tax for the assessment year 2020-21;
• tax treatment of the unutilized amount;
• when can he withdraw the unutilized amount; and
• what X has to do to ensure that the exemption under section 54 F is never taken back.

Section 54 & Section 54F:

26. Anish owns a residential house which is self-occupied and also a house plot. He sells the house
on 29.2.2020 and the house plot on 04.3.2020 for Rs.18 lacs and Rs.14.24 lacs, respectively.
The house was purchased on 17.10.2002 for Rs.4.2 lacs and the plot on 26.12.2006 for Rs.3.66
lacs. Anish has purchased a new residential house on 3.5.2020 for Rs.10 lacs. Compute
"Capital Gain" for the A.Y. 2020-21. Cost inflation indices for the financial year 2002-2003,
2006-2007 and 2019-20 are 105, 122 and 289 respectively.

SECTION 54 H: Extension of time limit under compulsory acquisition cases:

Under compulsory acquisition cases, the time limit for the purpose of acquiring a new asset to
avail exemption under section 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of
receipt of such compensation and not from the date of transfer.
142

CAPITAL GAINS – PART III:

TREATMENT OF ADVANCE MONEY RECEIVED AND FORFEITED:
Any advance money received by the assessee shall be taxable under the head “Income from
other sources” if:

a) such advance is forfeited; and

b) the negotiations did not result in transfer of such capital asset

Provision before 01.04.2014: Advance money received and forfeited shall be reduced from the
cost and the reduced cost is considered for indexation.

SECTION 50 C: IN THE CASE OF IMMOVABLE PROPERTY:

Sale consideration is taken as the STAMP DUTY VALUE or the ACTUAL SALE PRICE whichever
is higher. Where the stamp duty value does not exceed 105% of the actual sale price, then the
actual sale price shall be deemed to be the full value of consideration.

SDV on the date of agreement and on the date of registration are not same:
Ordinarily, SDV on the date of registration should be considered. However, SDV on the date of
the agreement may be taken only in a case where the amount of consideration, or part thereof,
has been paid by way of an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account, on or before the date of the agreement.

In case of dispute on the part of the assessee:

In case of dispute, the assessee can request the A.O. to refer the matter to the Valuation Officer.

e.g. case I case II case III

Actual sale value 25,00,000 25,00,000 25,00,000
Stamp duty value 32,00,000 32,00,000 32,00,000
Value determined by Valuation Officer 22,00,000 28,00,000 35,00,000

As per Section 50C (sale consideration) 25,00,000 28,00,000 32,00,000

SECTION 50 B: COMPUTATION OF CAPITAL GAIN IN THE CASE OF SLUMP SALE

‘Slump Sale’ means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities.

a) Cost of acquisition and cost of improvement shall be the “NET WORTH” of the undertaking
b) NET WORTH means value of total assets minus value of total liabilities of the “DIVISION”
c) Any change in the value of assets on account of revaluation shall be ignored
d) In case of depreciable assets, written down value (as per I.T. Act) shall be considered
e) In case of non-depreciable assets, book value shall be considered
143

f) Net worth cannot be negative

g) Short term or Long term depends upon the period for which the undertaking is owned and
held by the assessee.

h) Indexation benefit is not available

i) A report of a C.A. in Form No.3CEA showing the amount of net worth should be furnished

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET IN TO STOCK-IN-TRADE:

Conversion of capital asset into stock-in-trade amounts to transfer.

I. Computation of capital gain on conversion:

Fair Market Value on the date of conversion xxx
Less: Indexed cost of acquisition xxx
Long term capital gain xxx

The above capital gains are taxed only in the year in which the stock-in-trade is sold.

II. Computation of business income on sale of stock-in-trade:

Sale proceeds of stock in trade xxx
Less: Cost of stock-in-trade (being f.m.v. on the date of conversion) xxx
Income from Business xxx

MEANING OF ‘REVERSE MORTGAGE’:

A senior citizen who owns a house but not having regular source of income can mortgage his
property with a bank. The bank in turn pays him PERIODIC INSTALMENTS OR LUMP SUM to
the senior citizen during his life time. The borrower can continue to stay in the house and as well
as receive regular income from the bank.

The borrower is not required to pay the principal as well as the interest to the bank during his
life time. The bank will recover the loan along with the interest by selling the house after the
death of the borrower. However, before selling the property, the legal heirs are given an option
to repay the loan along with interest and get the mortgaged property released.

Tax treatment:
Mortgage of a property in a transaction of reverse mortgage under a scheme notified by Central
Government shall not be regarded as ‘transfer’. Therefore, no capital gain tax. The periodic
installments or lump sum received by the senior citizen is exempt from tax u.s.10 (43).
144

COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

Under compulsory acquisition cases, capital gains are taxable in the year of receipt of
compensation by the assessee. However, if compensation is received based on an INTERIM
ORDER of a court, tribunal or other authority, such compensation shall be deemed to be income
of the previous year in which the FINAL ORDER of such court, tribunal or other authority is made.

RECEIPT OF INSURANCE CLAIMS FOR DAMAGE OF CAPITAL ASSETS:

“Damage or Destruction” of a capital asset will be treated as transfer (extinguishment) provided
the asset is insured and compensation is received. Such gains are taxed in the year during which
the compensation is received from the “Insurer”.

The damage or destruction is as a result of a) flood, typhoon, hurricane, cyclone, earthquake; b)

riot or civil disturbance; or c) accidental fire or explosion; or d) action by an enemy.

SELF-GENERATED ASSETS:
Self-generated assets include:

a. Goodwill of a business; (but does not include self-generated goodwill of a profession)

b. tenancy rights,
c. route permits,
d. loom hours,
e. the right to manufacture, produce and process any article or thing, a trade mark or brand
name associated with a business and
f. a right to carry on any business or profession. (Section 55)

The cost of the above self-generated assets is “Nil”. Even if the aforesaid assets were acquired
before April 1, 2001, the option of adopting the fair market value on the said date is not available.
The entire sale consideration shall be treated as “capital gains”.

Note: Self-generated asset does not include “goodwill of a profession” (Supreme Court). If self-
generated goodwill of a profession is sold, then no capital gains shall arise.

RULE: CAPITAL GAINS ARE TAXED IN THE YEAR IN WHICH TRANSFER TOOK PLACE.

Exceptions to the above rule:

a. Conversion of Capital Asset in to Stock in trade
b. Compulsory Acquisition under any law
c. Extinguishment (destroyed) of a capital asset and Insurance compensation is received
d. In the case of Joint Development Agreement

Section 50CA: Capital gains in the case of UNQUOTED SHARES:

The full value of consideration shall be the higher of the following:
• Actual consideration received; or
• FMV of shares as per valuation rules prescribed by the CBDT
145

Capital gain in case of JOINT DEVELOPMENT AGREEMENTS – Section 45(5A):

Where the capital gains arises to an Individual or HUF from the transfer of land or building or both,
under a specified agreement, shall be chargeable to tax in the year in which certificate of
completion for whole or part of the project is issued by the competent authority.

The full value of consideration received shall be the aggregate of:

(i) his share of stamp duty value in the project as on the date of issue of certificate of completion;
(ii) consideration received in cash, if any.

“Specified agreement” means a registered agreement in which a person owning land or building or
both, agrees to allow other person to develop a real estate project on such land, in consideration of a
share, being land or building or both in such project, whether with or without payment of part of the
consideration in cash.

Advance money received and forfeited before or after 01.04.2014:

27. Mr.A received an advance of Rs.50,000 on 1-12-2019 against the sale of his house. However, due to
non-payment of instalment in time, the contract was cancelled and the amount of Rs.50,000 was
forfeited. Discuss the taxability or otherwise in the hands of recipient Mr.A.

28. [Link] received an advance of Rs.3 lakhs on 12.11.2019 to transfer his residential house
property. Since the transfer was not effected during the previous year due to failure in negotiations,
he deducted the advance money forfeited from the cost of acquisition of the property. State whether
the treatment is correct by [Link].

29. Mr.H has acquired a residential house in Chennai on 1st April, 2001 for Rs.22,00,000 and decided to
sell the same on 3rd May, 2004 to Mrs.P and an advance of Rs.70,000 was taken from her. The
balance money was not paid by Mrs.P and hence, Mr.H has forfeited the entire advance sum.

In April, 2019, he once again entered into negotiations for sale of the said property to Mr.Y, and
received Rs.2 lakhs as advance, but the transfer did not materialize and hence, the advance was
forfeited. On 3rd March, 2020, he finally sold this house to Mr.S for Rs.98,00,000. Compute capital
gains for A.Y.2020-21.

30. [Link] purchases a house property on April 10, 1992 for Rs.65,000. The fair market value of the
house on 01.04.2001 was Rs.2,74,000. On 31.08.2003, [Link] enters into an agreement with [Link]
for sale of such property for Rs.3,70,000 and received an amount of Rs.60,000 as advance. However,
as [Link] did not pay the balance amount, [Link] forfeited the advance. In May 2008, [Link]
constructed the first floor by incurring a cost of Rs.2,19,200.

Subsequently, in January 2009, [Link] gifted the house to his friend [Link]. On 10.01.2020, [Link]
sold the house for Rs.12,00,000. CII for F.Y. 2003-04: 109; 2008-09: 137; 2019-20: 289. Compute
the capital gains in the hands of [Link] for A.Y.2020-21.
146

Section 50 C: Capital gain in the case of immovable property:

31. Mr.T inherited a house in Jaipur under will of his father in May, 2003. The house was
purchased by his father in January, 2000 for Rs.2,50,000. He invested an amount of Rs.7,02,000
in construction of one more floor in this house in June, 2005. The house was sold by him in
November, 2019 for Rs.37,50,000.

The valuation adopted by the registration authorities for charge of stamp duty was Rs.47,25,000
which was not contested buy the buyer, but as per assessee’s request, the Assessing Officer
made a reference to Valuation Officer. The value determined by the Valuation Officer was
Rs.50,00,000.

Brokerage @ 1% of sale consideration was paid by Mr.T to Mr.S. The fair market value as on
01.04.2001 was Rs.3,27,000. You are required to compute the amount of capital gain chargeable
to tax for A.Y.2020-21. (CII: 2003-04: 109; 2005-06: 117)

32. Mr.S sold a residential house at Salem for a consideration of Rs.9.5 crores on 10.01.2020. The
buyer is an unrelated person. The stamp duty valuation of the house is Rs.10.2 crores.
Brokerage on sale paid at 2%.

In April, 2004 he had bought land for Rs.1.13 crores. Registration and other expenses incurred
were 10% of the same. The construction of the house was completed in March, 2006 for
Rs.93,60,000.

He purchased the following two residential houses in March, 2020:

a. House at Chennai for Rs.1.10 crores
b. House at Mumbai for Rs.3 crores

He also purchased bonds of NHAI on the following dates:

a. 23.02.2020: Rs.40 lakhs
b. 12.04.2020: Rs.50 lakhs

Compute income of Mr.S under the head “capital gains” for A.Y.2020-21.
(CII: 2004-05: 113; 2005-06: 117 and 2019-20: 289)

Stamp Duty Value on the DOA and Stamp duty value on the DOR:
33. Mr.S entered into an agreement with Mr.D to sell his residential house located at Chennai on
16.08.2019 for Rs.80,00,000. The sale proceeds was to be paid in the following manner:

i. 20% through account payee bank draft on the date of agreement;

ii. 60% on the date of the possession of the property;
iii. Balance after the completion of the registration of the title of the property.

Mr.D was handed over the possession of the property on 15.12.2019 and the registration
process was completed on 19.01.2020. He paid the sale proceeds as per the sale agreement.
147

The value determined by the stamp duty authority on 16.08.2019 was Rs.90 lakhs whereas on
19.01.2020 it was 94,00,000. Mr.S had acquired the property on 01.04.2001 for Rs.20,00,000.
After recovering the sale proceeds from Mr.D, he purchased another residential house property
for Rs.30,00,000. Compute capital gains for A.Y.2020-21.

Amount to be invested in section 54EC bonds after set-off of losses:

34. Mr.A transferred land and building on 02.01.2020 and furnishes the following information:

Net consideration received Rs.24,00,000

Value adopted by Stamp Valuation Authority Rs.30,00,000
Value ascertained by Valuation Officer on reference by the A.O. Rs.34,00,000

This land was acquired by Mr.A on 01.04.2001. FMV of the land as on 01.04.2001 was
Rs.4,55,000. Mr.A constructed a residential building on the land at a cost of Rs.5,88,000
(construction completed on 01.12.2012)

Brought forward short-term capital loss incurred on sale of shares during the financial year
2015-16 Rs.1,50,000. Mr.A seeks your advice regarding the amount to be invested in NHAI
bonds so as to be exempt from capital gain tax. (CII: 2012-13: 200)

Investment in NHAI bonds after 6 months & new house sold within 3 years tax - treatment:
35. Mr.S, acquired a residential house in January, 2003 for Rs.9,45,000 and made some
improvements by way of additional construction to the house, incurring expenditure of
Rs.2,26,000 in October, 2004.

He sold the house property in October, 2019 for Rs.68,00,000. The value of property was
adopted as Rs.85,00,000 by the State stamp valuation authority for registration purpose.

He acquired a residential house in January, 2019 for Rs.40,00,000. He deposited Rs.9,00,000 in

capital gain bonds issued by National Highways Authority of India (NHAI) in June, 2020.
Compute capital gain chargeable to tax for the assessment year 2020-21.

What would by the tax consequences and in which assessment year it would be taxable, if the
house property acquired in January, 2019 is sold for Rs.50,00,000 in December, 2020?

(CII: 2002-03: 105; 2004-05: 113)

Transfer of land and building where land is a LTCA and building is a STCA:
36. Mr.R sold a house to his friend Mr.D on 1st November, 2019 for a consideration of Rs.25,00,000.
The Sub-Registrar refused to register the document for the said value, as according to him,
stamp duty paid had to be paid on Rs.45,00,000, which was the Government guideline value.
148

Mr.R preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as
Rs.35,00,000 (Rs.22,00,000 for land and the balance for building portion). The differential
stamp duty was paid, accepting the said value determined.

What are the tax implications in the hands of Mr.R and Mr.D for the assessment year 2020-21?
Mr.R had purchased the land on 1st June, 2010 for Rs.5,01,000 and completed the construction of
house on 1st October, 2018 for Rs.14,00,000. (CII: 2010-11: 167; 2018-19: 280)

Conversion of capital asset in to stock in trade:

37. [Link] converts his plot of land purchased in July, 2003 for Rs.76,300 into stock-in-trade on
31st March, 2019. The fair market value as on 31.03.2019 was Rs.3,00,000. The stock-in-trade
was sold for Rs.3,25,000 in the month of January, 2020. Compute taxable income, if any, and if
so, under what head of income and for which assessment year.

Cost inflation index: F.Y.03-04: 109; F.Y.18-19: 280 (sum no.2; page no.4.449)

38. [Link] purchased a land at a cost of land of Rs.34,88,000 in the financial year 2003-04 and
held the same as her capital asset till 31st March, 2011. She started her real estate business on
1st April, 2011 and converted the said land into her stock in trade on 1st April, 2011, on which
date the fair market value of the land was Rs.210 lakhs.

She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
Rs.10 lakhs. Construction was completed in February, 2020. She sold 10 flats at Rs.30,00,000
per flat in March, 2020. The remaining 5 flats were held as stock on 31st March, 2020.

She invested Rs.50 lakhs in bonds issued by NHAI on 31st March, 2020 and another Rs.50 lakhs
in bonds of REC Ltd in April, 2020.

Compute capital gains & business income arising from above transactions for assessment year
2020-21 indicating clearly the reasons for treatment for each item.

(Cost inflation Index: 2003-04: 109; 2011-12: 184; 2019-20: 289) (sum no.3; page no.4.450)
149

Problem on Reverse Mortgage:

39. [Link] (senior citizen) received Rs.25,00,000 on 23.01.2020 on transfer of his residential
building in a transaction of reverse mortgage under a scheme notified by the Central
Government. The building was acquired in March 2002 for Rs.8,00,000. Is the amount received
on reverse mortgage chargeable to tax under the head ‘Capital Gains’?

Answer:
Mortgage of property with a bank under reverse mortgage scheme notified by the Central
Government shall not be regarded as transfer. Hence amount received by [Link] under RMS is
not chargeable to tax.

Note: Amount received by a senior citizen under RMS from the bank either in lumpsum or in
installments is exempt from tax under section 10(43) of the Income-tax Act.

40. [Link] a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. [Link]
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse
mortgage transaction? (sum no.6; page no.4.391)

Note: Amount received by the senior citizen under RMS from the bank either in lumpsum or in
installments is exempt from tax under section 10(43) of the Income-tax Act.

Note: However, capital gain tax would be attracted only at the stage of alienation (surrender) of
the mortgaged property by the bank for the purposes of recovering the loan.

41. Mrs.M, an individual aged 68 years, mortgaged her residential property, purchased for
Rs.3,15,000 on 01.10.2002, with a bank, under a notified reverse mortgage scheme and was
sanctioned a loan of Rs.20 lakhs. As per the said scheme, she was receiving the loan amount in
equal monthly installments of Rs.30,000 per month from the bank.

Mrs.M was not able to repay the loan on maturity and in lieu of settlement of the loan,
surrenders the residential property to the bank. Bank sold the property for Rs.25 lakhs on
22.02.2020. She had no other income during the year. Discuss the tax consequences and
compute tax for A.Y.2020-21. (CII: 2002-03: 105)
150

Answer:
Mortgage of property with a bank under reverse mortgage scheme notified by the Central Government shall
not be regarded as transfer. Hence amount received by Mrs.M under RMS is not chargeable to tax.

Note: Amount received by the senior citizen under RMS from the bank either in lumpsum or in installments
is exempt from tax under section 10(43) of the Income-tax Act. Hence, amount received by Mrs.M Rs.30,000
p.m. from the bank is exempt under section 10(43).

Note: However, capital gain tax would be attracted only at the stage of alienation (surrender) of the
mortgaged property by the bank for the purposes of recovering the loan.

Computation of capital gain in the hands of Mrs.M on sale of property by the Bank

Sale consideration 25,00,000

Less: Indexed cost of acquisition 8,67,000 (315000 / 105 x 289)
Taxable Long-term capital gain 16,33,000

Tax on total income: (16,33,000 – 3,00,000)*20% + 4% cess: Rs.2,77,260 (rounded off)

Computation of capital gain in the case of slump sale (Section 50 B)

42. The Balance Sheet of LMN Ltd as on 30th November 2019, being the date on which Unit N has
been transferred by way of slump sale is given hereunder:

BALANCE SHEET AS ON 30.11.2019

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up capital 1,700 Fixed Assets:
Reserves 620 Unit L 150
Unit M 150
Unit N 550
Liabilities
Unit L 40 Other assets
Unit M 110 Unit L 520
Unit N 90 Unit M 800
Unit N 390
TOTAL 2,560 TOTAL 2,560

• Using the information given below, calculate the capital gain arising on slump sale of Unit N:

• Slump sale consideration Rs.880 lakhs

• Fixed assets of Unit N includes land which was purchased at Rs.60 lakhs in the year 2007 and
revalued at Rs.90 lakhs as on 31.03.2019.

• Fixed assets of Unit N reflected at Rs.460 lakhs (Rs.550 lakhs less land value of Rs.90 lakhs) is the
written down value of depreciable assets as per books. However, the written down value of
these assets under section 43 (6) of the Income-tax Act is Rs.410 lakhs.
151

• Other assets of Unit N shown at Rs.390 lakhs represent book value of non-depreciable assets.

• Unit N is in existence since July, 2007

• CII may be taken as 125 for 2007-08 and 289 for 2019-20

43. PQR Ltd has two units – one engaged in manufacture of computer hardware and the other
involved in developing software. As a restructuring drive, the company has decided to sell its
software unit as a going concern by way of slump sale for Rs.385 lakhs to a new company called S
Ltd, in which it holds 74% equity shares.

The balance sheet of PQR Ltd as on 31st March 2020, being the date on which software unit has
been transferred, is given hereunder:

BALANCE SHEET AS ON 31.03.2020

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up share capital 300 Fixed Assets:
General Reserve 150 Hardware unit 170
Share premium 50 Software unit 200
Revaluation Reserve 120 Debtors
Current liabilities Hardware unit 140
Hardware unit 40 Software unit 110
Software unit 90 Inventories
Hardware unit 95
Software unit 35
Total 750 Total 750

Following additional information is furnished by the management:

a. The software unit is in existence since May, 2010

b. Fixed assets of software unit include land which was purchased at Rs.40 lakhs in the year 2010
was revalued at Rs.60 lakhs as on 31st March, 2020

c. Fixed assets of software unit reflected at Rs.140 lakhs (Rs.200 lakhs minus land value Rs.60
lakhs) is written down value of depreciable assets as per books of account. However, the written
down value of these assets under section 43 (6) of the Income-tax Act is Rs.90 lakhs.

Ascertain the capital gain, which would arise from slump sale to the company.

44. Mr.A is a proprietor of Akash Enterprises having 2 units. He transferred on 01.04.2019 his unit 1
by way of slump sale for a total consideration of Rs.25 lakhs. Unit 1 was started in the year 2005-
06. The expenses incurred for this transfer were Rs.28,000. His Balance Sheet as on 31.03.2019
is as under:
152

Liabilities Total Assets Unit 1 Unit 2 Total

Own capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve
(for building of unit 1) 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
Bank Loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000
Creditors (25% for unit 1) 1,50,000 Other assets 1,50,000 60,000 2,10,000

Other information:
a. Revaluation reserve is created by revising upward the value of the building of unit 1.

b. No individual value of any asset is considered in the transfer deed

c. Other assets of unit 1 include patents acquired on 01.07.2017 for Rs.50,000 on which no
depreciation has been charged. Compute the capital gain for the assessment year 2020-21.

Answer:

Computation of capital gains on slump sale of Unit 1 for A.Y.2020-21:

Slump sale consideration of Unit 1 25,00,000

Less: Selling expenses 28,000
Net consideration 24,72,000
Less: Net worth (see note below) 12,50,625
Long-term capital gain 12,21,375

Working notes:

Net worth of Unit 1:

Building (excluding Rs.3 lakhs on account of revaluation) 9,00,000
Machinery 3,00,000
Debtors 1,00,000
Other assets (1,50,000 – 50,000) 1,00,000
Patent (see note below) 28,125
14,28,125
Less: Creditors (25% of Rs.1,50,000) 37,500
Bank loan (70% of Rs.2,00,000) 1,40,000
Net worth of Unit 1 12,50,625

Written down value of patents as on 01.04.2019:

Cost as on 01.07.2017 50,000
Less: Depreciation @ 25% for financial year 2017-18 12,500
WDV as on 01.04.2018 37,500
Less: Depreciation @ 25% for financial year 2018-19 9,375
WDV as on 01.04.2019 28,125
153

Capital gain in case of JOINT DEVELOPMENT AGREEMENT – Section 45(5A):

45. Mr.X purchased a residential plot on 01.01.1998 for Rs.50,00,000. FMV of plot as on 01.04.2001
is Rs.65,00,000. Alpha Builders enter into a Development Agreement with Mr.X on 01.05.2019
on the following terms and conditions:

a. Mr.X will hand over the possession of plot to Alpha Builders on 01.05.2019
b. Alpha Builders will pay a cheque of Rs.60 lakhs to Mr.X on 01.05.2019.
c. Alpha Builders will construct 10 residential units on the plot of land will give 6 units to
Mr.X. The 10 units shall be completed by 30.06.2021 and that date 6 units will be
handed over to Mr.X

d. The stamp duty value of plot s on 01.05.2019 is Rs.2 crores

e. The stamp duty value of each flat on 30.06.2021 is Rs.45 lakhs

CASE I: The project completion certificate is issued by competent authority on 30.06.2021.

6 units are handed over to Mr.X on 30.06.2021.

CASE II: The project completion certificate is issued by competent authority on 30.04.2022
and on that date the stamp duty value of each flat is Rs.50 lakhs. 6 units are handed
over to Mr.X on 30.04.2022.

Answer:
There is a ‘Transfer’ on 01.05.2019 in hands of Mr.X since he has given the possession of residential plot
to the builder under a Development Agreement.

However, the capital gains shall not be taxable in previous year 19-20 but shall be taxable in the previous
year in which certificate of completion is issued by competent authority.

The above section is applicable since assessee is an individual

The holding period of residential plot shall be taken from 01.01.1998 to 30.04.2019. i.e. long term

Sale consideration = SDV on the date of issue of completion certificate of his share in land/building in
project plus consideration received in cash.

CASE I: Assessment Year 2022-23

Sale consideration (SDV of 6 flats on 30.06.2020 + cash received) 3,30,00,000
Less: Indexed cost of acquisition (65 lakhs / 100 * 289) 1,87,85,000
LTCG 1,42,15,000

CASE II: Assessment Year 2023-24

Sale consideration (SDV of 6 flats on 30.06.2020 + cash received) 3,60,00,000
Less: Indexed cost of acquisition (65 lakhs / 100 * 289) 1,87,85,000
LTCG 1,72,15,000
154

46. State whether the following statement is true or false:

Where capital gain arises to an individual from the transfer of capital asset, being immovable property
under a joint development agreement, the capital gain is chargeable to tax in the previous year in which
the certificate of completion for whole or part of the project is issued by the competent authority.

COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

47. Mr.A owns a land which was compulsorily acquired by NHAI on 10.01.2019 and he was
compensated for a sum of Rs.1 crore on 25.02.2019. The market value of the said property as on
the date of compulsory acquisition is Rs.2.5 crore. Mr.A filed a suit against NHAI challenging the
quantum of compensation.

On 26.07.2019, court passed an interim order granting an additional compensation of Rs.1.25

crores and the same was received on 27.07.2019. However, the final order of the court was made
on 20.04.2020 confirming the interim order. Determine the year of chargeability.

Solution: Taxable in the year in which the Court passes the FINAL order:
Year of chargeability of original compensation shall be the year in which such compensation
was received. Accordingly, Rs.1 crore shall be chargeable in the A.Y.2019-20.

Enhanced compensation received in pursuance of an interim order shall not be chargeable to

tax in the year in which it is received. Such enhanced compensation shall be chargeable in the
year in which the final order of the court is passed.

In the given case, though the interim order was passed in the financial year 2019-20, the year of
chargeability shall be A.Y.2021-22, being the year in which court has passed the final order.
Thus, Rs.1.25 crores shall be chargeable to tax only in the A.Y.2021-22.

Self-generated goodwill of profession:

48. On 31st January, 2020, Mr.A has transferred self-generated goodwill of his profession for a sale
consideration of Rs.7,00,000 and incurred expenses of Rs.25,000 for such transfer. You are required to
compute the capital gains chargeable to tax in the hands of Mr.A for the A.Y.2020-21.

Answer:
The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the Supreme
Court’s ruling in CIT vs. [Link] Shetty. The amount received on sale of such goodwill is a capital
receipt, hence not taxable.

49. State whether the following statement is true or false:

Cost of self-generated goodwill of business is deemed to be nil.

Answer:
The statement is true. The cost of self-generated goodwill of business is deemed to be nil.
155

CHAPTER – 11 INCOME FROM OTHER SOURCES

Specific examples:
• Dividend Income
• Casual Income
• Amount received in excess of fmv of shares of a closely held company – Section 56(2)(viib)
• Sum of money or property received by any person – Section 56(2)(x)
• Any interest on compensation or enhanced compensation received from the Government
• Advance forfeited due to failure of negotiations for transfer of a capital asset
• Compensation received by any person, in connection with termination of his employment
or the modification of the terms and conditions relating thereto.

Other examples:
• Interest on securities
• Interest on income-tax refund
• Income from sub-letting
• Salary received by a Member of Parliament
• Interest on deposit with a bank, company, etc.
• Keyman insurance policy received on maturity (if not taxed under other heads)
• Income from royalty
• Income from letting of plant and machinery on hire
• Income from letting of plant and machinery and also building being inseparable
• Income from a vacant land
• Interest on employees contribution to unrecognized provident fund received
• Foreign agricultural income
• Family pension received by family members of a deceased employee
• Director’s sitting fee
• Income from undisclosed sources

Dividend Income:
Any dividend received by a shareholder from a domestic company (private or public) (listed or
unlisted) (interim or final) is exempt from tax under section 10 (34). Dividend Distribution Tax
is paid by the company @ 20.5553% under section 115-O.

Dividend from domestic companies:

Where an assesse (being an individual, huf or a firm RESIDENT in India), receives dividend
from a domestic company shall pay income-tax @ 10% on the amount exceeding Rs.10 lakhs
u.s.115BBDA.

Dividend received from foreign companies:

However, dividend received from a foreign company is taxable in the hands of the shareholder as
foreign companies are not subject to dividend distribution tax.
156

Casual Income:
Winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature.

note: The above incomes are taxed at a flat rate of 30%.

note: Chapter VIA deductions are not available
note: Basic exemption is not available
note: Expenditure incurred for earning such income is not allowed as deduction
note: No loss can be set-off against casual income
note: How to “gross up” if net winning is given:
Net amount received
70%

Important points:
Income under this head is to be computed according to the method of accounting.

Unexplained cash credit or unexplained investments or unexplained expenditure shall be taxed

@ 60% plus surcharge @ 25% of tax and cess @ 4% (effective rate 78%).

Deduction in respect of family pension: Rs.15,000 (or) 33 1/3% of pension received (w.e.l.)

Family pension received by a widow of a member of the armed forces where the death of the
member has occurred IN THE COURSE OF OPERATIONAL DUTIES is exempt from tax u.s.10
(19). Any ex-gratia received by the widow is also exempt as per Circular issued by the CBDT.

Family pension received by any member of the family of an individual who has been awarded
“Param Vir Chakra” or “Vir Chakra” or “Mahavir Chakra” (gallantry awards) is exempt u.s.10 (18).

Interest on Post Office Savings Account is exempt to the extent of Rs.3,500 in the case of an
individual account and Rs.7,000 in the case of joint account. Section 10 (15)

Interest on Public Provident Fund account is exempt from tax under section 10 (11).

Income from units of a Mutual fund is exempt from tax u/s. 10 (35).

Deductions not allowed:

• Any personal expense of the assessee
• Any salary or interest which is payable outside India without tds
• Any payment exceeding Rs.10,000 by way of cash/bearer cheque
• Any expenditure in connection with income by way of earnings from lotteries, races, etc.
• Any payment to a resident without tds (30% shall not be allowed as deduction)
157

1. A Ltd., a domestic company, declared dividend of Rs.170 lakh for the year F.Y. 2018-19 and
distributed the same on 10.7.2019. Mr.X, holding 10% shares in A Ltd., receives dividend of
Rs.17 lakh in July, 2019. Mr.Y, holding 5% shares in A Ltd., receives dividend of Rs.8.50 lakh.
Discuss the tax implications in the hands of Mr.X and Mr.Y, assuming that Mr.X and Mr.Y have not
received dividend from any other domestic company during the year. (illustration 2 – pg. 4.484)

2. Mr.R (an ordinary resident) furnishes the following details for the A.Y.2020-21:

Agricultural income in India Rs.75,000; Agricultural income in Sri Lanka Rs.90,000; Income from
a vacant land Rs.72,000; Rent received on sub-letting house Rs.3,75,000; Rent payable for house
sub-let Rs.1,50,000; Maintenance expenses on house sublet Rs.12,000.

Interest on deposits with nationalized bank Rs.10,000; Interest on PPF account Rs.6,000; Interest
accrued but not received on NSC VIII issue Rs.8,000 (assessee follows mercantile system of
accounting); Winnings from lottery (net of tax of Rs.30,000) Rs.70,000 (cost of lottery tickets
purchased Rs.1,000). Income from undisclosed sources Rs.1,00,000.

During the year he received an Income-tax refund of Rs.2,30,000 relating to A.Y.17-18 from the
Income-tax Department. Interest included in the above Rs.30,000. Dividend from Indian
companies Rs.12,000; Dividend received from foreign companies Rs.10,000. Compute IFOS.

KEYMAN INSURANCE – POLICY

Keyman insurance policy is a policy taken on the life of one person by another person where the
insured plays a key role in the Organization. The relationship between the two persons may be
that of employer-employee or that of a principal-agent.

Important: Premium paid on such policy is allowed as business expenditure while computing
business income.

On its maturity:
a) If employer-employee relationship exists: Maturity value is taxed in the hands of
employee under the head “Salaries”.

b) Where no employer-employee relationship exists: Maturity value is taxed in the hands

of the person receiving it either as “Business Income” or as “IFOS”.

Note: Amount received on maturity of a life insurance policy is exempt u.s.10(10D) which is
different from keyman insurance policy.

3. Mr.M, Government servant, died on 11.5.2016 while still being in service. In terms of the rules
governing the service, his widow S, is paid a family pension of Rs.9,000 p.m. and dearness
allowance of 1,000 p.m. thereof. For the assessment year 2020-21, is the widow assessable on
the receipt and if so, under what head of income? Is she entitled to any relief or deduction on the
above sum? Discuss.
158

4. Sita received a family pension of Rs.10,000 p.m. in the capacity of widow of the deceased spouse
who died in the course of operational duties in Indian army. The amount of family pension
chargeable to tax is:

A. Rs.1,20,000 B. Rs.1,05,000 C. Nil D. Rs.30,000

5. Amit, a captain in Indian army was killed in Kargil border during a war. The widow of Amit was
paid an ex-gratia payment of Rs.8,00,000 in March, 2020, besides the family pension during the
year of Rs.10,000 p.m. She wants to know about the taxability of both the receipts.

6. In the following cases state the head of Income under which the receipt is to be assessed and
comment.

a. X Ltd., lets out its property to Y. Y sublets it. How is subletting receipt to be assessed in
the hands of Y?

b. X has built a house on leasehold land. He has let-out the property and claims the rent
received to be assessed under “other sources” and deducted expenses on repair,
security charges, insurance and collection charges in all amounting to 60% of receipts.

Section 2 (22) (e): DEEMED DIVIDEND:

Any loan or advance given by a closely-held company

a) directly to its shareholder who beneficially owns at least 10% equity in the company; or
b) indirectly to any other person for the benefit of such shareholder; or
c) indirectly to “any other concern” where such shareholder owns substantial interest in
addition to 10% shareholding in the company

then such loan or advance shall be deemed to be dividend in the hands of the shareholder to the
extent of accumulated profits of the company. The company shall pay dividend distribution tax
@ 30% on such dividends. Surcharge and cess is also applicable (effective rate 34.944%).

note: A closely-held company is a company in which public have no substantial interest (e.g. a private
company).

note: The company shall pay dividend distribution tax @ 30% on deemed dividend. Hence fully exempt
in the hands of the shareholder u.s.10(34).

note: “Any other concern” can be an individual, a huf, a firm or a company

note: “Substantial Interest” shall mean 20% equity or 20% share of profits in any other concern

note: Trade advances in the nature of commercial transactions cannot be deemed dividend

note: Where money-lending is a substantial part of the business of the company (i.e. giving loans), the
above provisions are not applicable.
159

7. Mr.P, a shareholder of a closely held company, holding 16% shares received advances from that
company which is to be deemed as dividend u.s.2(22)(e), hence taxable in the hands of Mr.P.
State whether the statement is true or false.

8. Sanjay holds 16% shares in XYZ Private Limited. The company has given him a loan of
Rs.2,00,000 on 01.02.2020. Accumulated profits of the company on that date was Rs.1,75,000.
Sanjay repaid the loan on 31.03.2020. Examine the tax implication, if any, of the above
transactions in the hands of XYZ Private Limited.

9. Rahul holding 28% of equity shares in a company took loan of Rs.5,00,000 from the same
company. On the date of granting the loan, the company had accumulated profits of Rs.4,00,000.
The company is engaged in some manufacturing activity.

a. Is the amount of loan taxable as deemed dividend, if the company is a company in which
the public are substantially interested?

b. What would be your answer, if the lending company is a private limited company (i.e.) a
company in which the public are not substantially interested? (illustration 1 – pg. 4.482)

10. [Link] has 15% shareholding in RSL (p) Ltd. and has also 50% share in Rakesh and Sons, a
partnership firm. The accumulated profits of RSL (p) Ltd. is Rs.20 lakhs. Rakesh and Sons had
taken a loan of Rs.25 lakhs, from RSL (p) Ltd. Explain whether the above loan is treated as
dividend, as per the provisions of the Income-tax Act.

ANY INTEREST ON COMPENSATION (OR) ENHANCED COMPENSATION RECEIVED:

Any interest received on compensation or enhanced compensation from the Government shall be
taxable in the year of receipt irrespective of the method of accounting followed by the assessee.
Note: A deduction @ 50% of the interest received shall be allowed.

11. The land of [Link] was acquired by NHAI in the year 2016 and since then the litigation was
going on for enhancement of compensation. The issue was resolved on 11.12.2019 and the court
ordered finally to make payment to [Link] of the enhanced compensation and the following
amounts for interest on such enhanced compensation.

Financial Year Amount (Rs.)

2016-17 1,15,000
2017-18 2,26,000
2018-19 3,75,000
2019-20 2,14,000

Explain the provisions of the Act and also work out the amount of interest and the assessment
year in which the same shall be taxed.
160

12. On 10.10.2019, [Link] (a bank employee) received Rs.5,00,000 towards interest on enhanced
compensation from State Government in respect of compulsory acquisition of his land effected
during the financial year 2013-14.

Out of this interest, Rs.1,50,000 relates to the previous year 2014-15, Rs.1,65,000 relates to
previous year 2015-16 and Rs.1,85,000 relates to previous year 2016-17. He incurred Rs.50,000
by way of legal expenses to receive the interest on such enhanced compensation. Discuss the tax
implication, if any, of such interest income for A.Y.2020-21. (question 3 – pg. 4.512)

PART – II: Income from other sources:

Taxability of Gifts – Section 56(2)(x):

Important: Any sum of money or value of property received without consideration or for
inadequate consideration to be taxed in the hands of the recipient [Section 56(2)(x)]

Different types of gifts:

a. Gift in cash; or
b. Gift of immovable property (land or building); or
c. Gift of movable property: “Movable property” includes the following capital assets:
jewellery, archaeological collections, drawings, paintings, sculptures, work of art, shares
and securities and bullion.

A. CASH:

Received as gift by any person:

Received from relatives is fully exempt from tax (any amount)
Received on the occasion of marriage is fully exempt from tax
In other cases, cash gift received in excess of Rs.50,000 in AGGREGATE in a year is fully taxable

B. IMMOVABLE PROPERTY RECEIVED:

1. Received as gift (without consideration) by any person:

a. Tax treatment in the hands of transferor:

Gift is not a transfer, capital gain tax is not attracted

b. Tax treatment in the hands of transferee:

In case Stamp Duty Value exceeds Rs.50,000; then SDV is taxable. SDV will be the cost of
acquisition if the asset is sold subsequently by the buyer.

Note: Agricultural land situated in a rural area is not a capital asset, hence not taxable.
161

2. If purchase price is less than the stamp duty value (i.e. inadequate consideration):

a. Tax treatment in the hands of Seller:

Since it is sold at a price less than the SDV, provisions of Section 50 C will apply for
computation of capital gains. However, if SDV does not exceed 105% of actual sale price,
actual sale price shall be the sale consideration for computing capital gains.

b. Tax treatment in the hands of Buyer:

If the difference between the SDV and the purchase price exceeds Rs.50,000 AND also
exceeds 5%; the difference is taxable.

note: SDV shall be the cost in the hands of the buyer in case of subsequent sale by him.

C. MOVABLE PROPERTY RECEIVED AS GIFT:

1. If received as a gift (without consideration):

a. In the hands of transferor:

Gift is not a transfer, hence no capital gain

b. In the hands of transferee:

Fully taxable if fair market value of the gift exceeds Rs.50,000 in aggregate

2. If purchased for a value which is less than the f.m.v (inadequate consideration):

In the hands of seller:

Capital gain is computed.

In the hands of buyer:

If the difference between f.m.v. and purchase price exceeds Rs.50,000 (in aggregate), the
difference is taxable.

Note: If gift received forms part of stock-in-trade then the above provisions do not apply, hence
no tax implication.

Gift received in the following cases shall not be taxable:

a. Gifts received from relatives
b. Gifts received on the occasion of the marriage of the individual
c. Gifts received under a will or by way of inheritance
d. Gifts received in contemplation of death of the payer
e. Gifts received from registered charitable institution
f. Gifts received from any fund, university, educational institution, hospital, medical
institution, any trust.
162

“RELATIVE” includes:
1. Spouse of the individual
2. Brother or Sister of the individual
3. Brother or Sister of the spouse of the individual
4. Brother or Sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual

Spouse of the person referred to in items (2) to (6) mentioned above

Note: In case of HUF, any member thereof.

Problems on gifts received and its taxability:

1. Mr.A, the friend of Mr.B, has gifted an immovable property to Mr.B on 1.1.2020 whose stamp
duty value on the date of gift is Rs.45,00,000. What shall be the value of gift in the hands of Mr.B?
Would your answer differ if Mr.B had purchased the above property from Mr.A for Rs.36,00,000?

2. Mr.X sold his residential house to Mr.Y for Rs.10 lakhs on 01.04.2019. The value of the said
house as per Stamp Valuation Authority was Rs.16 lakhs. Mr.Y is a childhood friend of Mr.X.

Mr.X gifted a plot of land (purchased by him on 01.08.2012) to Mr.Y on 01.07.2019. The value as
per Stamp Valuation Authority is Rs.8 lakhs. Mr.Y sold the land on 01.03.2020 at Rs.14 lakhs.

Compute the income of Mr.Y chargeable under the heads “capital gains” and “IFOS”.

3. From the following information, compute the income taxable under the head “Capital Gains” and
“Income from other sources” in the hands of Mr.V:

Mr.D gifted a vacant site to his friend Mr.V on 23.05.2019 on the occasion of latter’s birthday.
Mr.D had acquired the said vacant site in May, 2014 for Rs.30,00,000. The fair market value of
the site for stamp duty purposes on the date of gift i.e., on 23.05.2019 was Rs.60,00,000.

Mr.V sold the vacant site on 15.03.2020 for a consideration of Rs.70,00,000 when its stamp duty
value on the date of sale was Rs.90 lakhs.

4. Mr.A receives a motor car as gift from his friend on the occasion of birthday on 01.01.2020. The
fair market value of the car is Rs.25,00,000. Compute the sum taxable in the hands of Mr.A.
163

5. The following details have been furnished by [Link] pertaining to the year ended 31.03.2020:

a. Cash gift of Rs.51,000 received from her friend on the occasion of her “Shastiaptha Poorthi”,
a wedding function celebrated on her husband completing 60 years of age. This was also
her 25th wedding anniversary.

b. On the above occasion, a diamond necklace worth Rs.2 lacs was gifted by her sister living in
Dubai.

c. When she celebrated her daughter’s wedding on 21.02.2020, her friend assigned in
[Link]’s favour, a fixed deposit held by the said friend in a scheduled bank; the value of
the fixed deposit and the accrued interest on the said date was Rs.52,000. Compute the
income, if any, assessable as income from other sources. (question 4 – pg. 4.513)

6. Check the taxability of the following gifts received by Mrs.R during the previous year 2019-20
and compute the taxable income from gifts for Assessment Year 2020-21:

a. On the occasion of her marriage on 14.8.2019, she has received Rs.90,000 as gift out of
which Rs.70,000 are from relatives and balance from friends
b. On 12.9.2019, she has received gift of Rs.18,000 from cousin of her mother.
c. A cell phone worth Rs.75,000 is gifted by her friend on 15.8.2019.
d. She gets a cash gift of Rs.25,000 from the elder brother of her husband’s grandfather.
e. She has received a cash gift of Rs.12,000 from her friend on 14.4.2019.

7. Mrs.H, who draws a salary of Rs.60,000 p.m. received the following gifts during the p. y. 2019-20:

Gift of Rs.1,50,000 on 15.05.2019 from her close friend

Gift of jewellery worth Rs.3,00,000 on 01.08.2019 from her fiancee
Gift of Rs.51,000 each received from her two friends on the occasion of her marriage
Gift of Rs.51,000 on 01.12.2019 from her father’s sister
Gift of Rs.25,000 on 12.01.2020 from her family friend
Gift of Rs.11,000 on 12.02.2020 from her brother’s mother-in-law
Gift of Rs.75,000 from her sister-in-law

Compute her gross total income for the assessment year 2020-21.
164

OTHER PROVISIONS:

Section 2 (24): “Income” includes any consideration received for issue of shares as
exceeds the fair market value of the shares.

Section 56(2)(viib): Where a CLOSELY-HELD COMPANY issues shares to a RESIDENT at a

premium and the issue price is more than the fair market value then the difference between the
issue price and the fair market value shall be chargeable to tax.

Section 56(2)(viib) is attracted if the following two conditions are satisfied:

Condition 1: Shares are to be issued at a premium (not at par or discount) &
Condition 2: Issue price should be higher than the fair market value

The above provisions are not applicable in the following cases:

a. In the case of a company in which public are substantially interested
b. If shares are not issued at premium

8. X Pvt Ltd (a closely-held company) issues 20,000 shares to Mr.A (a resident) on 06.04.2019.
These shares are issued in one of the following situations:

Different situations
A B C D
Face value per share (in Rs.) 10 10 10 10
Issue price per share 10 9 40 40
Fair market value of such share 3 4 42 31

9. MLX Investments (P) Ltd. was incorporated during P.Y.2017-18 having a paid up capital of Rs.10
lakhs. In order to increase its capital, the company further issues, 1,00,000 shares (having face
value of Rs.100 each) during the year at par as on 01.08.2019. The FMV of such share as on
01.08.2019 was Rs.85.

(i) Determine the tax implications of the above transaction in the hands of the company,
assuming it is the only transaction made during the year.

(ii) Will your answer change, if shares were issued at Rs.105 each?

(iii) What will be your answer, if shares were issued at Rs.105 and FMV of the share was
Rs.120 as on 01.0.2019?
165

ADDITIONAL PROBLEMS FROM THE INSTITUTE MATERIAL:

1. Mr. A, a dealer in shares, received the following without consideration during the P.Y. 2019-20
from his friend Mr.B:-

(1) Cash gift of Rs.75,000 on his anniversary, 15th April, 2019.

(2) Bullion, the fair market value of which was Rs.60,000, on his birthday, 19th June, 2019.

(3) A plot of land at Faridabad on 1st July, 2019, the stamp value of which is Rs.5 lakh on that
date. Mr. B had purchased the land in April, 2009. On 1st March, 2020, he sold the land at
Faridabad for Rs.7 lakh.

Mr.A purchased from his friend Mr.C, who is also a dealer in shares, 1000 shares of X Ltd. @
Rs.400 each on 19th June, 2019, the fair market value of which was Rs.600 each on that date. Mr.
A sold these shares in the course of his business on 23rd June, 2019.

Further, on 1st November, 2019, Mr. A took possession of property (building) booked by him
two years back at Rs.20 lakh. The stamp duty value of the property as on 1st November, 2019 was
Rs.32 lakh and on the date of booking was Rs.23 lakh. He had paid Re.1 lakh by account payee
cheque as down payment on the date of booking.

Compute “IFOS” and “Capital Gains” for A.Y. 2020-21. (illustration 3 – pg. 4.499)

2. [Link], a share broker, sold a building to his friend Rajesh, who is a dealer in automobile spare
parts, for Rs.90 lakh on 1.1.2020, when the stamp duty value was Rs.150 lakh. The agreement
was, however, entered into on 1.9.2019 when the stamp duty value was Rs.140 lakh. [Link] had
received a down payment of Rs.15 lakh by a crossed cheque from Rajesh on the date of
agreement. Discuss the tax implications in the hands of Hari and Rajesh, assuming that [Link]
has purchased the building for Rs.75 lakh on 12th July, 2018. (illustration 5 – pg. 4.501)

3. Discuss the taxability or otherwise of the following in the hands of the recipient u.s.56(2)(x): -

(i) Akhil HUF received Rs.75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.

(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is Rs.9,00,000.

(iii) [Link] received 100 shares of A Ltd. from his friend as a gift on occasion of his 25th
marriage anniversary. The fair market value on that date was Rs.100 per share. He also received
jewellery worth Rs.45,000 (FMV) from his nephew on the same day.

(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination.
The fair market value of the car is Rs.5,25,000. (illustration 4 – pg. 4.496)
166

4. Examine under which heads the following incomes are taxable: (question 1 – pg. 4.512)
• Rental income in case property held as stock-in-trade for 3 years
• Dividend on shares in case of a dealer in shares
• Salary received by a partner from his partnership firm
• Rental income of machinery
• Winnings from lotteries by a person having the same as business activity
• Salaries payable to a Member of Parliament
• Receipts without consideration
• In case of retirement, interest on employee’s contribution if provident fund is
unrecognized.
• Rental income in case of a person engaged in the business of letting out of properties.

5. Examine the following transactions in the context of Income-tax Act, 1961:

(i) Mr.B transferred 500 shares of R (P) Ltd. to M/s.B Co. (P) Ltd. on 10.10.2019 for Rs.3,00,000
when the market price was Rs.5,00,000. The indexed cost of acquisition of shares for Mr.B was
computed at Rs.4,45,000. The transfer was not subjected to securities transaction tax.

Determine the income chargeable to tax in the hands of Mr.B and M/s.B Co. (P) Ltd. because of
the above said transaction.

(ii) [Link] is employed in a company with taxable salary income of Rs.5,00,000. He received
a cash gift of Rs.1,00,000 from Atma Charitable Trust (registered under section 12AA) in
December 2019 for meeting his medical expenses. Is the cash gift so received from the trust
chargeable to tax in the hands of [Link]? (question 5 – pg. 4.516)
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Answers to ifos

2. Agricultural income in India exempt u.s.10(1)

Agricultural income in Sri Lanka 90,000 (res and ordy res)

Income from a vacant land 72,000

Rent received from sub-letting 3,75,000

Less: Rent payable 1,50,000
Less: Maintenance expenses 12,000 2,13,000

Interest on deposit with a nationalized bank 10,000

Interest on PPF account exempt u.s.10(11)
Interest accrued on NSC (taxable on ‘due’ basis) 8,000

Winning from lottery including tds 1,00,000 (gross amount)

Income from undisclosed sources 1,00,000 (taxable at 60%)

Interest on Income-tax refund 30,000

Dividend from domestic companies exempt u.s.10(34)

Dividend from foreign companies 10,000
INCOME FROM OTHER SOURCES 6,33,000

Note: Purchase of lottery tickets not allowed.

7. The statement is false.

Taxable in the hands of the company. The company shall pay dividend distribution tax @ 34.944%
(30%+12%+4%). Hence fully exempt in the hands of the shareholder u.s.10(34).

8. XYZ pvt ltd is a closely-held company (a company in which public have no substantial interest)
[Link] owns 10% or more equity shares in the company
Loan received is deemed as dividend u.s.2(22)(e).
The company shall pay dividend distribution tax @ 34.944%
Fully exempt in the hands [Link] u.s.10(34)
Taxable amount Rs.1,75,000 (to the extent of accumulated profits)
Subsequent repayment does not alter the position.

9. a. Deemed dividend provisions are attracted only in the case of a company in which public have no
substantial interest. Therefore, the amount of loan received by Rahul from a company in which
public have substantial interest is not deemed as dividend.

b. The lending company (manufacturing company) is a company in which public have no

substantial interest. Therefore, advance received by Rahul is treated as deemed dividend. Deemed
dividend is taxable in the hands of the company @ 34.944%. Taxable amount Rs.4 lakhs (to the
extent of accumulated profits). Fully exempt in the hands of [Link] u.s.10(34)
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Answers to ifos

10. [Link] has 10% or more equity shares in RSL (p) Ltd.
He also has substantial interest (20% or more profit share) in Rakesh & Sons
Loan borrowed by Rakesh & Sons from RSL (p) Ltd shall be deemed as dividend u.s.2(22)(e).
Therefore, taxable in the hands of the company @ 34.944%
Taxable amount Rs.20,00,000 (to the extent of accumulated profits of the company)

1. Received as gift:
Taxable value in the hands of Mr.B is Rs.45,00,000 (SDV > Rs.50,000) under the head “IFOS”

If purchased for inadequate consideration by Mr.B

Taxable value in the hands of Mr.B is Rs.9,00,000 (difference is more than 5% and also more
thanRs.50,000)

2. In the hands of Mr.Y

A. Income from other sources: Taxable value

a. Purchased for inadequate consideration: Rs.6,00,000 (difference is taxable)
(difference is more than 5% and also
more than Rs.50,000)

b. Received as gift: Rs.8,00,000 (SDV > Rs.50,000)

Rs.14 lakhs

B. Capital gains:
Sale consideration Rs.14,00,000
Less: Cost of acquisition Rs.8,00,000 (SDV on the date of gift)
Short term capital gain Rs.6,00,000

3. In the hands of Mr.V

Income from other sources: Taxable value

Received as a gift Rs.60,00,000 (SDV on the date of gift)

Capital gains:
Sale consideration Rs.90,00,000 (section 50C) (SDV > 105% of actual sale price)
Less: Cost of acquisition Rs.60,00,000 (SDV on the date of gift)
Short term capital gain Rs.30,00,000

4. Car is not included in the definition of property for the purpose of section 56(2)(x), therefore, the
same shall not be taxable.

5. Cash gift received on the occasion of Shastiaptha Poorthi (fully taxable) 51,000
Diamond necklace from her sister (relative) not taxable
Gift from friend on the occasion of daughter’s marriage 52,000
Income from other sources 1,03,000
169
Answers to ifos

6. Gift on the occasion of marriage not taxable

Gift from cousin of her mother (not relative) Rs.18,000
Cell phone (not a capital asset) not taxable
Gift from non-relative Rs.25,000
Cash gift from friend Rs.12,000
Income from other sources (aggregate > Rs.50,000) Rs.55,000

7. Gift received from close friend Rs.1,50,000

Jewellery from fiancee Rs.3,00,000
Gift received on the occasion of marriage not taxable
Gift received from father’s sister (relative) not taxable
Gift from family friend (aggregate exceeds Rs.50,000) Rs.25,000
Gift from her brother’s mother-in-law (not relative) Rs.11,000
Gift from sister-in-law (relative) not taxable
Income from other sources Rs.4,86,000
Income from salary (7,20,000 – 50,000) Rs.6,70,000
Gross Total Income Rs.11,56,000

8. Where a closely-held company issues shares to a resident at a premium & issue price exceeds the
fmv., the difference between the issue price & the fmv. shall be treated as ‘income’ in the hands of
the company.

Shares are issued at par. Section 56(2)(viib) is not applicable.

Shares are issued at discount. Section 56(2)(viib) is not applicable.
Shares are issued at a premium. Issue price does not exceed f.m.v. Hence not applicable.
Shares are issued at a premium & Issue price exceeds f.m.v. Section 56(2)(viib) is applicable.
Taxable amount Rs.1,80,000 (9 x 20,000)

9. Where a closely-held company issues shares to a resident at a premium & issue price exceeds the
fmv., the difference between the issue price & the fmv. shall be treated as ‘income’ in the hands of
the company.

i. Shares are issued at par. Hence section 56(2)(viib) is not applicable.

ii. Shares are issued at a premium & Issue price exceeds f.m.v. Section 56(2)(viib) is applicable.
Taxable amount (105-85)*1,00,000 = Rs.20 lakhs
iii. Shares are issued at a premium but issue price does not exceed the fmv. Section 56(2)(viib) is
not applicable.

1. In the hands of Mr.A:

A. INCOME FROM OTHER SOURCES:

Cash gift exceeding Rs.50,000 (fully taxable) 75,000
Bullion (f.m.v exceeding Rs.50,000) (fully taxable) 60,000
Land received as gift (SDV exceeds Rs.50,000) 5,00,000
Shares received as gift (stock-in-trade) not taxable
(gift provisions not applicable for stock-in-trade)
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Answers to ifos

Property purchased for inadequate consideration

(difference between SDV and purchase price) (DOA) 3,00,000(a/c. payee cheque)
Income from other sources 9,35,000

B. CAPITAL GAINS:
Sale value of land at Faridabad 7,00,000
Less: Cost of acquisition being the stamp duty value
on the date of gift when received 5,00,000
Short term capital gains 2,00,000

2. [Link] is a stock broker:

Capital gains in the hands of [Link]

Sale value of building (Section 50C) (SDV on the date of agreement) 150 lakhs
Less: Purchase price of the building 75 lakhs
STCG 75 lakhs

Note: SDV on the date of registration shall be considered, as advance was not received by a/c. payee
cheque or a/c. payee bank draft or ecs.

Income from other sources in the hands of [Link]:

Stamp Duty Value on the date of registration 150 lakhs
Less: Purchased by [Link] from [Link] for 90 lakhs
Income from other sources (diff > Rs.50,000 and > 5%) 60 lakhs

Note: SDV on the date of registration shall be considered, as advance was paid not by way of
account payee cheque or account payee bank draft or through ECS.

3. Taxable:
Sum of money exceeding Rs.50,000 received without consideration from a non-member is taxable
under section 56(2)(x). Daughter of [Link]’s sister is not a member of Akhil HUF.

Not taxable:
Immovable property received without consideration by a HUF from its member is not taxable
under section 56(2) (x). Since Nitisha is a member of HUF, she is a relative of the HUF.

Taxable:
As per section 56(2)(x), in case the aggregate fair market value of property, received without
consideration exceeds Rs.50,000, the whole of the aggregate value shall be taxable. In this case, the
aggregate fair market value of shares (Rs.10,000) and jewellery (Rs.45,000) exceeds Rs.50,000.
Hence, the entire amount of Rs.55,000 shall be taxable.

Not taxable:
Car is not included in the definition of property for the purpose of section 56(2)(x), therefore, the
same shall not be taxable.
171
Answers to ifos

4. Income from house property

Income from other sources
Business or Profession
Business income or Income from other sources
Income from other sources
Income from other sources (no employer-employee relationship)
Income from other sources (gift)
Income from other sources
Business income (as per Supreme Court judgment)

5. (i) In the hands of B Co. (P) Ltd:

Amount taxable in the hands of B Co. (P) Ltd. Rs.2,00,000 (purchased for inadequate consideration).

In the hands of Mr.B:

Unquoted shares cannot be sold at a price less than the fair market value of the share as per section
50CA. Therefore, fair market value shall be deemed to be the full value of consideration.

Long-term capital gain in the hands of Mr.B is Rs.55,000 (Rs.5 lakhs – Rs.4,45,000)

(ii) Not taxable.

The provisions of section 56(2)(x) would not apply to any sum of money or any property received
from any trust or institution registered u.s.12AA. Therefore, the cash gift of Rs.1 lakh received from
a trust registered u.s.12AA, would not be chargeable to tax u.s.56(2)(x) in the hands of Mr. Chezian.
172

OBJECTIVE:

1. DJPA, LLP, resident in India has received dividend of Rs.15 lakhs from R Ltd., an Indian Company,
on which the company R Ltd had paid dividend distribution tax (DDT) u.s.115-O of the Income-tax
Act, 1961. The amount of tax payable by DJPA, LLP in respect of such dividend income for
A.Y.2020-21 shall be:-
a. Rs.5,00,000
b. Rs.10,00,000
c. Rs.52,000
d. Rs.78,000

2. HSP, a LLP had taken Keyman insurance policy on the life of its Managing Partner. The policy got
matured on 13th September, 2019 and amount of Rs.75 lakhs was paid by the Insurers to the
Managing Partner. The amount so received on maturity of the policy by the Managing Partner:
a. Is exempt in full u.s.10(10D)
b. 50% of Rs.75 lakhs is exempt
c. Rs.75 lakhs is taxable
d. Rs.25 lakhs is exempt and balance is taxable

3. Babulal won a prize of Rs.1 lakh in Rajasthan State Lottery and Lottery Department paid him an
amount of Rs.70,000 after deduction of tax at source of Rs.30,000. He had purchased lottery tickets
for Rs.8,000. The amount chargeable to tax in the hands of Babulal under other sources shall be:-
a. Rs.70,000
b. Rs.1,00,000
c. Rs.92,000
d. None of the above

4. [Link], a salaried employee, has taken a house on rent of Rs.12,000 p.m. which was sub-let by
him for Rs.15,000 p.m. He has incurred miscellaneous expenses in relation to sub-let of the house
of Rs.1,000. How much income from the sub-letting of house shall be taxable in the A.Y.2020-21
where the house was taken on rent and also sub-let by him from 1st April, 2019 onwards:
a. Rs.36,000
b. Rs.26,000
c. Rs.1,44,000
d. None of the above

5. Sameer received the following incomes during the p.y.2019-20: Director’s fees Rs.5,000; income
from agricultural land in Pakistan Rs.15,000; rent from let-out of land in Jaipur Rs.20,000; interest
on deposit with HDFC Bank Rs.1,000 and dividend from Indian company Rs.5,000, His income from
others sources is:
a. Rs.41,000
b. Rs.46,000
c. Rs.31,000
d. Rs.26,000
173

6. Akshay received a gift of Rs.35,000 each on 22nd December, 2019 from his three friends. The
amount chargeable to tax in this case would be:-
a. Rs.50,000
b. Rs.1,05,000
c. Nil
d. Rs.55,000

7. A private limited company engaged in manufacturing activity had general reserve of Rs.20 lakhs. It
granted a loan of Rs.5 lakhs to a director who held 13% shareholding cum voting rights in the
company. The said loan was re-paid by him before the end of the year. The amount of deemed
dividend arising out of the above transaction is:-
a. Rs.2,60,000
b. Rs.2,40,000
c. Rs.5,00,000
d. Nil

8. Comfort (Pvt) Ltd issued 10,000 equity shares to Pawan at Rs.18 per share when the fair market
value of each share was determined at Rs.11 per share. The tax implication of the transaction is:-
a. Rs.70,000 taxable as income for Comfort (Pvt) Ltd
b. Rs.20,000 taxable as income for Pawan
c. Rs.10,000 taxable as income for Pawan
d. Nil

9. A member of Parliament received Rs.1,50,000 per month as salary and Rs.4,50,000 as daily
allowance during p.y.2019-20. The taxable amount will be:
a. Salary Rs.17,50,000 after standard deduction
b. Income from profession Rs.22,50,000
c. Income from other sources Rs.18,00,000
d. Nil

10. Amit received Rs.70,000 being winnings from lottery after deduction of tax at source. His gross
winnings from lottery to be included in the total income is:-
a. Nil
b. Rs.1,00,000
c. Rs.70,000
d. Rs.30,000

11. Agni (Pvt) Ltd issued equity shares of Rs.10 each at Rs.40 per share. The fmv of the share on the
date of issue was ascertained as Rs.25 per share. The company issued 1,00,000 equity shares. The
amount liable to tax in the hands of the company would be:
a. Rs.15,00,000
b. Rs.30,00,000
c. Nil
d. Rs.40,00,000
174

12. Mala received a family pension of Rs.15,000 per month during the p.y.2019-20. Also, she was
employed in a private firm where she got a monthly consolidated salary of Rs.20,000 per month.
Her total income chargeable to tax is:
a. Rs.4,20,000
b. Rs.2,40,000
c. Rs.3,55,000
d. Rs.4,05,000

13. Rakesh acquired a motor car for Rs.3,00,000 from his friend (non-relative) when the fmv of the
motor car was Rs.5,00,000. The amount liable to tax in the hands of Rakesh from the transaction is:
a. Rs.3,00,000
b. Rs.2,00,000
c. Rs.1,50,000
d. Nil

14. [Link] solved a crossword puzzle and received Rs.84,000 after deduction of tax at source. His
income from crossword puzzle chargeable to tax would be:
a. Rs.84,000
b. Nil
c. Rs.72,000
d. Rs.1,20,000

15. [Link] received dividend of Rs.80,000 for her equity shareholding in MNO Ltd (a listed
company). She paid interest of Rs.12,500 for the amount borrowed for investment in those shares.
The taxable dividend income would be:
a. Rs.80,000
b. Nil
c. Rs.67,500
d. Rs.92,500

16. Lokesh (age 62) received following gifts on the occasion of his birthday:
i. Cash gift from elder brother Rs.30,000
ii. Gold chain from younger sister market value on the date of gift Rs.38,000
iii. Cash gifts from friends (non-relatives) Rs.45,000
iv. Purchased shares from younger brother for Rs.1 lakh when the market value was
Rs.1,35,000
Amount of income chargeable to tax in respect to the above transactions would be:
a. Rs.1,48,000
b. Rs.1,18,000
c. Rs.80,000
d. Nil

17. Suresh (age 65) won a prize on lottery ticket on 30.09.2019. The prize amount was Rs.5,50,000. He
had bought lottery tickets for Rs.75,000 during the year. Assuming that he had no other income
chargeable to tax for the year, his income tax liability (including cess @ 4%) would be:
a. Rs.1,71,600
b. Rs.30,900
c. Rs.36,050
d. Rs.10,300
175

CHAPTER – 12 DEPRECIATION
Conditions for claiming depreciation:
• Should be the owner of the asset (fractional or joint ownership is also recognized)
• The asset must be put to use in business (not active use but passive use)
• The assets should fall within the eligible classification of assets

Important points:
• Depreciation claim is mandatory (not an option)
• Registration is not compulsory to claim depreciation
• Allowed on the system of “block of assets”
• Allowed on the basis of “written down value” method
• No depreciation is allowed on land
• No depreciation for assets purchased by way of cash exceeding Rs.10,000

Block of Assets:
“Block of Assets” means a group of assets falling within a class of assets comprising,
a) tangible assets, being building, machinery, plant or furniture;

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

franchises or any other business or commercial rights of similar nature, in
respect of which the same percentage of depreciation is prescribed.

note: An assessee may have 9 different blocks of assets as under

Buildings ------ 3 blocks (5%, 10%, and 40%)
Furniture and fittings ------ 1 block 10%
Plant and machinery ------ 4 blocks (15%, 20%, 30%, 40%)
Intangible assets ------ 1 block 25%

Plant includes ships, vehicles, books, scientific apparatus and surgical equipments.
Building includes roads, bridges, culverts, wells and tube wells.
Goodwill an intangible asset, qualifies for depreciation.

How to compute depreciation?

Written down value as on 1.4.2019 xxx
Add: Purchases to the block xxx
xxx
Less: Amount realized through sale, etc. xxx
Less: Depreciation as per section 32 xxx
Written down value as on 1.4.2020 xxx
176

If the asset is acquired during the previous year (first year) and put to use for:
Less than 180 days: Only 50% of the depreciation is allowed
180 days or more: Full depreciation is allowed

note: The above provision is only for year of purchase and not for subsequent years. For
subsequent years, full depreciation is allowed.

note: No depreciation if WDV is reduced to zero or where the block ceases to exist.

In other words, depreciation is allowed only if the following two conditions are satisfied:
a) Block should exist (i.e. there should be an asset in the block)
b) Written down value of the block should not be zero.

On sale of entire block or part of the block:

A. Where ENTIRE block is sold: The result is either STCG or STCL

If the sale value > the opening w.d.v. plus additions made during the year: STCG
If the sale value < the opening w.d.v. plus additions made during the year: STCL

B. Where PART of the block is sold:

If sale value is less than w.d.v. of the block: Depreciation is allowed
If sale value is more than w.d.v. of the block: Short-term capital gain

Depreciation on Actual Cost:

Revaluation of assets does not have any impact under the IT Act. Depreciation is allowed
only on the actual cost of the asset and not on the revalued figure.

Is it mandatory to claim depreciation or is it an option?

Yes it is mandatory for the assessee to claim depreciation. Depreciation shall be allowed
whether or not the assessee has claimed depreciation in computing his total income.

Assets purchased on hire purchase basis will also qualify for depreciation. Depreciation
can be claimed by capitalizing the cash price of the asset.

note: GST paid on purchase of an asset shall not be included in the cost if ITC is availed.

note: Any subsidy or grant received from the Government in connection with purchase
of an asset shall not be included in the cost of such asset.
177

Rates of depreciation:
Computers: 40%; Cars: 15%; Buildings: 10%;
Furniture: 10%; Ships: 20% Residential quarters: 5%;
Aeroplanes: 40%; Books: 40% Plant and machinery (generally): 15%

ADDITIONAL DEPRECIATION on new plant and machinery:

Conditions for claiming additional depreciation – Section 32(1)(iia)

• It should be:
− a manufacturing unit; or
− an assessee engaged in the business of generation or transmission or
distribution of power.

• Rate of additional depreciation is 20% of cost of new plant and machinery acquired
and installed in a previous year

Additional Depreciation is NOT available in the following cases:

• Not available for assets like building or furniture
• Not available for assets like ships or aircrafts
• Should not be a second-hand machinery
• Machinery or plant used in any office premises or any residential premises
• Office appliances or road transport vehicles.
• Machinery or plant where whole of the cost is allowed as deduction in one year.

note: If the new machinery is put to use for less than 180 days: Additional depreciation is
allowed @ 10% (50% of 20%) and balance 10% shall be allowed in the next year.

note: Additional depreciation is allowed every year on the new investment made.

Special Rate of Additional Depreciation:

To whom available: The Assessee should set up an Undertaking for manufacture or
production of any article or thing on or after 01.04.2015.

Location: Backward Areas notified by the Central Government, in the

State of Andhra Pradesh or Bihar or Telengana or West Bengal.

Special rate: Additional depreciation shall be 35%

Condition: The assessee should acquire eligible Machinery during the

period 01.04.2015 to 31.03.2020.

CBDT Circular: Business of printing or printing and publishing amounts to manufacture or

production of any article or thing and is therefore eligible for additional depreciation.
178

Investment Allowance u.s. 32AD for Notified Backward Areas

To whom available: Any Assessee engaged in manufacturing activities
Amount of investment: Any amount in eligible machinery
Period: Between 01.04.2015 to 31.03.2020
Deduction u.s. 32AD: 15% of actual cost

Note: The assesse should set up an Undertaking on or after 01.04.2015 in any notified
Backward Area in the State of AP or Bihar or Telangana or West Bengal.

Other provisions:
Assets not eligible: Second-hand machinery
Assets used in office premises, residential and guest houses
Office appliances including computer and computer software
Any vehicle
Ship or aircraft
Machinery where whole of the cost is allowed as deduction

Lock-in-period: 5 years from the date of installation

Important note: The investment allowance @ 15% under this section is in

addition to the depreciation and additional depreciation.
Further, the investment allowance should not be reduced to
arrive at the written down value of plant and machinery.

Problems:
1. The following are the assets owned by X as on 1.4.2019:
Asset Rate of Depreciation
Building A 10%
Building B 10%
Building C 5%
Building D 40%
Machinery A 15%
Machinery B 15%
Machinery C 40%
Machinery D 15%
Car X 15%
Furniture and fixtures 10%
Patent rights 25%
Goodwill 25%

Classify the assets into different block of assets.

179

2. The w.d.v. of a block (machinery, rate of depreciation 15%) as on 31.03.19 is Rs.3,20,000. A

machinery costing Rs.50,000 was acquired on 01.09.19 but put to use on 01.11.19. During
January, 2020, part of this block was sold for Rs.2,00,000. The depreciation for A.Y.20-21
would be:-

A. 21,750 B. 25,500 C. 21,125 D. None of these

3. A motor car is the only asset in a block. Cost Rs.2,00,000. Rate of depreciation is 15%.
20% is disallowed for estimated personal use. WDV of the block is Rs…………………………..

ASSETS MEANT FOR PERSONAL USE AND LATER INTRODUCED INTO BUSINESS:

Building used for personal purpose and subsequently brought into business use:
The cost of the building as reduced by notional depreciation calculated up to the year of
bringing the asset to business use will be the cost for the purpose of claiming
depreciation.

However, this provision does not apply to any other asset (for eg. car, computer,
furniture) and therefore the original cost will be the cost for the purpose of depreciation.

4. Ram introduced his building costing Rs.10,00,000 acquired in April, 2015 into business
newly commenced by him from 01.04.2019. The actual cost of building for the purpose of
depreciation for the assessment year 2020-21 would be Rs.

A. 10,00,000 B. 5,90,490 C. 6,56,100 D. None of these

5. A car purchased by Mr.S on 10.08.2016 for Rs.5,25,000 for personal use is brought into the
business of the assessee on 01.07.2019, when its market value is Rs.2,50,000. Compute the
actual cost of the car and the amount of depreciation for the Assessment Year 2020-21
assuming the rate of depreciation is 15%.

6. Mr.X furnishes the following details pertaining to the financial year 2019-2020:-

Description Plant Building Patents

Rate of depreciation 15% 10% 25%

Opening balance as on 01.04.2019 14,50,000 25,00,000 15,00,000

Acquired before 30.09.2019 12,00,000 nil 5,00,000
Acquired after 01.12.2019 4,00,000 18,00,000 nil
One of 2 patents transferred in March 2020 nil nil 3,00,000
180

A machinery acquired in July 2019 (original cost Rs.1,50,000) was destroyed by fire and
the assessee received compensation of Rs.50,000 from the insurance company. Newly
acquired building given above includes value of land of Rs.3,00,000. Calculate the
eligible depreciation claim for the assessment year 2020-21.

7. A newly qualified Chartered Accountant [Link], commenced practice and has acquired
the following assets in his office during F.Y.2019-2020 at the cost shown against each item.
Assume that all the assets were purchased by way of account payee cheque. Calculate
depreciation that can be claimed from his professional income for A.Y. 2020-21:

Sl. Description Date of Date when Amount

No. acquisition put to use
1. Computer including
computer software 27.09.19 1.10.2019 35,000

2. Computer UPS 02.10.19 8.10.2019 8,500

3. Computer printer 1.10.19 1.10.19 12,500

4. Books (other than

annual publications
are of Rs.12,000) 1.04.19 1.04.19 13,000

5. Office furniture
(acquired from a
practising CA) 1.04.19 1.04.19 3,00,000

6. Laptop 26.09.19 8.10.19 43,000

SHARING OF DEPRECIATION IN THE CASE OF CONVERSION OR TAKE OVER:

Total depreciation allowable in the year of SUCCESSION to the PREDECESSOR and the
SUCCESSOR is to be restricted to depreciation allowable as if succession had not taken
place, and such depreciation is to be apportioned on the basis of NUMBER OF DAYS
used by each of them.

8. [Link] carrying on business as proprietor converted the same into a limited company by
name Gopi Pipes (P) Ltd. from 01-07-2019. The details of the assets are given below:

Rs.
Block - I WDV of P&M (rate of depreciation @ 15%) on 01.04.2019 12,00,000
Block - II WDV of building (rate of depreciation @ 10%) on 01.04.2019 25,00,000
181

The company Gopi Pipes (P) Ltd. acquired P&M in December 2019 for Rs.10,00,000. It has
been doing the business from 01-07-2019. Compute the quantum of depreciation to be
claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for the assessment year 2020-2021.
Assume that plant and machinery were purchased by way of account payee cheque. Note:
Ignore additional depreciation.

9. M/s.R & Co., a sole proprietary concern is converted into a company, R Ltd. with effect from
29.11.2019. The written down value of assets as on 01.04.2019 is as follows:

Item Rate of depreciation WDV as on 01.04.2019

Building 10% 3,50,000
Furniture 10% 50,000
Plant and Machinery 15% 2,00,000

Further, on 15.10.2019, M/s.R & Co. purchased a plant for Rs.1,00,000 (rate of depreciation
15%). After conversion, the company added another plant worth Rs.50,000 (rate of
depreciation 15%). Compute the depreciation available to: (i) M/s.R & Co. & (ii) R Ltd. for
A.Y.2020-2021

Problems on Additional Depreciation:

10. X Ltd, a manufacturing concern, furnishes the following particulars:

Opening WDV of the block of plant and machinery Rs.5,00,000

Purchase of plant and machinery (put to use before October 1, 2019) Rs.2,00,000
Sale proceeds of plant and machinery which became obsolete
(it was purchased on 01.04.2017 for Rs.5,00,000) Rs.5,000

Further, out of purchase of plant and machinery, machinery of Rs.20,000 has been installed in
office and another machinery of Rs.20,000 was used previously for the purpose of business by
the seller. Compute depreciation and additional depreciation for the A.Y. 2020-21.

11. Mr.A is engaged in the business of generation and distribution of electric power. He always
opts to claim depreciation on written down value for income tax purposes. From the following
details, compute the depreciation allowable for the A.Y.2020-21:

i. Opening WDV of block (15% rate) 42,00,000

ii. New machinery purchased on 12.10.2019 10,00,000
iii. Machinery imported from China on 12.04.2019. This
machine had been used only in China earlier and
the assessee is the first user in India 9,00,000
iv. New computer installed in generation wing of the unit on 15.07.19 2,00,000

All assets were purchased by A/c payee cheque.

182

Normal Depreciation, Additional Depreciation and Investment Allowance:

12. Mr.X, set up a manufacturing unit in Warangal in the state of Telangana on 01.06.2019. It
invested Rs.30 crore in new plant and machinery on 1.6.2019. Further, it invested Rs.25
crore in the plant and machinery on 01.11.2019, out of which Rs.5 crore was second hand
machinery. Compute the depreciation allowable u.s.32. Is Mr.X entitled for any other
benefit in respect of such investment? If so, what is the benefit available?

13. Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars
relating to its manufacturing unit at Chennai, for the year ending 31-3-2020:

(in lakhs)
Opening WDV of Plant and Machinery 20
New machinery purchased on 1-9-2019 10
New car purchased on 1-12-2019 8
Computer purchased on 3-1-2020 4

Additional information:
• All assets were purchased by A/c. payee cheque
• All assets were put to use immediately.
• Computer has been installed in the office.

• During the year ended 31-3-2019, a new machinery had been purchased on 31-10-2018,
for Rs.10 lacs. Additional depreciation, besides normal depreciation, had been claimed
thereon. Depreciation rate for machinery may be taken as 15%.

Compute the depreciation available to the assessee as per the provisions of the Income-tax
Act, 1961 and the WDV of different blocks of assets as on 31-3-2020.

Additional problems:
14. [Link], set up a manufacturing unit of detergent powder in notified backward area on 20th
April, 2019. He purchased the following machineries (falling under 15% block) during the previous
year 2019-2020.
Amount (₹ lakhs)
i. Machinery A, Machinery B and Machinery C from XYZ Limited
on credit (installed on 20th June, 2019) 45

ii. Machinery D from Suyog Limited (installed on 5th September, 2019)

The Invoice was paid through a cash payment on the same day. 25

iii. Machinery E from Den Limited (a second-hand machine dealer)

on 15th December, 2019 (The payment for the purchase
invoice was made through NEFT on 2nd January, 2020) 5

Compute the depreciation allowance u.s.32 for the assessment year 2020-2021.
183

15. Mr.R resides in Delhi. As per new rule in the city, private cars can be plied in the city only
on alternate days. He has purchased a car on 21-09-2019, for the purpose of his business
as per following details:

Cost of car (excluding GST) 12,00,000

Add: Delhi GST at 14% 1,68,000
Add: Central GST at 14% 1,68,000
Total price of car 15,36,000

He estimates the usage of the car for personal purposes will be 25%. He is advised that
since the car has run only on alternate days, half the depreciation, which is otherwise
allowable, will be actually allowed. He has started using the car immediately after
purchase. Determine the depreciation allowable on car for the AY 2020-21, if this is the
only asset in the block. Rate of depreciation may be taken at 15%

If this car were to be used in the subsequent Assessment Year 2021-22 on the same terms
and conditions above, what will be the depreciation allowable? Assume that there is no
change in the legal position under.

16. Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose w.d.v. on 01.04.2019
was Rs.40 lacs. It purchased another asset (second-hand plant) of the same block on
01.11.2019 for Rs.14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with
Shirdi Ltd. with effect from 01.01.2020.

You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2020 assuming that the assets were transferred to Shirdi Ltd. at
Rs.60 lacs. Also assume that P & M were purchased by way of account payee cheque.

17. [Link] is engaged in composite business of growing and curing (further processing)
coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant
information pertaining to the year ended 31.3.2020 are given below:
Rs.
WDV of car as on 1.4.2019 3,00,000
WDV of machinery as on 1.4.2019 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000

Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car running and
maintenance are Rs.50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2020-2021.
Show the WDV of the assets as on 1.4.2020.
184

18. [Link], a proprietor started a business on 01.01.2019 for manufacture of tyres and
tubes for motor vehicles. The manufacturing unit was set up on 01.05.2019. He
commenced his manufacturing operations on 01.06.2019. The total cost of the plant and
machinery installed in the unit is Rs.120 crore. The said plant and machinery included
second hand machinery bought for Rs.20 crore and new machinery for scientific research
relating to the business of the assesse acquired at a cost of Rs.15 crore.

Compute the amount of depreciation allowable under section 32. Assume that all the
assets were purchased by of account payee cheque.

Insurance claim received for damage or destruction of capital assets

19. A manufacturing company was transporting two of its machines from unit ‘A’ to unit ‘B’
(which is at a distance of 100 miles) on September 1, 2019 by a truck. The written down
value of this block of assets as on 01.04.2019 is Rs.4,80,000.

On account of a civil disturbance, both the machines were damaged. The insurance
company paid Rs.5,00,000 for the damaged machineries. On these facts, for submitting the
return of income for the previous year ending March 31, 2020, your advise is sought as to:

a. Whether the damage of machines results in any transfer?

b. How the amounts received from the insurance company are to be treated for
taxability?

Answer:
a. Damage of machines results in transfer – Extinguishment

b. Treatment of amount received from Insurance Company:

Compensation received 5,00,000

Less: Cost of acquisition being w.d.v. as on 01.04.2019 4,80,000
Short-term capital gain 20,000

Note: Inventory converted in to Capital Asset and used for business or profession:
Where inventory is converted or treated as a capital asset and is used for the purpose of
business or profession, the fair market value of such inventory as on the date of its
conversion into capital asset, shall be the actual cost of such capital asset to the assessee.
185

RATES OF DEPRECIATION:

BUILDINGS: RATE
Buildings acquired on or after 1st September, 2002 for installing
machinery and plant forming part of water supply project or water
treatment system and which is put to use for the purpose of
business of providing infrastructure facilities 40%

PLANT AND MACHINERY:

Motors buses, motor lorries, motor taxis used in the business of
running them on hire 30%

Air & Water Pollution control equipments, solid waste control

equipment and solidwaste recycling and resource recovery systems and

Energy Saving Devices

Computers including computer software 40%

Annual publications owned by assessees carrying on a profession

Books used in lending libraries
Books, other than annual publications for professional use

Life saving medical equipments

186

4. Cost of the building in f.y. 2015-16 10,00,000

Less: Notional depreciation @ 10% 1,00,000
W.d.v. as on 01.04.2016 9,00,000
Less: Notional depreciation @ 10% 90,000
W.d.v. as on 01.04.2017 8,10,000
Less: Notional depreciation @ 10% 81,000
W.d.v. as on 01.04.2018 7,29,000
Less: Notional depreciation @ 10% 72,900
W.d.v. as on 01.04.2019 6,56,100

Note: Rs.6,56,100 shall be the cost of the building for the purpose of claiming depreciation for the
previous year 2019-20.

12. Previous year: 19-20

Assessment year: 20-21

15% block
Cost of the assets
put to use for more than 180 days 30 cr
put to use for less than 180 days 25 cr
55 cr
Less: Normal depreciation 6.375 cr (30 c x 15%) + (25 c x 15% x ½)
Less: Additional depreciation 14 cr (30c x 35%) + (25-5) x 35% x 1/2
Written down value as on 01.04.2020 34.625 cr

Note: Mr.X can claim investment allowance u.s.32AD @ 15% on the investment in plant and
machinery excluding investment in second-hand machinery.

Note: Investment allowance @ 15% on Rs.50 crores is Rs.7.50 crores

13. 15% block 40% block

W.D.V. as on 01.04.2019 20,00,000 nil
Add: Purchases
>180 days 10,00,000 nil
<180 days 8,00,000 4,00,000 (half)
38,00,000 4,00,000
Less: Normal depreciation 5,10,000 80,000
Add: Additional depreciation 3,00,000 nil
W.D.V. as on 01.04.2020 29,90,000 3,20,000

Note:
Normal depreciation:
(20,00,000 + 10,00,000) * 15% + (8,00,000 * 15% * 50%) = Rs.5,10,000

Additional depreciation:
(10,00,000 * 20%) + Rs.1,00,000 (relating to balance additional depreciation @ 10% on Rs.10,0000;
machinery purchased last year and put to use for less than 180 days)
187

16. Asset wdv 1.4.19 rate total depreciation For Sai Ltd For Shirdi Ltd
Machinery 40,00,000 15% 6,00,000 4,52,055 1,47,945
Additions 14,40,000 15% 1,08,000 43,629 64,371
7,08,000 4,95,684 2,12,316

No. of days used by: Opening balance Additions

Sai Ltd 275 61
Shirdi Ltd 90 90
Total no of days used 365 151

The price at which the assets were transferred, i.e., Rs.60 lacs, has no tax implication in computing
eligible depreciation. No capital gains in the hands of Sai Ltd as there is no ‘transfer’.

17. Sale value of cured coffee 22,00,000

Less: Expenses incurred for growing coffee 3,10,000
Less: Expenditure for curing coffee 3,00,000
Less: Running and maintenance expenses (80%) 40,000
Less: Depreciation on car (3,00,000 * 15% * 80%) 36,000
Less: Depreciation on machinery (15,00,000 * 15%) 2,25,000
Income from the business of growing and curing coffee 12,89,000

Agricultural income: 12,89,000 * 75%: Rs.9,66,750

Business income: 12,89,000 * 25%: Rs.3,22,250

WDV of the asssets:

Asset WDV as on 01.04.2019 Depreciation WDV as on 01.04.2020
Car 3,00,000 36,000 2,64,000
Machinery 15,00,000 2,25,000 12,75,000

(in crores)
18. Total cost of plant and machinery 120
Less: Used for scientific research 15 (deduction allowed u.s.35)
105
Less: Normal depreciation @ 15% 15.75
Less: Additional depreciation (105-20) * 20% 17
WDV as on 01.04.2020 72.25
188

1. If a block of assets ceases to exist on the last day of the previous year, depreciation admissible for
the block of assets will be:-
a. Nil
b. 50% of the value of the block of assets on the first day of the previous year
c. The total value of the block of assets on the first day of the previous year
d. 50% of the value of the block of assets on the last day of the previous year

2. Vaibhav, deriving business income, owns a car whose WDV as on 1 st April, 2018 was Rs.3,00,000.
This is the only asset in the block of assets with rate of 15%. It is estimated that one-third of the
total usage of the car is for personal use in both years. The WDV of the block of assets as on 31 st
March, 2020 would be:-
a. Rs.2,16,750
b. Rs.2,43,000
c. Rs.2,55,000
d. None of the above

3. Sunil acquired a building for Rs.15 lakhs in June, 2017 in addition to cost of land beneath the
building of Rs.3 lakhs. It was used for personal purposes until he commenced business in June,
2019 and since then it was used for business purposes. The amount of depreciation eligible in his
case for the AY.2020-21 would be:-
a. Rs.1,50,000
b. Rs.75,000
c. Rs.37,500
d. Rs.1,21,500

4. C Ltd., engaged in manufacture acquired machineries for Rs.27 crore in April, 2019. All the
machines were used within 45 days of acquisition. The deduction u.s.32AD for the AY.2020-21 will
be:
a. Rs.4,05,00,000
b. Rs.4,50,00,000
c. Rs.8,55,00,000
d. Rs.8,40,00,000

5. Madhu Ltd. owns machinery (rate 15%) the WDV of which as on 1st April, 2019 is Rs.30 lakhs. Due
to fire, entire assets in the block were destroyed and the insurer paid Rs.25 lakhs. The eligible
depreciation in respect of this machinery is:-
a. Rs.4,50,000
b. Rs.75,000
c. Rs.5,00,000
d. Nil

6. Ekta (P) Ltd., engaged in manufacturing activity, acquired new plant for Rs.100 lakhs for its
manufacturing unit located in Bihar. The acquisition and use was from 1 st June, 2019. The assessee
is eligible for additional depreciation of:-
a. Rs.30 lakhs
b. Rs.20 lakhs
c. Rs.35 lakhs
d. Rs.10 lakhs
189

7. Swan (Pvt) Ltd. acquired machinery for Rs.5,75,000 which included GST of Rs.75,000 eligible for
input tax credit. It borrowed Rs.3 lakhs from a bank for purchase of the said machine. Interest on
bank loan up to the date of usage of machine was ascertained as Rs.25,000. The machine was put to
use from 15th September, 2019. Assume the rate of depreciation at 15%. The eligible amount of
depreciation will be:-
a. Rs.90,000
b. Rs.78,750
c. Rs.86,250
d. Rs.75,000

8. [Link] has surgical equipments whose WDV as on 01.04.2019 was Rs.4,10,000. He acquired some
more equipments in December 2019 for Rs.3,50,000. He sold equipment in March 2020 for
Rs.2,00,000 whose original cost was Rs.1,70,000. The WDV of the block for the purpose of
computing depreciation for the A.Y.2020-21 is:-
a. Rs.5,90,000
b. Rs.5,60,000
c. Rs.7,30,000
d. Rs.4,30,000

9. Rosy Ltd engaged in manufacture of bio-medicines in August, 2019 converted one equipment which
was used for scientific research purposes previously, for regular business use. The original cost of
the plant is Rs.15 lakhs which was acquired in April, 2018. The company had claimed deduction at
150% under section 35(2AB) in the A.Y.2019-20. The plant used for scientific research would be
included in the block of assets now at a value of:
a. Nil
b. Rs.15 lakhs
c. Rs.30 lakhs
d. Rs.12,75,000

10. Vikram Mfg. Co. Ltd located in a backward area in the State of Andhra Pradesh acquired some
machinery for Rs.20 lakhs on 10.08.2019. It was put to use from 1.09.2019. The applicable rate of
depreciation is 15%. How much would be the eligible additional depreciation for the A.Y.2020-21
in respect of the said machinery?
a. Rs.3,00,000
b. Rs.4,00,000
c. Rs.7,00,000
d. Rs.20,00,000

11. Ranga & Co. had as on 1.04.2019 plant and machinery whose WDV was Rs.12 lakhs. It acquired 2
plants on 3.11.2019 for Rs.6 lakhs. The applicable depreciation rate is 15%. The eligible
depreciation including additional depreciation for the A.Y.2020-21 would be:
a. Rs.2,70,000
b. Rs.2,55,000
c. Rs.2,85,000
d. Rs.2,25,000
190

12. The additional depreciation on the factory building constructed during the P.Y.2019-20 and put to
use for manufacturing of garments on 1st Feb., 2020 having cost of Rs.100 lakhs shall be allowed in
A.Y.2020-21 at the rate of:
a. 5%
b. 10%
c. 15%
d. Nil

13. The WDV of a block of asset depreciated @ 15% as on 1st April, 2019 was Rs.3 lakhs. Out of this
block, one machine was sold for Rs.2 lakhs on 1st July, 2019 and a new machine of Rs.6 lakhs added
on 1st August, 2019 was put to use only from 1st September, 2019. The amount of depreciation to be
claimed (in the manner most beneficial to the assessee) in the A.Y.2020-21 shall be:
a. Rs.1,20,000
b. Rs.96,000
c. Rs.1,05,000
d. Rs.60,000

14. Z an assessee incurs expenditure for acquisition of an asset in respect of which payment (or
aggregate of payment made to a person in a day), otherwise than by an account payee cheque/draft
or use of ECS through a bank, exceeds Rs……….., such payment shall not be eligible for claiming the
amount of depreciation on such asset.
a. Rs.50,000
b. Rs.20,000
c. Rs.10,000
d. Rs.2,00,000

15. Zed Ltd. a domestic company engaged in manufacturing activity at Mumbai acquired a plant for Rs.5
lakhs on 7th January, 2020 which is eligible for depreciation @ 15%. It paid Rs.4 lakhs through ECS
system from bank and balance Rs.1 lakh in cash on 23rd February, 2020. The plant was put to use
on 12.03.2020. The amount of depreciation (normal and additional) on this plant for A.Y.2020-21
shall be:
a. Rs.40,000
b. Rs.30,000
c. Rs.70,000
d. Rs.60,000

16. Assets put to use in business for more than 180 days during the previous year consisting
(i) Factory building
(ii) Computers
(iii) Motor vehicles used for chemical purposes; and
(iv) Intangible Assets
shall be depreciated at the rate of ……………………..respectively:

a. 5%, 15%, 30%, 25%

b. 10%, 40%, 30%, 25%
c. 10%, 15%, 25%, 25%
d. 5%, 40%, 15%, 25
191

17. A machine owned by AB and Co. was transferred to XYZ and Co. On 1st January, 2020 for Rs.5 lakhs
of which actual cost and WDV was of Rs.3 lakhs and Rs.2 lakhs respectively. However, the fair
market value on the date of transfer of machine was of Rs.4 lakhs. XYZ and Co. will be allowed
depreciation on such machine by taking value thereof at Rs……………………
a. Rs.5 lakhs
b. Rs.2 lakhs
c. Rs.3 lakhs
d. Rs.4 lakhs

18. Any asset on which depreciation is claimed on the basis of SLM is sold and the amount by which
money payable together with scrap value, fall short of the WDV of such asset, the amount of such
deficiency in value of asset is allowed to be written off in the year of sale as ……………….
a. Balancing charge
b. Terminal depreciation
c. Loss on sale of asset
d. Residual value of asset

19. A company engaged in manufacturing of steel balls acquired computers at a cost of Rs.3 lakhs on
10th July, 2019. The depreciation allowance for the AY 2020-21 under Income-tax Act, 1961 would
be:
a. Rs.1,80,000
b. Rs.1,20,000
c. Rs.3,00,000
d. Rs.45,000
192

Loss under the head How to set-off current If carried forward, No. of years cfd Whether return has
year losses? how to set-off? to be filed in time?

House property Inter-source adjustment Only against HP income 8 Can be a belated return
(SOP or LOP) (no limit)

Inter-head adjustment
(max Rs.2 lakhs)

Business Loss:
Non-speculative business Inter-source adjustment Only against Business income 8 Yes
Inter-head adjustment

Speculative business loss Only against speculative Only against speculative

business income business income 4 Yes

Specified business loss Only against specified Only against specified

under section 35 AD business income business income Indefinitely Yes

Capital Loss:
Short-term capital loss Against any capital gains Only against capital gains 8 Yes

Long-term capital loss Against LTCG only Only against LTCG 8 Yes

LTCL on sale of listed

shares through stock
exchange and STT paid Against LTCG only Only against LTCG 8 Yes

Other Sources:
Loss from the activity of Income from the activity of Income from the activity of
owning and maintaining owning and maintaining owning and maintaining
race horses race horses race horses 4 Yes
193

CHAPTER – 13 SET-OFF AND CARRY-FORWARD OF LOSSES

Step 1: Inter-source Adjustment:
Set-off within the same head of income

Step 2: Inter-head Adjustment:

Set-off against income from any other head of income

Step 3: Carry forward of a loss:

Unabsorbed loss (if any) will be carried forward.

Important points:
Business loss cannot be set-off against salary income.

House property loss can be set-off without any ceiling limit against HP income (inter-source
adjustment). Loss from HP can be set-off up to a maximum of Rs.2 lakhs against other income and
balance loss if any shall be carried forward.

No loss can be set off against casual income. Similarly, loss from gambling, etc can neither be set off
nor carried forward.

Loss of a discontinued business can be carried forward and be set-off against income from any other
business.

Meaning of unabsorbed depreciation: Business profits are insufficient to absorb the entire
amount of depreciation. Unabsorbed depreciation can be carried forward for any number of years
and can be set off against any head of income.

Meaning of Speculative business: Profit or loss made in a business without taking delivery at the
time of purchase (or) giving delivery at the time of sale but the contract is ultimately settled.

Compulsory filing of loss returns (Section 80): In order to claim the benefit of carry forward of a
loss, the assessee should file his loss return before the “due date”. However, loss under the head
“house property” & “unabsorbed depreciation” can be carried forward even if the return is filed after
the “due date” of filing ITR.

Order of set off if business profits are insufficient:

A. Current year capital expenditure on scientific research;
Current year depreciation;
Current year expenditure on family planning

B. Brought forward business loss

C. Unabsorbed depreciation;
Unabsorbed capital expenditure on scientific research;
Unabsorbed family planning expenditure
194

1. From the following information, compute total income of Mr.A for the A.Y.2020-21.

Income from salary (after standard deduction) 6,80,000

Income from house property 40,000
Business loss (-) 1,80,000
Loss from a specified business referred to in section 35 AD (-) 60,000
Short-term capital loss (-) 60,000
Long-term capital gains 1,40,000
Loss from gambling (-) 30,000

2. Mr.A submits the following particulars pertaining to the A.Y. 2020-21:

Income from salary (before standard deduction) 4,40,000

Loss from self-occupied property (-)70,000
Loss from let-out property (-) 1,50,000
Business loss (-)1,00,000
Bank interest (FD) received (gross) 80,000

Compute the total income of Mr. A for the A.Y. 2020-21.

3. Mr.D has the following income for the P.Y. 2019-20:

Income from the activity of owning and maintaining race horses 75,000
Income from textile business 85,000
Brought forward textile business loss 50,000
Brought forward loss from the activity of owning and maintaining
the race horses (relating to A.Y. 2017-18) 96,000

What is the total income in the hands of Mr.D for the A.Y. 2020-21?

4. Compute the gross total income of Mr. F for the A.Y. 2020-21 from the information given below:–

Net income from house property (computed) 1,25,000

Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of shares 56,000
Long term capital loss from sale of property (brought forward from A.Y. 2019-20) (90,000)
Income from growing and manufacturing tea 1,20,000
Dividends from Indian companies carrying on agricultural operations 80,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)
195

5. Miss G is a resident individual, provides the following details of her income/losses for the year
ending 31.03.2020: Compute GTI of Miss G and ascertain the loss to be carried forward.

➢ Salary received as a partner from a partnership firm Rs.7,50,000. The same was allowed
to the firm.
➢ Brought forward business loss from A.Y.18-19 Rs.7,50,000
➢ Loss on sale of shares listed in BSE Rs.3,00,000. Shares were held for 15 months and STT
paid on sale and acquisition.
➢ Long-term capital gain on sale of land Rs.5,00,000
➢ Rs.51,000 received in cash from friends in party
➢ Rs.55,000 received towards dividend on listed equity shares of domestic companies

6. The following are the details of [Link], a resident Indian, relating to the year
ended 31.03.2020:
Income from salaries (after standard deduction) Rs.2,30,000
Loss from house property Rs.2,10,000
Loss from cloth business Rs.2,40,000
Income from speculation business Rs.30,000
Loss from specified business covered by section 35AD Rs.20,000
Long-term capital gain from sale of urban land Rs.3,60,000
LTCL from sale of listed shares in stock exchange (STT paid) Rs.1,10,000
Loss from card games Rs.32,000
Income from betting (gross) Rs.45,000
Life Insurance Premium paid Rs.45,000

Compute the total income and show the items eligible for carry forward.

7. [Link] submits the following details of his income for the assessment year 2020-21.

Income from salary (after standard deduction) Rs.3,00,000

Loss from let out house property Rs.40,000
Income from sugar business Rs.50,000
Loss from iron ore business b/f (discontinued in 2015-16) Rs.1,20,000
Short term capital loss Rs.60,000
Short term capital loss u.s. 111A Rs.10,000
Long term capital gain from shares (STT paid) Rs.10,000
Long term capital gain Rs.40,000
Income received from lottery winning (gross) Rs.50,000
Winnings in card games (gross) Rs.6,000
Bank interest on fixed deposit Rs.5,000
Dividend from domestic companies Rs.5,000
Agricultural income Rs.20,000

Calculate gross total income and losses to be carried forward.

196

8. Mr.X furnishes the following details for the year ending 31.03.2020:

Short term capital gain Rs.1,40,000

Loss from speculative business Rs.60,000
Long term capital gain on sale of land Rs.30,000
Long term capital loss on sale of listed shares (STT not paid) Rs.1,00,000
Income from business of textile (after allowing current year depreciation) Rs.50,000
Income from activity of owning and maintaining race horses Rs.15,000
Income from salary (after standard deduction) Rs.1,00,000
Loss from house property Rs.40,000

Following are the carried forward losses:

a. Losses from activity of owning and maintaining race horses (A.Y.2017-18) Rs.25,000
b. Carried forward loss of textile business of the A.Y.2012-13 Rs.60,000

Compute GTI of Mr.X and the cfd losses for the A.Y. 2020-21.

9. X, a businessman of Delhi, furnishes the following, determine the net income of Mr.X:

Income from house property (computed) Rs.60,000

Business profits (before claiming the following deductions) Rs.34,000

Current depreciation allowance Rs.8,000
Current scientific research expenditure Rs.6,000

Unabsorbed depreciation allowance of the previous year:

16-17 Rs.13,000 and 09-10 Rs.3,500

Unabsorbed business losses of the previous year:

16-17 Rs.9,000 and 09-10 Rs.4,000

10. Compute GTI of Mr.M for the A.Y. 2020-21 from the following particulars:

House property income as computed under the head “IFHP” Rs.2,70,000

Income from growing and manufacturing coffee (cured, roasted & grounded) Rs.1,00,000

Income from textile business before adjusting the following Rs.90,000

(a) Brought forward business loss Rs.70,000
(b) Current year depreciation Rs.30,000
(c) Brought forward unabsorbed depreciation Rs.1,40,000

Short term capital gain – jewellery Rs.1,60,000

Long term capital loss – listed equity shares (STT paid) Rs.40,000
Long term capital gains – Debentures Rs.2,00,000
Dividend on shares held as stock in trade Rs.10,000
Dividend from a company carrying on agricultural operation Rs.12,000
197

11. Mr.R submits the following information for the financial year ending 31.03.2020. He
desires that you should compute the total income and the losses that can be cfd.

He has two houses:

House I: Income after all statutory deductions Rs.72,000
House II: Current year loss (Rs.30,000)

He has three proprietary businesses:

a. Textile business:
Discontinued from 31.12.2019 - Current year loss Rs.40,000
Brought forward business loss of A.Y.2016-17 Rs.95,000

b. Chemical business:
Discontinued from 1.3.2018 - hence no profit or loss Nil
Bad debts allowed in earlier year recovered in this year Rs.35,000
Bfd business loss of the assessment year 2018-19 Rs.50,000

c. Leather business income: Profit for the current year Rs.1,00,000

d. Share of profit in a firm in which he is a partner since 2006 Rs.16,550

Short-term capital gain Rs.60,000

Long-term capital gain Rs.35,000
Contribution to LIC towards premium Rs.10,000

Late filing of income tax return: Effect on losses:

12. A firm filed a return of income for the assessment year 2019-20 on 1st December, 2019 showing
business loss of Rs.3.35 lakhs, unabsorbed depreciation of Rs.1 lakh, loss from house property of
Rs.75,000 and loss of Rs.1.30 lakhs under the head “capital gains”. What is the effect of such
return of income?

Additional sums:
13. Mr. Aditya furnishes the following details for the year ended 31-03-2020:

Loss from speculative business A 25,000

Income from speculative business B 5,000
Loss from specified business covered under section 35AD 20,000
Income from salary (after standard deduction) 3,00,000
Loss from house property 2,50,000
Income from trading business 45,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized stock
exchange (STT paid at the time of acquisition and sale of shares) 1,02,000
198

Following are the brought forward losses:

(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2018-19: Rs.2,000.
(2) Brought forward loss from trading business Rs.5,000 relating to A.Y. 2015-16.

Compute the total income of [Link] and show the items eligible for carry forward.

14. Mr.P, a resident individual, furnishes the following particulars of his income and other details
for the previous year 2019-20:
Income from salary (after standard deduction) 18,000
Net annual value of house property 70,000
Income from business 80,000
Income from speculative business 12,000
Long term capital gain on sale of land 15,800
Loss on maintenance of race horse 9,000
Loss on gambling 8,000

Depreciation under the IT Act, 1961, comes to Rs.8,000 for which no treatment is given above.

The other details of unabsorbed depreciation and bfd losses (pertaining to A.Y.2019-20) are:
Unabsorbed depreciation 9,000
Loss from speculative business 16,000
Short term capital loss 7,800

Compute GTI of Mr.P, for the A.Y.2020-21, and the amount of loss that can or cannot be cfd.

15. Compute the total income of [Link] for the A.Y. 2020-21 from the following particulars:

Income from business before adjusting the following items: 1,75,000

(a) Business loss brought forward from assessment year 2016-17 70,000
(b) Current year depreciation 40,000
(c) Unabsorbed depreciation of earlier year 1,55,000

Income from house property (Gross Annual Value) 4,32,000

Municipal taxes paid 32,000

Mr. Krishna sold a plot at Noida on 12th September, 2019 for a consideration of Rs.6,40,000, which
had been purchased by him on 20th December, 2017 at a cost of Rs.4,10,000

Long-term capital loss on sale of shares sold through recognized stock exchange (STT paid at
acquisition and sale) 75,000

Long-term capital gain on sale of debentures 60,000

Dividend on shares held as stock in trade 22,000
Dividend from a company carrying on agricultural business 10,000
199

16. [Link] Gupta has derived the following income/loss, as computed below, for the previous
year 2019-20:

Loss from let out house property 2,50,000

Loss from non-speculation business 3,20,000

Income from speculation business 12,45,000

Loss from specified business covered u/s 35 AD 4,10,000

Winnings from lotteries (Gross) 1,50,000

Winnings from bettings 90,000
Loss from card games 3,40,000

You are required to compute the total income of the assessee for the assessment year 2020-21,
showing clearly the manner of set-off and the items eligible for carry forward. The return of
income has been filed on 30-7-2020. Nov.2018 IPCC new syllabus

17. Following are the details of incomes/losses of Mr.R for the financial year 2019-20:
(figures in brackets represents losses)

Taxable salary income (computed) Rs.3,60,000

Taxable income from house property (computed)

- from rented house property X Rs.1,20,000
- from rented house property Y (Rs.3,40,000)

Taxable profit from business (computed)

- business P Rs.2,30,000
- business Q (Rs.12,000)
- business R (speculative business) Rs.15,000
- business T (speculative business) (Rs.25,000)

Taxable income from other sources:

- from card games Rs.16,000
- from owning & maintenance of race horses (Rs.7,000)
- Interest on securities Rs.5,000

You are required to determine the gross total income of Mr.R for A.Y.20-21.
Nov.2019 IPCC new syllabus
200
Answers to set-off

7. Income from salary (computed) 3,00,000

Less: Loss from house property (40,000) 2,60,000

Income from sugar (non-specified) business 50,000

Loss from discontinued business (50,000) Nil (balance 70,000 cfd)

Long term capital gain (40 + 10) 50,000

Less: Short term capital loss (total) (50,000) Nil (balance 20,000 cfd)

Casual income:
Winning from lottery (gross) 50,000
Winning from card games 6,000 56,000

Bank interest on fixed deposit 5,000

Gross Total Income 3,21,000

Exempted incomes:
Dividend from domestic companies u.s.10(34)
Agricultural income u.s.10(1)

8. Income from salary (computed) Rs.1,00,000

Loss from house property Rs.40,000 Rs.60,000

Income from business of textile

(after allowing current year depreciation) Rs.50,000
Less: Bfd loss of textile business of A.Y.2012-13 Rs.50,000 Nil (balance cannot be cfd.)

Short term capital gain Rs.1,40,000

Long term capital gain on sale of land Rs.30,000

LTCL on sale of listed shares (STT not paid) Rs.30,000 Nil (balance cfd.)

Income from activity of owning and maintaining

race horses Rs.15,000
Less: Losses from activity of owning and maintaining
race horses (A.Y.2017-18) Rs.15,000 Nil (balance cfd)

Gross Total Income Rs.2,00,000

Note:
Loss from speculative business Rs.60,000 to be carried forward.
201
Answers to set-off

9. Income from house property 60,000

Business profits 34,000

Less: Current year cap exp on scie res 6,000
Less: Current year depreciation 8,000
20,000
Less: Bfd business loss
P.Y.09-10 nil
P.Y.16-17 9,000
11,000
Less: Unabsorbed depreciation of
p.y.09-10 & p.y.16-17 11,000 (5,500)
Net Income 54,500

10. House property income as computed under the head “IFHP” Rs.2,70,000

Income from growing and manufacturing coffee:

Business income (40%) (60% agri income) 40,000
Textile business income: 90,000
1,30,000
Less: Current year depreciation 30,000
Less: Brought forward business loss 70,000
30,000
Less: Unabsorbed depreciation 30,000 (Rs.1,10,000)

Short term capital gain – jewellery Rs.1,60,000

Long term capital gains – Debentures 2,00,000

Less: LTCL on sale of listed shares 40,000 Rs.1,60,000

Gross Total Income Rs.4,80,000

Exempted income:
Dividend on shares held as stock in trade
Dividend from a company carrying on agricultural operation

11. Income from house property (house 1 – house 2) 42,000

Income from business:

Leather business income 1,00,000
Bad debts recovered (taxable) 35,000
1,35,000
Less: Current year business loss (textile) 40,000
Less: Bfd textile business loss AY 16-17 95,000 nil

Chemical business loss shall be carried forward

Share of profit received by the partner is exempt u.s.10(2A)

202
Answers to set-off

Short term capital gain 60,000

Long term capital gain 35,000
Gross Total Income 1,37,000
Less: Section 80 C (life insurance premium paid) 10,000
Total Income 1,27,000

12. Previous year 18-19

Assessment year 19-20

Due of filing return of income in the case of a firm:

Tax Audit u.s.44AB: 31st October, 2019 (extended due date)
Not subject to Tax Audit: 31st August, 2019 (extended due date)

Actual date of filing income-tax return by the firm: 01.12.2019

Late filing of income-tax return (belated return)

Effect on losses:
Business loss cannot be carried forward
Unabsorbed depreciation can be carried forward
Loss from house property can be carried forward
Loss under the head ‘capital gains’ cannot be carried forward

16. Income from speculation business 12,45,000

Less: Loss from non-speculation business 3,20,000
9,25,000
Less: Loss from house property (maximum) 2,00,000 7,25,000

HP loss balance Rs.50,000 can be carried forward

Loss from specified business covered u.s.35AD to be cfd.

Casual income:
Winning from lotteries 1,50,000
Winning from bettings 90,000 2,40,000

Loss from card games can neither be set-off nor cfd.

Total income 9,65,000

203

1. If an individual, having a sales turnover of Rs.60 lakhs files his return of income for the AY 2020-21
after the due date showing unabsorbed business loss of Rs.23,000 and unabsorbed depreciation of
Rs.45,000, he can carry forward to the subsequent assessment years:-
a. Both unabsorbed business loss of Rs.23,000 and unabsorbed depreciation of Rs.45,000
b. Only unabsorbed business loss of Rs.23,000
c. Only unabsorbed depreciation of Rs.45,000
d. Neither unabsorbed business loss nor unabsorbed depreciation

2. If a person is eligible to claim:

(1) Unabsorbed depreciation
(2) Current scientific research expenditure
(3) Current depreciation
(4) Brought forward business loss

The order of priority to set-off would be:-

a. 4, 3, 2 & 1
b. 2, 3, 4 & 1
c. 3, 4, 1 & 2
d. 1, 2, 3 & 4

3. To cfd and set-off losses, a loss return must be filed by the assessee within the stipulated time and
get the loss determined by the Assessing Officer. However, this condition is not applicable to:-
a. Loss from house property
b. Loss from speculation business
c. Loss from discontinued business
d. Loss from capital assets

4. No loss can be set-off against:

a. Income from salaries
b. Income from house property
c. Income from capital gains
d. Winnings from lotteries

5. The amount of depreciation not absorbed in the same year can be carried forward:-
a. For a period of 4 years
b. For a period of 8 years
c. For a period of 6 years
d. Indefinitely

6. [Link] for the previous year has:

i. Business loss of Rs.1,30,000
ii. Income from salary Rs.2,40,000; and
iii. Speculation gain of Rs.1,10,000

His total income for income tax assessment is:

a. Rs.3,50,000
b. Rs.2,20,000
c. Rs.2,40,000
d. Rs.1,10,000
204

7. Mathur Storage (P) Ltd. engaged in cold storage facility has brought forward business loss of Rs.12
lakhs relating to AY 2019-20. During the previous year 2019-20, its income from the said business
is Rs.9 lakhs. It also has profit from trade in food grains of Rs.6 lakhs. The total income of the
company for the AY.2020-21 is:
a. Rs.15 lakhs
b. Rs.6 lakhs
c. Rs.9 lakhs
d. Rs.3 lakhs

8. [Link] is employed in a company. His income under various heads are:

i. Salary Rs.5,60,000
ii. Loss from let out property is Rs.65,000
iii. Loss from business Rs.1,10,000
iv. Loss under the head other sources Rs.30,000

His total income after set off of losses would be:

a. Rs.3,55,000
b. Rs.4,65,000
c. Rs.4,20,000
d. Rs.5,30,000

9. A company has the following:

i. Current scientific research expenditure
ii. Current depreciation
iii. Unabsorbed depreciation
iv. Brought forward business loss

The order sequence of set off is:

a. (i), (ii), (iii), (iv)
b. (iv), (iii), (i), (ii)
c. (i), (ii), (iv), (iii)
d. (iv), (ii), (i), (iii)

10. The loss computed under the head “IFHP” can be set off by inter head adjustment during the same
year from:
a. Any other head of income upto maximum of Rs.2,50,000
b. Any other head of income upto maximum of Rs.3,00,000
c. Any other head of income upto maximum of Rs.5,00,000
d. Any other head of income upto maximum of Rs.2,00,000

11. Anand, a resident individual having computed for the previous year 1st April, 2019 to 31st March,
2020 his business loss at Rs.60,000, short term capital gain on sale of gold of Rs.40,000; long term
capital gain on sale of house property of Rs.3,60,000. The amount of total income to be declared in
the return for the A.Y.2020-21 by Anand shall be:
a. Rs.4,00,000
b. Rs.3,40,000
c. Rs.4,00,000 and carry forward loss of Rs.60,000
d. None of the above
205

CHAPTER – 14 CLUBBING OF INCOME

Transfer of income without transfer of asset:
Transfer of income alone without transfer of asset under an agreement, arrangement,
settlement, etc., will be clubbed in the hands of the transferor.

1. Mr.V has transferred through a duly registered document the income arising from a
godown, to his major son, without transferring the godown. In whose hands will the rental
income from godown be charged?

2. X has a fixed deposit of Rs.5,00,000 in SBI. He instructs the bank to credit the interest on
the deposit @ 7% p.a. to the savings bank account of Y, son of his brother, to help him in his
education. Discuss the tax treatment of the interest income.

Revocable Transfer Vs. Irrevocable Transfer:

Revocable Transfer: Income will be clubbed in the hands of the transferor
Irrevocable Transfer: Income will NOT be clubbed. Taxed in the hands of transferee

“Revocable” means the transferor has the right to take back the asset during the life time of
the transferee.

SALARY INCOME OF SPOUSE:

Salary received by spouse will be clubbed if the following conditions are satisfied:

− If the assessee has “substantial interest” in a concern where the spouse is

employed; and

− If remuneration is received by the spouse from such concern “without any

technical or professional knowledge or experience”

Where both husband and wife have substantial interest and both are getting remuneration
from a concern without any technical or professional knowledge or experience:
Income shall be clubbed in the hands of that spouse whose income is greater without
taking in to account the above remuneration.

Meaning of “Substantial Interest”

In the case of a company:
If an individual beneficially holds (individually or along with his relatives) 20% or more of
equity shares in the company at any time during the previous year.

In any other case:

If an individual is entitled to 20% share in the profits of the concern
206

3. Mr.A is an employee of X Ltd. and he has 25% shares of that company. His salary is
Rs.1,00,000 p.m. Mrs.A is working as a computer software programmer in X Ltd. at a salary
of Rs.70,000 p.m. She is, however, not qualified for the job. Compute the gross total income
of Mr.A and Mrs.A for the A.Y.2020-21 assuming that they do not have any other income.

4. Mr.B is an employee of Y Ltd. and has substantial interest in the company. His salary is Rs.
20,000 p.m. Mrs.B is also working in Y Ltd. at a salary of Rs.12,000 p.m. without any
qualification. Mr.B also receives Rs.30,000 as interest on securities. Mrs.B owns a house
property which she has let out. Rent received from tenant is Rs.6,000 p.m. Compute the
gross total income of Mr.B and Mrs.B for the A.Y. 2020-21.

5. Rohit (a Chartered Accountant) is working as Accounts Officer in Raj (P) Ltd. on a salary of
Rs.50,000 p.m. He got married to [Link] who holds 25% shares of this company. What will be
the impact of salary paid to Rohit by the company in the hands of [Link]:

a. 100% salary to be clubbed

b. 50% salary to be clubbed
c. No amount be clubbed
d. 25% salary to be clubbed

HOUSE PROPERTY TRANSFERRED TO SPOUSE – DEEMED OWNER:

‘Deemed Owner’ provisions shall apply in the following cases:

a. Where a house is transferred to spouse for an inadequate consideration; or
b. Where there is no agreement between them to live apart.

In other words, ‘deemed owner’ provisions shall not apply if the house is transferred for an
adequate consideration or there is agreement between them to live apart.

Note: Where CASH is gifted to spouse and a house is purchased out of the cash received as
a gift then clubbing provisions shall be applicable. Deemed Owner provisions do not apply.

6. State whether “deemed owner” provisions are applicable or not:

X owns two houses:

House 1: It is transferred for an adequate consideration to Mrs.X on 1.12.19.

House 2: X gifts this house to his wife Mrs.X on 15.03.2020. There is no agreement
between them to live separately.

Briefly state the income-tax consequences showing clearly the person in whose hands the
same is chargeable and the quantum in respect of the above transactions.
207

INCOME FROM BUSINESS – CLUBBING PROVISIONS WHEN APPLICABLE?

Amount to be clubbed in the hands of the spouse is determined as follows:

a. In the case of existing business: Ratio that existed as on the 1st day of the
previous year

b. In the case of new business: Ratio that existed as on the 1st day of
commencement of business.

7. Mrs.A started the business in 2017. Her capital in the business as on 1.4.18 stood at
Rs.3,00,000. Mr.A (her husband) gifted a sum of Rs.2,00,000 to Mrs.A on 10.12.18, which
was also invested in the aforesaid business on the same date. She earned a profit of
Rs.1,50,000 and Rs.3,90,000 during the previous year 2018-19 and 2019-20 respectively.
Compute the amount of the income to be clubbed in the hands of Mr.A. If Mr.A gave the
said amount as loan, what would be the amount to be clubbed?

8. Mr.A started a proprietary business on 20.04.2018 with a capital of Rs.5,50,000. His wife
Smt.P gifted Rs.2,00,000 on the occasion of his birthday on 28.07.2018, out of which he
introduced Rs.1,00,000 into his proprietary business.

Details of his income from business are given below:

Financial Year (Loss) Income

2018-19 Rs.1,50,000
2019-20 Rs.4,00,000

He did not withdraw any amount from the business for his personal use. Determine the
amount chargeable to tax in the hands of Mr.A and the amount liable for clubbing in the
hands of his wife Smt.P.

9. [Link] started a proprietary business on 01.04.2018 with a capital of Rs.5,00,000. He

incurred a loss of Rs.2,00,000 during the year 2018-19. To overcome the financial position,
his wife [Link], a software engineer, gave a gift of Rs.5,00,000 on 01.04.2019, which
was immediately invested in the business by [Link]. He earned a profit of Rs.4,00,000
during the year 2019-20. Compute the amount to be clubbed in the hands of [Link]
for the Assessment Year 2020-21.
208

INCOME FROM ASSETS TRANSFERRED TO SPOUSE WITHOUT ADEQUATE

CONSIDERATION (CAPITAL GAINS AND INCOME FROM OTHER SOURCES):

Any income from asset transferred without adequate consideration shall be clubbed in the
hands of the transferor spouse.

When income is NOT clubbed:

a) if the asset has been transferred for an adequate consideration; or
b) if the transfer is in connection with an agreement to live apart (i.e. agreement to live
separately)

Clubbing provisions are attracted only if husband and wife relationship subsist both
at the time of transfer of asset and at the time of accrual of income.

10. Shyam transferred 2,000 shares of X Ltd to [Link] without any consideration. Later, Shyam and
[Link] got married to each other. The dividend income from the shares transferred would be:

a. Taxable in the hands of Shyam both before and after marriage

b. Taxable in the hands of Shyam before marriage but not after marriage
c. To be assessed in the hands of his wife but dividend is exempt from tax
d. Taxable in the hands of Shyam after marriage but not before marriage

Whether income on income (ACCRETION) be clubbed?:

Clubbing provisions will apply only in respect of income which arises out of assets
transferred. However, income on income (accretion/accumulation) will not be clubbed. In
other words, where there is any ACCRETION to the asset transferred, income arising to
the transferee from such accretion will not be clubbed.

Mr.X had transferred Rs.5,00,000; 11% debentures of ABC Ltd to his wife Mrs.X. The interest on
such debentures was received by Mrs.X during the year 2019-20. Later, she invested the same in a
fixed deposit with SBI and earned Rs.4,000 as interest from the deposit. Discuss in whose hands
will interest on debentures and interest on fixed deposit shall be assessed?

11. Ram has gifted an amount of Rs.10,00,000 to his wife Sita without consideration (not in an
agreement to live apart), which was invested by his wife in interest bearing security. She earned
interest of Rs.1,00,000. The interest of Rs.1,00,000 was further invested by her in the business
from which she earned a profit of Rs.15,000. The income which is to be included out of this gifted
amount in the hands of Ram is:

a. Rs.1,15,000
b. Rs.15,000
c. Rs.1,00,000
d. Nil, because gift is to relative
209

12. Aiyer gifted 100 shares to his wife on 1st August, 2014. She received 200 bonus shares from the
company in April, 2018. All the shares were sold to a friend for Rs.1,50,000 in May, 2019. The 100
shares were originally acquired by Aiyer for Rs.5,000. The capital gain on sale of shares in the
month of May, 2019 shall be chargeable to tax:

a. Fully in the hands of Aiyer

b. Fully in the hands of [Link]
c. For 100 shares in the hands of Aiyer and balance 200 shares in the hands of [Link]
d. For 200 shares in the hands of Aiyer and balance 100 shares in the hands of [Link]

13. Kapoor gifted Rs.10,00,000 to his wife Sunita Kapoor on 15th May, 2019. The amount of gift of
Rs.10,00,000 was invested by his wife in debentures of a company on 1st June, 2019 earning
interest @ 12% p.a. The income of interest of ………………….from the debentures earned by Sunita
Kapoor shall be …………with the income of Kapoor in A.Y.2020-21.

a. Rs.1,20,000, not clubbed

b. Rs.1,00,000 clubbed
c. Rs.1,00,000 not clubbed
d. Rs.1,20,000 clubbed

14. On 01.05.2019, [Link] transferred the right to receive rental income arising from a factory
godown owned by him, to his major son [Link], for a period of 10 years. The rental income
derived is Rs.10,000 p.m.

On 12.03.2015, he gifted 2000 shares of face value of Rs.100 each in ITC Ltd., a listed company, to
his wife [Link]. [Link] had purchased them on 19.02.2013 at Rs.110 each.

ITC Ltd. allotted bonus shares in the ratio of 1:1 on 12.04.2017. [Link] sold all shares of the
above company on 15.01.2020 in the National Stock Exchange for a net consideration of Rs.180 per
share, paying the applicable STT thereon.

Discuss how the above items will be treated in the hands of [Link] and [Link] for the
Assessment Year 2020-21 (Computation of income is not required).

SUMMARY OF PROVISIONS:

a. Salary: If the spouse is working in a concern where the tax-payer has

substantial interest and the spouse is not qualified for the job to justify
the remuneration drawn.

b. House property: Deemed owner provisions u.s.27 shall apply

c. Business Income: Ratio as on the first day of the previous year

d. Capital gains: Will be clubbed if the asset has been transferred without adequate
consideration
210

e. Other sources: Will be clubbed if the asset has been transferred without adequate
consideration

Note: Income includes loss. In other words if income is clubbed then

loss should also be allowed to be set-off.

INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE:

Any income from assets transferred (directly or indirectly) to son’s wife without adequate
consideration will be clubbed in the hands of the transferor. However, the relationship of
father-in-law/mother-in-law and daughter-in-law should exist both at the time of transfer
of asset and at the time of accrual of income.

15. Mr.A has gifted a house property valued at Rs.50 lakhs to his wife, Mrs.B, who in turn has gifted the
same to Mrs.C, their daughter-in-law. The house was let out at Rs.25,000 per month throughout the
year. Compute the total income of Mr.A and Mrs.C. Will your answer be different if the said property
was gifted to his son, husband of Mrs.C?

16. [Link] gifted a let-out building which fetches rental income of Rs.10,500 per month to his son’s
wife on 01.11.2019. The municipal tax of Rs.6,000 on the property was paid on 10.01.2020. The
total income from all other sources (computed) amounts to Rs.2,60,000 except from above said
property. His total income chargeable to tax is:

a. Rs.3,11,450
b. Rs.3,44,000
c. Rs.3,80,000
d. Rs.3,33,500

CLUBBING OF INCOME OF A MINOR CHILD:

The income of minor will be included in the income of that parent whose total income is
greater. Income of the minor child will be clubbed after providing exemption u/s.10 (32)
to the extent of Rs.1,500 for each child.

Income of minor child will not be clubbed in the following cases:

a. Income of minor child suffering from any disability specified u/s.80 U
b. Income of minor child on account of any manual work
c. Income of minor child on account of any skill, talent or experience.

17. Baby Meena (age 12) a child artist acted in feature films and earned Rs.3,50,000. The total income
of her father is Rs.5,20,000 and mother is Rs.4,80,000. The minor’s income would be:

a. Chargeable to tax in the hands of father

b. Chargeable to tax in the hands of mother
c. Chargeable to tax in her own hands
d. Fully exempt from tax
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18. All income which arises or accrues to the minor child (not suffering from any disability as specified
u.s.80U) shall be clubbed with the income of parent whose total income excluding the income to be
included of the minor nor derived from any activity involving application of his skill, talent or
specialized knowledge:

a. In the hands of father only

b. In the hands of mother only
c. Equally in the hands of both mother and father
d. With the income of that parent whose total income is greater before clubbing of such
income

19. Choose the correct answer:

Income arising to a minor married daughter is:
a) To be assessed in the hands of the minor married daughter
b) To be clubbed with the income of that parent whose total income is higher
c) Completely exempt from tax
d) To be clubbed with the income of her husband

20. Mr.G has four minor children consisting of 2 daughters and 2 sons. The annual income of 2
daughters was Rs.7,500 and Rs.5,000 and of sons were Rs.5,500 and Rs.1,250 respectively. The
daughter who was having income of Rs.5,000 was suffering from a disability specified u.s.80 U.
Work out the amount of income earned by minor children to be clubbed in the hands of Mr.G.

21. Mr.A has three minor children – two twin daughters and one son. Income of the twin daughters is
Rs.2,000 p.a. each and that of the son is Rs.1,200 p.a. Compute the income, in respect of minor
children, to be clubbed in the hands of Mr.A.

22. Compute total income of Mr.A & Mrs.A from the following information:

Salary Income (computed) of Mrs.A Rs.5,30,000

Income from profession of Mr.A Rs.9,90,000
Income of minor son B from company deposit Rs.15,000
Income of minor daughter C from special talent Rs.72,000
Interest from bank received by C on deposit made out of her special talent Rs.6,000
Gift received by C from friend of Mrs.A Rs.20,000

23. [Link] and his wife [Link] furnish the following information:

Salary income (computed) of [Link] Rs.4,60,000

Income of minor son B who suffers from disability specified u.s. 80 U Rs.1,08,000
Income of minor daughter C from singing Rs.86,000
Income from profession of [Link] Rs.7,50,000
Income of minor married daughter A from company deposit Rs.30,000

Compute the total income of [Link] and [Link] for the A.Y. 2020-21.
212

24. Mr.S is a trader. Particulars of his income and those of the members of his family are given below.
These relate to the previous year ended 31.03.2020:

Income from business – Mr.S Rs.4,90,000

Salary derived from an educational institution by Mrs.S (computed) Rs.3,50,000
Interest on company deposits derived by Master Deep (minor son).
These deposits were made in the name of Deep by his father’s father
6 years ago Rs.12,000

Receipts from sale of paintings and drawings made by minor Deepthi

(minor daughter of Mr. and Mrs.S and a noted child artiste) Rs.60,000

Income by way of lottery earnings by Master Dippu (minor son of Mr.S) Rs.6,000

Discuss whether the above will form part of the assessable income of any individual and also
compute the assessable income of Mr.S.

25. During the p.y. 2019-20, the following transactions are noted from the records of X.

a. X has a fixed deposit of Rs.5,00,000 in State Bank of India. He instructs the bank to credit the
interest on the deposit at the rate of 9% from 01.04.2019 to 31.03.2020 to the savings bank account
of Y, son of his brother, to help him in his education.

b. X holds 75% share in a partnership firm. Mrs.X receives a commission of Rs.25,000 from the firm
for promoting the sales of the firm. Mrs.X possesses no technical or professional qualification.

c. X gifts a flat to Mrs.X on 01.04.2019, during the previous year. The flat generates a net income
(computed) of Rs.52,000 to Mrs.X.

d. X gifts Rs.2,00,000 to his minor son who invested the same in a business and he derived income of
Rs.20,000 from the investment.

e. X’s minor son derives an income of Rs.20,000 through a business activity involving application of
his skill and talent.

During the year X gets a pension of Rs.1,70,000 p.a. He has no other income. Mrs.X receives salary
of Rs.2,90,000 p.a. from a part-time job. Discuss the tax implications of each transaction and
compute the total income of X, Mrs.X and their minor child.

26. [Link] gifted Rs.10,00,000 to his wife, [Link] on 1st January, 2019. Out of the same,
Sangeeta lent Rs.4,00,000 for 6 months to her friend, Bedabati on 1st April, 2019 bearing interest @
20% p.a.

Sangeeta received half-yearly interest of Rs.40,000 on such loan on 1st October, 2019. The aforesaid
interest was immediately invested in debentures of a company. These debentures were sold by
Sangeeta for Rs.70,000 on 31st January, 2020.
213

The balance amount of gift received from [Link] was invested as her capital in a sole
proprietary business, which resulted in a loss of Rs.50,000 for the previous year 2019-20.

[Link]’s own income (computed) consisted of salary of Rs.30 lakhs and income from other
sources of Rs.80,000. The return of income is being filed on 21.12.2020.

Compute the total income of [Link] under suitable heads of income, indicating brief reason
for treatment of all the important items.

CROSS TRANSFERS:
27. [Link] gifted a sum of Rs.6 lakhs to his brother’s wife on 14-6-2019. On 12-7-2019,
his brother gifted a sum of Rs.5 lakhs to [Link]’s wife. The gifted amounts were
invested as fixed deposits in banks by [Link] and wife of [Link]’s brother
on 01-8-2019 at 7% interest. Discuss the consequences of the above under the provisions
of the Income-tax Act, 1961 in the hands of [Link] and his brother.

Solution:
In the given case, [Link] gifted a sum of Rs.6 lakhs to his brother’s wife on 14.06.2019 and
simultaneously, his brother gifted a sum of Rs.5 lakhs to [Link]’s wife on 12.07.2019. The
gifted amounts were invested as fixed deposits in banks by [Link] and his brother’s wife.
These transfers are in the nature of cross transfers.

If two transactions are inter-connected and are part of the same transaction, clubbing
provisions would be attracted.

Accordingly, the interest income arising to [Link] would be included in the total income of
[Link] and interest income arising in the hands of his brother’s wife would be taxable in the
hands of [Link]’s brother, to the extent of amount of cross transfers i.e., Rs.5 lakhs.

This is because both [Link] and his brother are the indirect transferors of the income to
their respective spouses with an intention to reduce their burden of taxation.

Important: However, the interest income earned by his spouse on fixed deposit of Rs.5 lakhs
alone would be included in the hands of [Link]’s brother and not the interest income on the
entire fixed deposit of Rs.6 lakhs, since the cross transfer is only to the extent of Rs.5 lakhs.

Income of HUF:
Where a member of a HUF has converted or transferred his self acquired property into joint family
property for an inadequate consideration, income arising therefrom is taxable as the income of the
transferor-member.

If the converted property is subsequently partitioned among the members of the family, the income
derived from such converted property as is received by the spouse and minor child of the
transferor will be taxable as income of the transferor.
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Answers to clubbing

1. Transfer of income alone without transfer of asset shall be clubbed in the hands of the transferor.
Hence income arising from the godown shall be clubbed in the hands of Mr.V.

2. Transfer of income alone without transfer of asset shall be clubbed in the hands of the transferor.
Hence, interest income of Rs.35,000 on the fixed deposit shall be clubbed in the hands of Mr.X.

4. Mr.B Mrs.B
Salary received from Y Ltd by:
Mr.B (after standard deduction) 1,90,000 nil
Mrs.B (after sd) (clubbed) 94,000 nil

Interest on securities 30,000 nil

Income from house property (computed) nil 50,400

Gross total income 3,14,000 50,400

6. House I: The house is transferred by Mr.X to his wife for an adequate consideration. Therefore,
Mr.X will not be deemed as the ‘owner’ of the house.

House II: The house is transferred by Mr.X to his wife by way of gift and there is no agreement
between them to live apart. Hence Mr.X shall be the ‘deemed owner’ of this house.

7. For the previous year 2018-19:

Profit earned by Mrs.A is Rs.1,50,000
No ratio existed as on first day of the previous year 18-19 (i.e. no ratio on 01.04.2018)
Hence clubbing provisions are not applicable.

Note: Closing balance of Mrs.A is Rs.3 lacs + 2 lacs introduced + profit Rs.1.50 lacs = Rs.6.50 lacs

For the previous year 2019-20:

Profit earned by Mrs.A is Rs.3,90,000
Ratio as on 01.04.2019 between Mr.A and Mrs.A is 20:45 or 4:9
Hence clubbing provisions are applicable.
Amount to be clubbed in the hands of Mr.A Rs.1,20,000 (3,90,000 x 4/13) and Rs.2,70,000 to be
included in the total income of Mrs.A.

Note: If the said amount is given as a loan to Mrs.A; clubbing provisions are NOT applicable.

8. For the previous year 2018-19:

Loss incurred by Mr.A is Rs.1,50,000
No ratio existed as on first day of commencement of business (i.e. no ratio on 20.04.2018)
Hence clubbing provisions are not applicable.

Note: Closing balance of Mr.A is Rs.5.50 lacs +Rs.1 lac introduced - loss Rs.1.50 lacs = Rs.5.00 lacs
215
Answers to clubbing

For the previous year 2019-20:

Profit earned by Mr.A is Rs.4,00,000
Ratio as on 01.04.2019 between Mr.A and Mrs.A is 4:1
Hence clubbing provisions are applicable.

Amount to be clubbed in the hands of Mrs.A Rs.80,000 (4,00,000 x 1/5) and Rs.3,20,000 to be
included in the total income of Mr.A.

9. For the previous year 2018-19:

Loss incurred during the year Rs.2,00,000
No ratio existed as on 01.04.2018
Hence clubbing provisions are not applicable.
Entire loss to be assessed in the hands of [Link]

Note: Closing balance of [Link] is Rs.5 lacs - loss Rs.2 lacs = Rs.3.00 lacs

For the previous year 2019-20:

Profit made during the year Rs.4,00,000
Ratio as on 01.04.2019: 3:5
[Link] Rs.3,00,000 (5 lacs – 2 lacs)
[Link] Rs.5,00,000

Therefore, income to be clubbed in the hands of [Link]: Rs.2,50,000 (4 lacs x 5/8)

Income to be assessed in the hands of [Link]: Rs.1,50,000

14. Transfer of income alone without transfer of asset:

Transfer of income alone without transfer of asset shall be clubbed in the hands of the transferor.
Hence, income arising from the factory godown shall be clubbed in the hands of [Link]. Income
to be clubbed after 30% standard deduction is Rs.84,000.

Income from assets transferred to spouse without adequate consideration:

On sale of original shares:

These shares were gifted by [Link] to his wife. Hence, income arising from an asset transferred
by way of gift shall be clubbed in the hands of [Link].

These shares were held for more than 12 months, hence, long-term capital asset. Therefore, LTCG
to be clubbed.

On sale of bonus shares:

Any income arising from an asset transferred to spouse without adequate consideration shall be
clubbed in the hands of the transferor. However, any income on accretion to the original asset
transferred shall not be clubbed. Bonus shares are directly allotted to [Link]. Bonus shares
are not transferred by [Link]. Hence, LTCG (held for > 12 months) on sale of bonus shares shall
not be clubbed and will be assessed in the hands of [Link].
216
Answers to clubbing

15. House has neither been transferred for adequate consideration nor in connection with an
agreement to live apart. Hence, Mr.A shall continue to be the deemed owner of the house
transferred to his wife. Income from such house property shall be assessed in the hands of Mr.A.

Any income arising from assets transferred to son’s wife (directly or indirectly) without adequate
consideration shall be clubbed in the hands of the transferor. In this case, income of Rs.2,10,000
from let-out property arising to Mrs.C, being son’s wife, would be included in the income of Mr.A,
applying the above provisions (indirect transfer). Such income would, therefore, not be taxable in
the hands of Mrs.C.

In case the property was gifted to Mr.A’s son, the clubbing provisions would not apply, since the son
is not a minor child. Therefore, the income of Rs.2,10,000 from letting out of property gifted to the
son would be taxable in the hands of the son.

24. Mr.S Mrs.S

Income from business 4,90,000 nil
Income from salary nil 3,50,000

Interest on company deposit 12,000

Less: Exempt u.s.10(32) 1,500 10,500 nil

Receipts from sale of painting (skill or talent) nil nil

Income by way of lottery 6,000

Less: Exempt u.s.10(32) nil 6,000 nil
Total Income 5,06,500 3,50,000

Mr.X Mrs.X Minor child

25. Pension / Salary (after standard deduction) 1,20,000 2,40,000 ---
Interest on fixed deposit (clubbed) (note 1) 45,000 --- ---
Commission received by Mrs.X (note 2) 25,000 --- ---
Income from house property (note 3) 52,000 --- ---
Income derived by minor son (note 4) (-) 1,500 18,500 ---
Income of minor son involving skill or talent --- --- 20,000
Total Income 2,60,500 2,40,000 20,000

note 1: Transfer of income without transfer of asset shall be clubbed in the hands of Mr.X

note 2: Commission received by Mrs.X shall be clubbed in the hands of Mr.X. Mr.X has substantial
interest in the firm and Mrs.X possesses no technical or professional qualification.

note 3: Income from house property transferred by way of inadequate consideration or not in an
agreement to live apart, Mr.X shall be the deemed owner.

note 4: Income earned by the minor son not by way of skill or talent shall be clubbed in the hands
of the parent whose income is greater. (Mr.X: Rs.2,42,000 and Mr.X: Rs.2,40,000)
217
Answers to clubbing

26. Computation of total income of [Link] and [Link]

Jayabrata Sangeeta

Income from salary (computed) 30,00,000 nil

Income from other sources 80,000 nil

Interest on loan given to her friend (4 lacs x 20% x 6/12) 40,000 nil (note 1)

Short term capital gain on sale of debentures nil Rs.30,000 (note 2)

Loss from business to be clubbed against other income (50,000) nil (note 3)

Total Income 30,70,000 30,000

Note 1: Any income from asset transferred to spouse without consideration or not in an agreement
to live apart shall be clubbed in the hands of the transferor. Hence Rs.40,000 interest on loan shall
be clubbed in the hands of [Link].

Note 2: Interest on loan received by her shall be clubbed in the hands of [Link]. However,
any income on ACCRETION to the original asset shall not be clubbed and shall be included in the
total income of Sangeeta. Therefore, STCG Rs.30,000 on sale of debentures shall not be clubbed.

Note 3: The entire capital invested in business by Sangeeta is out of gift received from [Link].
Income to be clubbed is based on the ratio that existed as on 1st day of the previous year i.e.
01.04.2019. Since no ratio existed, the entire loss is clubbed in the hands of [Link].
218

CHAPTER – 15 CHAPTER VIA DEDUCTIONS

➢ Deductions under chapter VIA cannot exceed Gross Total Income

➢ Deductions are NOT available against incomes that are taxed at SPECIAL RATE

➢ Deductions can be in respect of certain:

• Expenditure incurred or payment made (eg. 80C, 80D); or
• Incomes (eg. 80IA to 80TTB)

➢ Deduction in respect of certain incomes such as 80-IA, 80-IAB, 80-IAC, 80-IB, 80IBA, 80-IC,
80-IE, 80JJA, 80JJAA, 80LA, 80P, 80PA, 80QQB and 80RRB shall be allowed only if the
return of income is filed before ‘due date’.

Section 80 C Deduction in respect of certain investments, deposits

To whom available: Individuals and HUF (resident or non-resident)

Amount of deduction: Maximum Rs.1,50,000

Condition: Payment should be made on or before 31st March

Investments which qualify for deduction under section 80 C:

• Life insurance premium paid on the life of individual, spouse, children (minor or major;
dependent or not)

Policy issued: Qualifying amount

Before 01.04.2012 20% of sum assured or actual premium (w.e.l)
On or after 01.04.2012 10% of sum assured or actual premium (w.e.l)

Policy on the life of any person suffering from any disability or disease:
Before 01.04.2012 20% of sum assured or actual premium (w.e.l)
Between 2012-13 10% of sum assured or actual premium (w.e.l)
On or after 01.04.2013 15% of sum assured or actual premium (w.e.l)

• Contribution to SPF or RPF out of salary

• Amount deposited in 15-year PPF (individual, spouse and children)
• Amount invested in NSC certificates (VIII issue) and interest accrued thereon
• Repayment of loan taken from banks for construction or purchase of a house
• Stamp duty (registration charges) paid on acquisition of a residential house
• Tuition fees for education of the children in India (max: 2 children) (full time education)
• Investment in units of a tax-saver mutual fund
• Fixed deposit (tax-saver) in a scheduled bank for a period of 5 years
• Amount deposited in five year time deposit scheme in post office
219

• Contribution towards Unit Linked Insurance Plan (ULIP)

• Deposit in Senior Citizen Saving Scheme
• Deposit in Notified Bonds of NABARD
• Contribution to Sukanya Samriddhi Account notified by Central Government

Section 80 CCC: Contribution to the Pension Fund of LIC or any other

Insurance company

To whom available: Individuals only

Amount of deduction: Actual premium paid or Rs.1,50,000 (whichever is less)

Note: The aggregate of section 80C, 80CCC and 80CCD(1) cannot exceed Rs.1,50,000

Section 80 CCD: Contribution to the Notified Pension Scheme (NPS) set-

up by the Central Government

To whom available: Individuals only

U.S. 80CCD(1):
Amount of deduction: a. In case of a salaried employee:
• Amount contributed; or
• 10% of salary (basic + DA (F))
(whichever is less)

b. In case of self-employed:
• Amount contributed; or
• 20% of gross total income; or
(whichever is less)

Important: The aggregate of Section 80C, 80CCC & 80CCD(1) cannot exceed Rs.1,50,000.

A. Additional deduction u.s.80CCD(1B) (apart from Rs.1,50,000):

Section 80CCD(1B) provides for an additional deduction up to Rs.50,000 in respect of amount
contributed under NPS (ATAL PENSION YOJANA has been notified). Hence an assessee can
claim Rs.1,50,000 and also additional Rs.50,000 (in total Rs.2,00,000) to reduce his tax liability.

B. Contribution by the EMPLOYER to the pension fund:

Contribution made by the employer is taxable under the head “salary” and such contribution is
separately allowed as deduction under section 80CCD (2) but not exceeding 10% of salary.
(14% shall be allowed as deduction if employer is Central Government – From A.Y.2020-21).
220

C. ON CLOSURE OR OPTING OUT OF NPS BY ANY ASSESSEE:-

Section 10(12A) provides that any payment from NPS Trust on account of closure or his opting
out of the pension scheme, 60% of the total amount payable shall be exempt from tax.

D. PARTIAL WITHDRAWAL – EXEMPTION ONLY IN CASE OF EMPLOYEES:

Section 10(12B): In case of partial withdrawal by any employee: 25% of amount of
contribution made by the employee shall be exempt.

Note: Difference between 10(12A) and 10(12B): Section 10(12A) exemption is for all
individuals (salaried or self-employed) but Section 10(12B) is only for ‘salaried’ individuals.

Important: However, the amount received by the nominee on the death of the assessee shall
NOT be deemed to be the income of the nominee, hence exempt from tax.

Summary: Amount received on closure or opting out of NPS:

➢ 60% shall be exempt in case of total withdrawal for all assesses – Section 10(12A)
➢ 25% of the amount of contributions made by the employee shall be exempt in case of
partial withdrawal – Sec 10(12B)
➢ Received by nominee on death of the assessee shall be fully exempt

Section 80 CCE – Maximum deduction restricted to Rs.1,50,000:

The aggregate of section 80C, section 80CCC and section 80CCD(1) cannot exceed Rs.1,50,000.
Deduction u.s.80CCD(1B) and 80CCD(2) are separate deductions in addition to Rs.1,50,000.

Important: Section 80CCD(1B) and Section 80CCD(2) are not included in the above limit. They
are separate deductions.

Section 80 D: Health insurance premium paid to Insurance

Company or to Central Government Health Schemes

To whom available: Individuals and HUF (resident or non-resident)

Deduction on account of: a. Medical insurance premium paid; or

b. Expenditure on preventive health check-up; or
c. Medical expenditure on the health of a senior citizen not
having a mediclaim policy.

I. Amount of deduction:

Category I:
For assessee, spouse and Rs.25,000 (or) actual premium paid (whichever is less)
dependent children Rs.50,000 if the assessee is a resident senior citizen
221

Category II:
For parents Separate deduction of Rs.25,000 if policy is taken on the health
of parents (dependant or not). Higher deduction of Rs.50,000
if parent is a resident senior citizen.

Conditions: a. Premium can be paid by any mode EXCEPT cash.

b. Mediclaim Policy can be taken on the health of the
individual, spouse, dependent children and parents.

Premium paid to cover more than one year:

In case of single premium health insurance policies having cover of more than one year, the
deduction is allowed on proportionate basis for the number of years for which health insurance
cover is provided.

II. Deduction in respect of expenditure on preventive health check-up:

The aggregate deduction on account of preventive health check-up of self, spouse, dependent
children, parents cannot exceed Rs.5,000. This is within the overall limit of Rs.25,000 (or)
Rs.50,000 mentioned above.

Important: Expenditure on preventive health check-up can be paid in cash.

III. Medical expenditure incurred on the health of a SENIOR CITIZEN (WHO IS NOT COVERED
BY ANY HEALTH INSURANCE) (as a welfare measure):
Expenditure on medical treatment of senior citizen (resident) for whom health insurance is not
available: Deduction is Rs.50,000 (or) actual medical expenditure (w.e.l.)

Provisions in brief: For his family For his parents

a. Medical Insurance premium Rs.25,000 Rs.25,000 (including expenses)
(no senior citizen)

b. Medical Insurance premium Rs.25,000 Rs.50,000 (including expenses)

(if parent is a senior citizen)

c. Medical Insurance premium Rs.50,000 Rs.50,000 (including expenses)

(if assesse is also a senior citizen)

Section 80 DD Deduction in respect of expenditure incurred for

dependent persons with disability

To whom available: Resident individuals or resident huf

Amount of deduction: Rs.75,000 flat with less than 80% disability

Rs.1,25,000 flat with 80% or more disability
222

note: Actual expenditure is not relevant

note: A Certificate from the medical authority should be produced.

note: ‘Family’ includes spouse, dependant children, dependant parents,

dependant brothers and sisters of the individual.

Section 80 DDB: Deduction in respect of expenditure incurred on medical

treatment of specified diseases or ailments

To whom available: Resident individuals or resident huf

Amount of deduction: Rs.40,000 or actual expenditure (whichever is less)

Rs.1,00,000 or actual expenditure (w.e.l for res. senior citizen)

Condition: The assessee is required to obtain a PRESCRIPTION from a

specialist doctor.

‘Family’ includes the assessee, spouse, dependant children, dependant parents, dependant brothers
and sisters of the individual.

Note: Deduction will be reduced to the extent of amount received from Insurance Company or
towards medical reimbursement from Employer.

Points Section 80DD Section 80DDB

• Assessee should be a: Resident Resident
• Suffering from: Disability Disease
• Actual expenditure: Not relevant Relevant
• Whether assessee is also included: No Yes
• Requirement: Medical certificate Prescription

Section 80 E: Deduction i.r.o. loan taken for higher education

To whom available: Individuals only

Amount of deduction: Actual amount of interest

• The loan can be for the assessee himself or his spouse or his children or a student for whom the
assessee is the legal guardian.
• Loan can be borrowed from any Financial Institution or approved charitable institution
• Deduction is allowed for a period of 8 years
• Higher education in an educational institution can be in India or outside India

“Higher Education” means any course of study pursued after passing the Senior Secondary
Examination or its equivalent from any school or board recognized by the Government.
223

Section 80EE: Deduction i.r.o. interest on loan taken for

acquisition of a residential house

To whom available: Individuals only

Amount of deduction: Maximum Rs.50,000 (in addition to Rs.2,00,000 u.s.24)

Period of benefit: Till the repayment of loan

Conditions:
• The value of residential house does not exceed Rs.50,00,000
• The loan amount does not exceed Rs.35,00,000
• The loan is sanctioned during the previous year 2016-17
• The loan is borrowed from a bank or a housing finance company
• The assessee does not own any residential house on the date of sanction of loan

Note: The above deduction is only in respect of a self-occupied property

Section 80EEA: Deduction i.r.o. interest on loan taken for

acquisition of a residential house

To whom available: Individuals only

Amount of deduction: Maximum Rs.1,50,000 (in addition to Rs.2,00,000 u.s.24)

Period of benefit: From A.Y.2020-21, till the repayment of loan

Conditions:
• The stamp duty value of residential house does not exceed Rs.45,00,000
• The loan is sanctioned during the previous year 2019-20
• The loan is borrowed from a bank or a housing finance company
• The assessee does not own any residential house on the date of sanction of loan

Note: The above deduction is available for both self-occupied and let-out properties

Points Section 80EE Section 80EEA

• Value of the property Rs.50 lakhs Rs.45 lakhs
• Deals with: Actual purchase price Stamp duty value
• Amount of loan: Rs.35 lacs Not specified
• Loan sanctioned during the p.y. 2016-17 2019-20
• Amount of deduction: Rs.50,000 Rs.1,50,000
• Deduction available: Only for self-occupied Both self and let out
224

Problems on Gross Total Income

1. Mr.A, aged 61 years, has earned a lottery income of Rs.1,20,000 (gross) during the previous year
2019-20. He also has a business income of Rs.30,000. He invested Rs.10,000 in Sukanya
Samridhi Scheme and Rs.24,000 in NSC. What is the taxable income of Mr.A for the A.Y.2020-21?

2. Compute the eligible deduction u.s. 80C for A.Y.2020-21 in respect of life insurance premium
paid by Mr.G during the previous year 2019-20, the details of which are given hereunder:

Date of issue Insured in the Actual capital Insc prm

of policy name of sum assured paid
30.03.2012 Self 5,00,000 51,000
01.05.2015 Spouse 1,50,000 20,000
01.06.2017 Handicapped son 4,00,000 80,000

3. Compute deduction allowed u.s.80 C from the following information:

Income from salary (after standard deduction) 10,00,000

Income from other sources 50,000

LIP on his own life (sum assured Rs.1,00,000) (issued on 01.04.2011) 25,000
LIP on the life of his wife 10,000
LIP on the life of his major married son (not dependent on A) 10,000
LIP on the life of daughter suffering from disability (sum assured
Rs.1,00,000; issued on 01.04.2017) 18,000

Contribution to a Recognized Provident Fund 20,000

Amount deposited in 15-year PPF Account 15,000
Contribution to ULIP 10,000
Subscription to units of a Mutual fund notified u/s 10(23D) 25,000
Term deposit for 5 years with a scheduled bank 20,000
Deposit in Sukanya Samriddhi Scheme in the name of his girl child 10,000

Amount incurred on the education of:

Child X: Rs.14,000; Child Y: Rs.7,000; Child: Z Rs.5,000

Repayment of housing loan taken from LIC (principal amount Rs.20,000

and interest Rs.40,000). He had taken loan from LIC for construction of a
residential house which was completed in 1998 and which is being utilized
by A for his own residence. 60,000
225

4. Mr.S, aged 67 years, furnishes the following particulars for the year ending 31.03.2020:

a. LIP paid – Rs.50,000, policy assured for Rs.2,00,000. Policy was taken in 2011.
b. Contribution to PPF – Rs.30,000 in the name of mother
c. Tuition fee payment – Rs.10,000 each for 3 daughters pursuing full time graduation course in
Chennai; Tuition fee for son pursuing MBA in a foreign university – Rs.1,00,000
d. Housing loan principal repayment – Rs.24,000 to HDFC Ltd. This property is under
construction at Chennai as on 31.03.2020
e. Principal repayment of housing loan taken from friend – Rs.50,000, property is self-occupied.
f. Deposit under Senior Citizens Savings Scheme – Rs.50,000
g. Deposits under Post Office Time Deposit Scheme (five years) – Rs.30,000
h. Investment in National Savings Certificate – Rs.30,000
i. Subscription to bonds issued by NABARD Rs.25,000
j. Term Deposits of Rs.25,000 with a Scheduled bank for a period of 5 years. This deposit was
pledged to avail education loan for his son. Compute deduction eligible under section 80 C.

Sec. 80 CCD
5. The basic salary of Mr.A is Rs.1,00,000 p.m. He is entitled to dearness allowance, which is 40% of
basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both Mr.A
and his employer, ABC Ltd., contribute 15% of basic salary to the pension scheme referred to in
section 80 CCD. Explain the tax treatment in respect of such contribution in the hands of Mr.A.

6. [Link], widow of [Link] (who was an employee of M/s. XYZ Ltd.), received Rs.7 lakhs on
1.10.2019, being amount standing to the credit of [Link] in his NPS Account, in respect of
which deduction has been allowed under section 80CCD to [Link] in the earlier previous
years. Such amount received by her as a nominee on closure of the account is deemed to be her
income for A.Y.2020-21. State whether the statement is true or false.

7. Mr.S aged 40 years, a salaried employee of Nirja Ltd. was contributing to National Pension
Scheme Rs.50,000 every year since 2014 and was claiming deduction under section 80CCD. In
December 2019, he opted out of the pension scheme and withdrew a lump sum amount of Rs.
2,00,000. Is the amount so withdrawn taxable? If yes, how much is the taxable amount?

8. Mr.D a salaried employee with HDFC Bank is a subscriber to a National Pension Scheme (NPS).
The accumulated balance in his NPS account as on 31.01.2020 is Rs.50 lakhs. Out of which Rs.30
lakhs were contributed by his employer and the balance of Rs.20 lakhs is his own contribution.
Compute the taxable amount on withdrawal in the following situations:

a. On 29th February, 2020 he had opted out of the scheme and withdrew the entire amount
of Rs.50 lakhs;

b. On 29th February, 2020 he made a partial withdrawal of Rs.20 lakhs out of contribution
made by him to his NPS account.
226

Sec 80 D
9. Mr.A, aged 40 years, paid medical insurance premium of Rs.20,000 during the previous year
2019-20 to insure his health as well as the health of his spouse. He also paid medical insurance
premium of Rs.47,000 during the year to insure the health of his father, aged 63 years, who is not
dependent on him. He contributed Rs.3,600 to Central Government Health Scheme during the
year on his health. He has incurred Rs.3,000 in cash on preventive health check-up of himself
and his spouse and Rs.4,000 by cheque on preventive health check-up of his father. Compute the
deduction u.s.80D for the A.Y.2020-21.

10. Mr.Y, aged 40 years furnishes the following information relating to premium on mediclaim policy
paid by cheque for the year ending 31.03.2020:

a. For self – Rs.15,000; b. for spouse, aged 37 years – Rs.7,000; c. for dependent father aged
63 years – Rs.52,000; d. for dependent mother-in-law, aged 57 years – Rs.5,000

b. Cash paid for preventive health check up of self and spouse – Rs.6,000

Compute deduction u.s.80D. What would be your answer, in case the premium was paid in cash.

11. Mr.X (58 years) is the assessee. Other members of his family are Mrs.X (55 years) and dependent
children Y and Z. Parents of X are resident in India but they have annual income of more than
Rs.25 lakhs from business, rent and interest.

The following expenditure is incurred by X during the previous year 2019-20 for the purpose of
claiming deduction under section 80D:

Particulars: For X, Mrs.X, Y and Z For parents of X

Mediclaim insurance premium by cheque Rs.2,000 Rs.50,000
Paid by cheque to Central Govt Health Scheme Rs.6,000 nil
Cash payment for preventive health check-up Rs.8,000 Rs.7,000

12. Mr.Y, aged 40 years, paid medical insurance premium of Rs.22,000 during the previous year
2019-20 to insure his health as well as the health of his spouse and dependent children. He also
paid medical insurance premium of Rs.33,000 during the year to insure the health of his mother,
aged 67 years, who is not dependent on him. He incurred medical expenditure of Rs.20,000 on
his father, aged 71 years, who is not covered under Mediclaim policy. His father is also not
dependent upon him. He contributed Rs.6,000 to Central Government Health Scheme during the
year. Compute the deduction u.s.80D for the A.Y.2020-21.
227

Sec 80 DD
13. Mr.X is a RESIDENT individual. He deposits a sum of Rs.50,000 with Life Insurance Corporation
every year for the maintenance of his handicapped grandfather who is wholly dependent upon
him. The disability is one which comes under the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995. A copy of the certificate from the medical
authority is submitted. Compute the amount of deduction available u.s.80DD for A.Y.2020-21.

What will be the deduction if Mr.X had made this deposit for his dependant father with severe
disability?

Sec 80 DDB
14. Find out the amount of deduction under section 80DDB:

Name of the taxpayer X Y Z A B

Residential status Res Res Res Res Non-res

Expenditure incurred on
dependent mother 90,000 26,000 70,000 1,00,000 34,000

Age of mother 89 years 59 yrs 64 yrs 63 yrs 65 yrs

Residential status of mother Res Non-res Res Non-res Res

Problems on Section 80 E:

15. X has taken three education loans from a Bank on April 1, 2019. The details are below:

Loan 1 Loan 2 Loan3

For whose education loan was taken X Son of X Daughter of X

Purpose of loan MBA B. Sc. BA

Amount of loan 5,00,000 2,00,000 4,00,000

Annual repayment of loan 1,00,000 40,000 80,000
Annual repayment of interest 20,000 10,000 18,000

Find out the amount deductible under section 80 E for the assessment year 2020-21.
228

Problem on Section 80EE:

16. Mr.A purchased a residential house property for self-occupation at a cost of Rs.45 lakh on
1.4.2017, in respect of which he took a housing loan of Rs.35 lakh from Bank of India @ 9% p.a.
on the same date. The loan was sanctioned on 28th March, 2017. Compute the eligible deduction
in respect of interest on housing loan for A.Y. 2020-21 under the provisions of the Income-tax
Act, 1961, assuming that the entire loan was outstanding as on 31.3.2020 and he does not own
any other house property.

17. The following are the particulars relating to Mr.A and Mr.B, salaried individuals for A.Y.2020-21:

Particulars Mr.A Mr.B

Stamp duty value of the house Rs.45 lakhs Rs.48 lakhs
Amount of loan taken Rs.43 lakhs Rs.45 lakhs
Loan taken from HFC NBFC
Rate of interest 9% p.a. 9% p.a.

Date of sanction of loan 01.04.2019 01.04.2019

Date of disbursement of loan 01.05.2019 01.05.2019

Purpose of loan Purchase of Purchase of

house for self-occ house for self-occ

Compute deduction u.s.80EEA for A.Y.2020-21 assuming no principal repayment is made.

Additional Problems:
18. Mr.A (aged 63), a resident Indian, paid for himself through account payee cheque, health insurance
premium of Rs.2,10,000 for 5 years in one lump sum on 28.03.2020. The eligible amount of
deduction u.s.80D for A.Y.2020-21 would be Rs………………….

a. Rs.50,000 c. Rs.30,000
b. Nil d. Rs.42,000

19. Rajiv paid Rs.1,20,000 by cheque on 05.01.2020 towards medical insurance premium for his
parents who are senior citizens and not dependent on him. The premium was to provide health
insurance cover for 3 years. How much is deductible u.s.80D for the A.Y.2020-21?

a. Nil c. Rs.40,000
b. Rs.40,000 d. Rs.50,000
229
Answers to chapter VIA

3. Income from Salary 10,00,000

Less: Loss from self-occupied property (30,000) (before 01.04.1999) (max)
Income from other sources 50000
------------
Gross total income 10,20,000
Less: Section 80C (note 1) 1,50,000 (maximum)
------------
Total Income 8,70,000
------------

Deduction u.s.80C
Life insurance premium on own life (20% of 1,00,000) or 25,000 (w.e.l) 20,000
Life insurance premium on the life of his wife 10,000
Life insurance premium on the life of his major married son 10,000
LIP on the life of daughter (on or after 01.04.2013) (15% of 1,00,000) or 18,000 (w.e.l) 15,000
Contribution to RPF 20,000
Amount deposited in PPF 15,000
Contribution to ULIP 10,000
Subscription to mutual funds 25,000
Term deposit with a scheduled bank (five years) 20,000
Deposit in Sukanya Samriddhi scheme 10,000
Tuition fee for a maximum of 2 children (x + y) 21,000
Repayment of loan taken for house 20,000
------------
Total 1,96,000
------------

4. Deduction u.s.80C
Life insurance premium (20% of 2 lakhs) or 50,000 (w.e.l) 40,000
Contribution in the name of mother not eligible
Tuition fee for two daughters (10,000 x 2) 20,000
Principal repayment to HDFC (house is under construction) not eligible
Principal repayment to friend not eligible
Deposit under senior citizen scheme 50,000
Deposit under Post Office Time Deposit Scheme 30,000
Investment in NSC 30,000
Subscription to bonds of NABARD 25,000
Term deposit with a bank (pledged for availing education loan) not eligible
--------------
Total 1,95,000
--------------
Deduction u.s.80C (maximum) Rs.1,50,000
230
Answers to chapter VIA

5. Employer and employee contribute (15% of basic) Rs.1,80,000 (15% of Rs.12,00,000)

Tax treatment in the hands of Mr.A

A. Employer’s contribution:
Taxable under the head “Salary” and later allowed as deduction u.s.80CCD(2) but not exceeding
10% of salary (14% if the employer is Central Government). In other words, Rs.1,80,000 is taxable
under the head “salary” and later Rs.1,44,000 is allowed as deduction u.s.80CCD(2). Salary for this
purpose: Basic + DA (forming) 10% of Rs.12,00,000 + Rs.2,40,000. It is a separate deduction (not
included in overall limit of Rs.1,50,000 u.s.80CCE).

B. Employee’s contribution:

Alternative one:
Allowed as deduction u.s.80CCD(1) up to a maximum of 10% of salary. i.e. Rs.1,44,000 (included
within the overall limit of Rs.1,50,000 u.s.80CCE)
Balance Rs.36,000 (1,80,000 – 1,44,000) shall be allowed as deduction u.s.80CCD(1B).

(or)
Alternative two:
The assessee can claim Rs.50,000 u.s.80CCD(1B) and the balance Rs.1,30,000 shall qualify for
deduction u.s.80CCD(1) but not exceeding 10% of salary.

6. The statement is false. Amount received by the nominee, on closure of NPS account on the death of
the assessee, shall not be deemed to be the income of the nominee. Hence, amount received by Mrs.
Sheela would not be deemed to be her income for A.Y. 2019-20.

7. Section 10(12A) provides that any payment from NPS Trust on account of closure or his opting out
of the pension scheme, 60% of the total amount payable to him at the time of closure or his opting
out of the scheme, shall be exempt from tax. 60% of Rs.2,00,000 shall be exempt and balance 40%
shall be taxable. Taxable amount (2,00,000 – 1,20,000) Rs.80,000.

8. (a) As per Section 10(12A), any payment from the NPS account on closure of or opting out of the
scheme is exempt to the extent of 60%. Therefore, the balance 40% shall be taxable. Accordingly,
in the given case, Mr.D shall be subject to tax for Rs.20 lakhs, being 40% of Rs.50 lakhs.

(b) In case, if it is a situation of partial withdrawal (not by way of opting out or closure of account),
sum withdrawn shall be exempt u.s.10(12B) to the extent of 25%. Accordingly, Mr.D shall be
subject to tax for a sum of Rs.15 lakhs being 75% of Rs.20 lakhs. Balance sum of partial withdrawal
Rs.5 lakhs is exempt u.s.10(12B).
231
Answers to chapter VIA

9. Mr.A & Mrs.A Parents

Medical insurance premium 20,000 47,000
Medical insurance premium (CG scheme) 3,600 nil
Expenditure on preventive health check up 3,000 4,000
26,600 51,000

Amount of deduction u.s.80D Rs.75,000

Rs.25,000 + Rs.50,000
(20,000+3,600+1,400) (47,000+3000)

Note: Father need not be dependent. Higher deduction of Rs.50,000 as father is a senior citizen
Expenditure on PHC is Rs.4,400 (1,400 + 3,000), cannot exceed Rs.5,000

10. Mr.Y & Mrs.Y Parents

Medical insurance premium 22,000 52,000
Expenditure on preventive health check up 6,000 nil
28,000 52,000

Amount of deduction u.s.80D Rs.75,000

Rs.25,000 + Rs.50,000
(22,000+3,000)

Note: Expenditure on preventive health check up can be in cash

Family members does not include mother-in-law

11. Mr.X & Mrs.X Parents

Medical insurance premium 2,000 50,000
Medical insurance premium (CG scheme) 6,000 nil
Expenditure on preventive health check up 8,000 7,000
28,000 57,000

Amount of deduction u.s.80D Rs.63,000

Rs.13,000 + Rs.50,000
(2,000+6,000+5,000)

12. Mr.Y & Mrs.Y Parents

Medical insurance premium 22,000 33,000 (mother)
Medical insurance premium (CG scheme) 6,000 nil
Medical expenditure on his father’s health Nil 20,000
28,000 53,000

Amount of deduction u.s.80D Rs.75,000

Rs.25,000 + Rs.50,000
(22,000+3,000)

Medical expenditure on the health of his father not having a mediclaim policy shall qualify for
deduction. Actual expenditure Rs.20,000 or limit Rs.50,000 (whichever is less).
234

Problem on Section 80EEB:

20. The following are the particulars relating to Mr.A and Mr.B, salaried individuals, for A.Y.2020-21:

Mr.A Mr.B
Amount of loan taken Rs.20 lakhs Rs.15 lakhs
Loan taken from NBFC Public Sector Bank

Date of sanction of loan 01.04.2019 30.3.2019

Date of disbursement of loan 01.05.2019 01.05.2019
Purpose of loan Electric vehicle Electric vehicle
for personal use for personal use

Cost of electric vehicle Rs.22 lakhs Rs.18 lakhs

Rate of interest 10% p.a. 10% p.a.

Problems on Section 80 G:
21. Compute deduction u.s. 80 G of the IT Act in respect of Mr.X for A.Y. 2020-21:
Income from salary (computed) Rs.8,00,000. No other income for the assessee.
Deduction eligible under section 80 C Rs.1,50,000
Interest paid on loan taken (p.y. 19-20) from SBI for purchase of Electric vehicle Rs.1,72,000
Donation to Clean Ganga Fund Rs.20,000 by cheque
Donation to Swachh Bharat Rs.20,000 by cheque
Donation to Indira Gandhi Memorial Trust Rs.20,000 by cheque
Donation to a registered charitable trust Rs.60,000 by cheque
Donation to a notified temple Rs.5,000 in cash

22. X (34 years), a resident individual, submits the following particulars:

Business income Rs.2,55,000;
Interest on debentures Rs.50,000;
Long-term capital gains on transfer of gold Rs.4,10,000;
Short-term capital gain on sale of shares taxable u/s.111A Rs.20,000;
Other short-term capital gain Rs.10,000;

Contribution towards PPF Rs.40,000;

Payment of medical insurance premium on own life Rs.28,000 through net banking
Interest paid on loan taken (p.y. 19-20) from NBFC for purchase of Electric vehicle Rs.1,80,000 for
personal use.

Donation to Clean Ganga Fund Rs.4,000;

Donation to Swachh Bharat Kosh Rs.3,000;
Donation to Rajiv Gandhi Foundation Rs.1,000;
Donation to Prime Minister’s Drought Relief Fund Rs.5,000;
Donation to a poor boy for higher education Rs.5,000;
Donation to approved public charitable institution Rs.11,000;
Donation of clothes to an approved institution Rs.5,000;
Donation in cash to National Children Fund Rs.5,000
Donation to a charitable institution for construction of a rest house only for a particular religious
community Rs.25,000. Compute total income.
235

23. [Link] aged 58 years, has gross total income of Rs.9,25,000 comprising of income from salary
and house property. He has made the following payments and investments:

a. Premium paid to insure the life of her major daughter (policy taken on 1.4.2017) (assured
value Rs.1,80,000) – Rs.20,000.
b. Deposit in PPF Rs.1,00,000
c. LIC Pension Fund – Rs.60,000
d. Interest paid on loan taken from NBFC for purchase of Electric vehicle Rs.1,75,000
e. Medical Insurance premium for self – Rs.12,000; Spouse – Rs.14,000.
f. Donation to National Children’s Fund – Rs.25,000 by way of cheque
g. Donation to Jawaharlal Nehru Memorial Fund – Rs.25,000 by way of cheque
h. Donation to approved institution for promotion of family planning – Rs.40,000 by cheque.
i. Donation to a public charitable institution registered under 80G Rs.50,000 by cheque.
Compute the total income of Mr. Shiva for A.Y. 2020-21.

Problems on Section 80 GG:

24. X, a professional tax consultant, based at New Delhi furnishes the following:

Income from profession Rs.8,30,000

Short-term capital gain (covered by section 111A) Rs.4,000
Long-term capital gain Rs.10,000
Winning from lottery (gross) Rs.50,000
Income from other sources Rs.10,000

Medical insurance premium paid by credit card Rs.8,000

Expenses on preventive health check-up on his health paid in cash Rs.7,500
Interest paid on loan taken from SBI for purchase of Electric vehicle Rs.1,72,000 for personal use
Payment of house rent Rs.80,000
Deposit in PPF Rs.70,000

Determine the amount of deduction under section 80 GG.

25. Mr.G (age 42), who is working in Delhi as a Manager of X Ltd. furnishes the following:

Income from salary (computed) Rs.5,64,000; Interest on bank fixed deposit Rs.10,000; Winning
from races (gross) Rs.7,000; He has taken on rent a furnished accommodation in Noida (UP) for
which he pays Rs.6,000 p.m. as rent.

Neither he, nor his wife, nor any minor child, owns any residential accommodation at Delhi or
Noida. However, his wife owns an accommodation in Bangalore, which she is claiming as self-
occupied in her assessment. Compute total income of Mr.G assuming he donates Rs.6,000 to
Swachh Bharat Kosh and deposits Rs.20,000 in Suganya Samridhi Scheme. Compute total income
for A.Y.2020-21.
236

Section 80 GGB: Deduction in respect of contributions made by companies

to any political party or an electoral trust:

To whom available: Indian Company

Amount of deduction: 100% of contribution made

Note: “Contribution” also includes expenditure incurred on

advertisement in a souvenir or a brochure published by a
political party.

Important: No deduction if donations are in cash.

Section 80 GGC: Deduction in respect of contributions made by any person

to political parties or to an electoral trust

To whom available: Any assessee other than an Indian Company

Amount of deduction: 100% of contribution made to a political party or to an

electoral trust

Important: No deduction if donations are in cash.

Section 80 JJAA: Deduction i.r.o new employment

To whom available: All assesses to whom section 44AB applies i.e. turnover in
business exceeds Rs.1 crore

Amount of deduction: 30% of “additional employee cost”.

Period of deduction: 3 Assessment Years

1. “Additional employee”: An employee who is newly employed during the previous year

Who is not an additional employee:

• an employee whose total emoluments exceed Rs.25,000 per month; or

• an employee employed for a period of less than 240 days during the previous year
(150 days in case of an assessee engaged in the business of manufacturing of apparel or
footwear or leather products)

• an employee who does not participate in the recognized provident fund

237

2. “Additional Employee Cost”: Total emoluments paid or payable to additional employees

Condition: Emoluments should not be paid in cash. However, in the case

of first year of a new business the emoluments can be in cash.

Section 80 QQB: Deduction in respect of royalty income of authors:

To whom available: Resident Individual

Conditions: a) Should be a book on literary, artistic or scientific nature

b) Income is derived by way of Royalty or Copyright fee

Amount of deduction: If received by way of lumpsum:

• Royalty income; or
• Rs.3,00,000 (whichever is less)

If not by way of lumpsum:

• Royalty income (not to exceed 15% of the value of books sold)
(before allowing expenses)
• Rs.3,00,000 (whichever is less)

Note: ‘Books’ here does not include journals, guides, newspapers, textbooks for school students,
pamphlets, dairies and other publications of similar nature.

Section 80 RRB: Deduction in respect of royalty income on Patents

To whom available: Resident Individual

Conditions: a) Owner or Co-owner of a Patent

b) Patent should be registered under the Patents Act, 1970

Amount of deduction: 100% of royalty income (or) Rs.3,00,000 (whichever is less)

Section 80 TTA: Deduction i.r.o. interest on deposits in SAVINGS account

To whom available: Individual or HUF

Amount of deduction: Interest income (in aggregate) or Rs.10,000 (whichever is less)

Income eligible: Interest on savings account with a bank

Interest on savings account with a post office
Interest on savings account with a co-operative bank
238

Important:
Deduction under this section is not available for senior citizens. Senior citizens can claim
deduction under section 80TTB.

Interest on post office savings account is also exempt u.s.10(15) up to Rs.3,500 in a single
account and Rs.7,000 in a joint account. Deduction u.s.80TTA is in addition to the amount
exempt.

Section 80 TTB: Deduction i.r.o. interest on deposits in case of a senior

citizen (both SAVINGS & TIME DEPOSIT):

To whom available: A resident senior citizen

Amount of deduction: Interest income (in aggregate) or Rs.50,000 (whichever is less)

Income eligible: Interest on ‘time deposit’ or ‘savings account’ with a:

i. Bank; or
ii. Post Office; or
iii. Co-operative banks

Points Section 80 TTA Section 80 TTB

• To whom available Not allowed for Snr Ctzns Only for senior citizens
• Deals with: Interest on savings a/c only Any interest on savings/fixed/recurring
• Amount of deduction: Rs.10,000 (max) Rs.50,000 (max)

Section 80 U: Deduction in case of an assessee with disability

To whom available: Resident Individuals

Amount of deduction: Rs.75,000 in case of a person with disability

Rs.1,25,000 in case of a person with severe disability

Conditions: Medical Certificate should be produced

239

Problems on Section 80 GGB:

26. During the previous year 2019-20, ABC Ltd., an Indian company,

Contributed a sum of Rs.2,00,000 to an electoral trust by an account payee cheque; and

Incurred an expenditure of Rs.25,000 on advertisement in a brochure of a political party

Is the company eligible for deduction in respect of such contribution/expenditure? If so, what is
the quantum of deduction?

Problems on Section 80 JJAA:

27. X & Co. is a limited liability partnership (date of commencement of business May 1, 2019). It owns
and operates retail outlets in different parts of North India. During the previous year 2019-20, it
appoints the following persons:

Date of appointment No. of employees Designation Salary (per person)

May 1, 2019 8 Storekeeper Rs.18,000 p.m.
June 1, 2019 12 Salesperson Rs.25,000 p.m.
July 1, 2019 4 Supervisor Rs.28,000 p.m.
October 1, 2019 25 Helper Rs.11,000 p.m.

Salary to storekeepers is paid in cash up to December 31, 2019. In other cases, salary is
transferred by use of electronic clearing system through SBI, Noida. Determine the amount of
deduction available u.s.80JJAA for the A.Y. 2020-21 under the following two situations:

1. Turnover of X & Co. for previous year 2019-20 is Rs.6 crores and tax audit is applicable
2. Turnover of X & Co. for previous year 2019-20 is Rs.90 lakhs and tax audit is not applicable.

28. Mr.A has commenced the business of manufacture of computers on 1.4.2019. He employed 350
new employees during the previous year 2019-20, the details of which are as follows:

No. of employees Date of Regular/Casual Monthly emoluments

employment per employee
75 1.4.2019 Regular Rs.24,000
125 1.5.2019 Regular Rs.26,000
50 1.8.2019 Casual Rs.25,500
100 1.9.2019 Regular Rs.24,000

The regular employees participate in provident fund while the casual employees do not.

Compute the deduction, if any, available to Mr.A for A.Y.2020-21, if the profits and gains derived
from manufacture of computers for that year is Rs.75 lakhs and total turnover is Rs.9.16 crores.
What would be your answer if Mr.A has commenced the business of manufacture of footwear on
1.4.2019?
240

Problem on section 80QQB:

29. Mr.X, an author, received a lumpsum royalty of Rs.8,00,000 for assignment of interest in copyright
to a publisher. The book is covered by section 80QQB. Expenditure incurred for earning such
royalty is Rs.2,40,000. Compute deduction available u.s.80QQB for Mr.X for A.Y.2020-21.

30. Mr.Y, an author, received royalty of Rs.90,000 which is 18% on value of books sold. The book is
covered by section 80QQB. Expenditure incurred for earning such royalty is Rs.10,000. The royalty
is not a lumpsum payment. Compute deduction available u.s.80QQB for Mr.Y for A.Y.2020-21.

Problem on Section 80 TTA:

31. Mr.R (42 years) furnishes the following information for the previous year 2019-20:
Income from salary (computed) Rs.24,00,000; Loss from let-out property Rs.2,50,000; LTCG on sale
of listed shares through recognised stock exchange and STT paid Rs.4,00,000; Dividend from
domestic companies Rs.12 lakhs; Interest on savings account with a bank Rs.6,000; Interest on post
office savings account Rs.8,500. Compute total income of the assessee.

Problem on section 80TTB:

32. Mr.A, resident individual aged about 61 years, has earned business income of Rs.1,35,000; lottery
income of Rs.1,20,000 (gross) during the previous year 2019-20. He also has interest on fixed
deposit of Rs.30,000 with banks. He invested an amount of Rs.1,50,000 in Public Provident Fund
account. What is the total income of Mr.A for the A.Y.2020-21.

Problems on Section 80 U:
33. X (age 39 years), suffers from disability (60%) duly certified by a specialist. X is employed as
personal assistant to the Managing Director in a private company on a monthly salary of
Rs.40,000. Besides, X submits the following particulars of income for the year ending 31.03.2020:

Interest on deposits with Indian companies Rs.50,000; Dividend from ABC (Pvt) Ltd. Rs.12 lakhs;
Interest on post office savings bank account Rs.12,000. Determine the taxable income for the
A.Y.2020-21.

34. Examine the following statements with regard to the provisions of the Income-tax Act, 1961:

(a) For grant of deduction u.s. 80-IB, filing of audit report in prescribed form is must for a
corporate assessee; filing of return within the due date is not required.

(b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an
assessee from claiming deduction under section 80-IE.
241

Solution:
(a) The statement is not correct. Section 80AC stipulates compulsory filing of return of income on
or before the due date specified under section 139(1), as a pre-condition for availing the benefit of
deduction, under section 80IA, 80IAB, 80-IB, 80IC, etc.

(b) The statement is correct. As per section 80AC, the assessee has to furnish his return of income
on or before the due date specified under section 139(1), to be eligible to claim deduction under,
inter alia, section 80-IE.

ADDITIONAL PROBLEMS FROM THE INSTITUTE MATERIAL:

35. [Link], aged 42 years, has salary income (computed) of Rs.5,50,000 for the previous year
ended 31.03.2020. He has earned interest of Rs.14,500 on the saving bank account with State
Bank of India during the year. Compute the total income of [Link] for the assessment year
2020-21 from the following particulars:

(i) Life insurance premium paid to Birla Sun life Insurance in cash amounting to Rs.25,000 for
insurance of life of his dependent parents. The insurance policy was taken on 15.07.2017 and the
sum assured on life of his dependent parents is Rs.2,00,000.

(ii) Life insurance premium of Rs.25,000 paid for the insurance of life of his major son who is not
dependent on him. The sum assured on life of his son is Rs.2,50,000 and the life insurance policy
was taken on 30.3.2012.

(iii) Life insurance premium paid by cheque of Rs.22,500 for insurance of his life. The insurance
policy was taken on 08.09.2016 and the sum assured is Rs.2,00,000.

(iv) Premium of Rs.26,000 paid by cheque for health insurance of self and his wife.

(v) Rs.1,500 paid in cash for his health check-up and Rs.4,500 paid in cheque for health check-up
for his parents, who are senior citizens.

(vi) Paid interest of Rs.6,500 on loan taken from bank for MBA course pursued by his daughter.

(vii) A sum of Rs.15,000 donated in cash to an institution approved for purpose of section 80G
for promoting family planning.

36. Examine the following statements with regard to the provisions of the Income-tax Act, 1961:

(i) During the financial year 2019-20, [Link] paid interest on loan availed by him for his son’s
higher education. His son is already employed in a firm. Mr. Amit will get the deduction under
section 80E.

(ii) Subscription to notified bonds of NABARD would qualify for deduction under section 80C.
242

(iii) In order to be eligible to claim deduction under section 80C, investment/contribution/

subscription etc. in eligible or approved modes, should be made out of income chargeable to tax.

(iv) Where an individual repays a sum of Rs.30,000 towards principal and Rs.14,000 as interest
in respect of loan taken from a bank for pursuing eligible higher studies, the deduction allowable
under section 80E is Rs.44,000.

37. Examine the allowability of the following:

(i) Rajan has to pay to a hospital for treatment Rs.62,000 and spent nothing for life insurance or
for maintenance of handicapped dependent.

(ii) Raja, a resident Indian, has spent nothing for treatment in the previous year and deposited
Rs.25,000 with LIC for maintenance of handicapped dependant.

(iii) Rajan has incurred Rs.20,000 for treatment and Rs.25,000 was deposited with LIC for
maintenance of handicapped dependant.

(iv) Payment of Rs.50,000 by cheque to an electoral trust by an Indian company.

38. For A.Y. 2020-21, the GTI of [Link], a resident in India, was Rs.8,18,240 which includes
LTCG of Rs.2,45,000 taxable u.s.112 and STCG of Rs.58,000. The GTI also includes interest
income of Rs.12,000 from savings bank deposits with banks and Rs.40,000 interest on fixed
deposits with banks.

[Link] has invested in PPF Rs.1,20,000 and also pai d a medical insurance premium
Rs.51,000. [Link] also contributed Rs.50,000 to Public Charitable Trust eligible for
deduction u.s.80G by way of an account payee cheque. Compute the total income and tax thereon
of [Link], who is 70 years old as on 31.3.2020.

39. Mr. Rajmohan whose gross total income was Rs.6,40,000 for the financial year 2019-20 furnishes
you the following information:

a. Stamp duty paid on acquisition of residential house (self-occupied) Rs.50,000.

b. Five-year Post-Office Time Deposit Rs.20,000.
c. Donation to a recognized charitable trust Rs.25,000 eligible for deduction u.s. 80G.
d. Interest on loan taken for higher education of spouse paid during the year Rs.10,000.

Compute the total income of Mr. Rajmohan for the Assessment year 2020-21.
243

40. [Link], a resident individual, aged 40 years, suffers from severe disability as certified by
medical authority. He gives the following information for the previous year 2019-20:

He had written a book for Himalaya Publication on “Yoga and its benefits”. A lump sum amount
of royalty income earned in the previous year 2019-20 amounted to Rs.6,00,000. Expenses
incurred for writing the book amounted to Rs.20,000.

His friends gifted a statue of Lord Ganesh to his daughter [Link] (aged 14 years) on the
successful completion of her secondary school. Fair market value of the statue is Rs.55,000.

The following gift was received on the occasion of his son’s (aged 10 years) thread ceremony:
• in-laws-gold chain worth Rs.35,000

He had deposited Rs.50,000 in fixed deposit with Bank of Baroda in the name of his son in March
2019. Interest earned on such deposit Rs.5,000.

He donated Rs.5,000 in cash to Swabhiman, a NGO set up for the destitute (the association was
registered under section 80G of the Income-tax Act, 1961).

He paid life insurance premium on his life Rs.10,000 (sum assured Rs.1,00,000)

Compute the gross total income of [Link] for the Assessment Year 2020-21.

Answer:

Income from other sources:

Royalty received 6,00,000
Less: Expenses 20,000 5,80,000

Gift of Statue (sculpture) 55,000

Less: Exempt u.s.10(32) 1,500 53,500

Value of gold chain received from relative not taxable

Interest on fixed deposit 5,000

Less: Exempt u.s.10(32) 1,500 3,500

Gross Total Income 6,37,000

Less: Chapter VIA deductions:

Section 80C 10,000
Section 80G (in cash) not eligible
Section 80QQB (5,80,000 or 3 lacs) 3,00,000
Section 80U (severe disability) 1,25,000 4,35,000

Total Income 2,02,000

244
Answers

26. Contribution of Rs.2,00,000 to an Electoral Trust:

Amount of deduction u.s.80GGB: 100% of contribution made. Rs.2,00,000

Expenditure on advertisement in a souvenir published by a political party

Such expenditure shall be disallowed while computing business income of ABC Ltd. However, it
qualifies for deduction u.s.80GGB. Amount of deduction: 100% of expenditure incurred. Rs.25,000

28. Amount of deduction u.s.80JJAA: 30% of additional employee cost

Additional employees Additional employee cost

Regular 75 Rs.2,16,00,000
Regular 125 Nil (salary exceeds Rs.25,000 p.m.)
Casual 50 Nil (do not participate in provident fund)
Regular 100 Nil (employed for less than 240 days)

Amount of deduction for A.Y.2020-21: 30% of Rs.2,16,00,000: Rs.64,80,000

Case B: Business of manufacture of FOOTWEAR:

Amount of deduction u.s.80JJAA: 30% of additional employee cost

Additional employees Additional employee cost

Regular 75 Rs.2,16,00,000
Regular 125 Nil (salary exceeds Rs.25,000 p.m.)
Casual 50 Nil (do not participate in provident fund)
Regular 100 Rs.1,68,00,000 (employed for > 150 days)

Total Rs.3,84,00,000

Amount of deduction for A.Y.2020-21: 30% of Rs.3,84,00,000: Rs.1,15,20,000

32. Income from business 1,35,000

Interest on fixed deposit 30,000
Winning from lottery (gross) 1,20,000
Gross Total Income 2,85,000
Less: Chapter VIA deductions:
Section 80C – PPF 1,50,000
Section 80TTB – int 30,000 1,65,000 (chapter VIA deductions not
Total income 1,20,000 available against lottery income)
245
Answers

35. Total Income for [Link] for A.Y.2020-21

Income from salary (after standard deduction) 5,50,000
Interest on savings account with bank 14,500

Gross Total Income 5,64,500

Less: Deduction under chapter VIA

Section 80C
Insurance premium on parents life nil
On major son (20% or 25,000) (w.e.l) 25,000
Own life (10% or 22,500) (w.e.l) 20,000

Section 80D
Self and spouse
Medical insurance premium 26,000
Expenditure on preventive health check-up 1,500 25,000

Parents
Expenditure on preventive health check-up 4,500 4,500 29,500

Section 80E (Interest on loan) 6,500

Section 80TTA (interest on savings account with a bank) 10,000

------------
Total income 4,73,500
------------

36. The statement is correct. Deduction is allowed u.s.80E. Son need not be dependant.
The statement is correct. Qualifies for deduction u.s.80C
The statement is not correct. Payment need not be made out of taxable income
The statement is not correct. Deduction u.s.80E Rs.14,000 (to the extent of interest paid)

37. The deduction of Rs.75,000 under section 80DD is allowed in full, irrespective of the amount of
expenditure incurred by the assessee. If the expenditure is incurred in respect of a dependant with
severe disability, the deduction allowable is Rs.1,25,000.

The assessee is eligible to claim Rs.75,000 as deduction under section 80DD, irrespective of the
amount deposited with LIC. In the case of dependant with severe disability, the deduction allowable
is Rs.1,25,000.

Section 80DD allows a deduction of Rs.75,000 irrespective of the actual amount spent on
maintenance of handicapped dependent and/or actual amount deposited with LIC. Therefore, the
deduction will be Rs.75,000 even though the total amount incurred/deposited is Rs.45,000. If the
dependant is a person with severe disability the quantum of deduction is Rs.1,25,000.

Amount paid by an Indian Company to an electoral trust is eligible for deduction under section 80GGB
from gross total income, since such payment is made otherwise than by way of cash.
246

1. The maximum possible amount of deduction U/s.80DDB for senior citizen is —

(a) ₹ 75,000
(b) ₹ 1,25,000
(c) ₹ 1,00,000
(d) ₹ 60,000

2. The following is not allowed as deduction u/s.80TTA

(a) Interest on deposits in a savings account with bank up to ₹ 10,000
(b) Interest on time deposits with bank up to ₹ 10,000
(c) Interest on deposits in a savings account with post office up to ₹ 10,000
(d) Interest on savings account with co-operative society

3. The maximum amount of deduction u/s.80U allowed to a person with 80% or more of one or
more disabilities is
(a) ₹ 40,000
(b) ₹ 60,000
(c) ₹ 50,000
(d) ₹ 1,25,000

4. An Indian resident patentee is entitled to a deduction u/s 80RRB to the extent of –

(a) 100% of such income
(b) 50% of such income
(c) 100% of such income or ₹ 3,00,000 whichever is less
(d) 50% of such income or ₹ 3,00,000 whichever is more

5. Sahil works in a technology company. On 1st January, 2019, he took a loan of ₹ 2,40,000 from
his company for education of his daughter. During the year 2019-2020, he paid an interest
of ₹ 46,000 towards the said loan and repaid principal component of ₹ 10,000. The
deduction that he can claim u/s.80E would be —
(a) Nil
(b) 24,000
(c) 46,000
(d) 10,000

6. Monetary limit for deduction in respect of royalty on patents received by a resident

individual is —
(a) 1,00,000
(b) 3,00,000
(c) 5,00,000
(d) Nil

7. Raghu's father is dependent on him and suffering with 90% disability. Raghu has incurred
an amount of ₹ 72,500 in maintaining and medical treatment of his father. The deduction he
claim in his income-tax return for AY 2020-2021 is:
(a) ₹ 72,500
(b) ₹ 50,000
(c) ₹ 1,25,000
(d) None of the above

246
247

8. Bharat, engaged in business, claimed that he paid ₹ 10,000 per month by cheque as rent for
his residence. He does not own any residential building. His total income computed before
deduction under section 80GG is ₹ 3,40,000. The amount he can claim as deduction under
section 80GG is —
(a) ₹ 60,000
(b) ₹ 86,000
(c) ₹ 1,20,000
(d) ₹ 85,000

9. Rajan paid ₹ 25,000 to LIC of India for the maintenance of his disabled son and incurred ₹
15,000 for the treatment of his handicapped wife who is working in State Bank of India. The
deduction allowable to him u.s. 80DD is —
(a) ₹ 15,000
(b) ₹ 25,000
(c) ₹ 50,000
(d) ₹ 75,000

10. Deduction in respect of interest on savings account u.s.8OTTA shall be allowed with respect
to saving account with —
(a) Bank
(b) Cooperative society
(c) Post office
(d) All of the above

11. When a person suffers from severe disability the quantum of deduction u.s.80U is –
(a) ₹ 50,000
(b) ₹ 75,000
(c) ₹ 1,25,000
(d) ₹ 1,00,000

12. U.s.80QQB, the maximum deduction in respect of royalty is allowed up to –

(a) ₹ 1,00,000
(b) ₹ 1,50,000
(c) ₹ 2,50,000
(d) ₹ 3,00,000

13. Ragunath repaid during previous year 2019-20 education loan of ₹ 60,000 and interest on
education loan of ₹ 18,000 taken from Punjab National Bank for his son to pursue MS in
Germany. The loan was taken in the financial year 2011-2012 and the payment commenced
from financial year 2012-2013. The amount eligible for deduction under section 80E for the
assessment year 2020-2021 is:

(a) ₹ 60,000
(b) ₹ 78,000
(c) ₹ 18,000
(d) Nil

247
248

14. Shravan engaged in business paid monthly rent of ₹ 5,000 by cheque for his residence during
the previous year 2019-2020. His adjusted total income is ₹ 3,40,000. The amount eligible
for deduction under section 80GG is:
(a) ₹ 86,000
(b) ₹ 60,000
(c) ₹ 24,000
(d) ₹ 85,000

15. [Link] acquired a house property for ₹ 8 1akhs and paid stamp duty and registration fee
of ₹ 80,000. He borrowed housing loan and repaid principal of ₹ 60,000 and interest of ₹
20,000. The amount eligible for deduction u.s.80C would be:
(a) ₹ 80,000
(b) ₹ 60,000
(c) ₹ 1,00,000
(d) ₹ 1,40,000

16. Mr. Uday is a resident individual having patent registered on 1.7.2015 under the Patents Act,
1970. He received ₹ 5 lakhs by way of royalty from ABC Ltd. during the financial year 2019-
2020. The quantum of royalty eligible for deduction would be
(a) ₹ 5 lakhs
(b) ₹ 3 lakhs
(c) ₹ 1 Iakh
(d) ₹ 2 lakhs

17. [Link] earns monthly rental income of ₹ 60,000 from a house property. He suffers from
severe disability and has obtained certificate from the prescribed medical authority. He has
not incurred any expenditure towards treatment of severe disability. His total income
chargeable to tax after deduction u.s.80U would be:
(a) 3,79,000
(b) 4,29,000
(c) 5,04,000
(d) 7,20,000

18. Mr. Baskar a person with disability referred to in section 80U is employed in a bank. He paid
₹ 50,000 as premium on life insurance policy taken on himself before 01.04.2012 and whose
sum assured is ₹ 4 lakhs. The amount of premium eligible for deduction u.s.80C would be:
(a) ₹ 40,000 (10% of sum assured)
(b) ₹ 50,000
(c) Nil (since it exceeded 10%)
(d) None of the above.

19. [Link] engaged in business wants to deposit in pension fund of Life Insurance
Corporation of India. The maximum amount of contribution eligible for deduction from total
income is:

(a) ₹ 10,000
(b) ₹ 50,000
(c) ₹ 1,00,000
(d) ₹ 1,50,000

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249

20. Sudhan Ltd. incorporated in April 2019 commenced commercial production from 1.6.2019.
It deployed 100 employees who were employed for 260 days during the year and recruited
50 casual workmen who were employed for 100 days during the financial year 2019-2020.
The salary paid to 100 employees was ₹ 25 lakhs and salary paid to casual workmen was ₹ 6
lakhs. The quantum of deduction u.s. 80JJAA is:
(a) ₹ 7.50 lakhs
(b) ₹ 9.30 lakhs
(c) ₹ 25 lakhs
(d) ₹ 6 lakhs

21. [Link] gave donation by way of cheque of ₹ 40,000 and by cash ₹ 5,000 to an approved
charitable trust having recognition u.s.80G. His GTI for the AY 2020-2021 is ₹ 5 lakhs. The
quantum of deduction u.s. 80G would be:
(a) ₹ 45,000
(b) ₹ 5,000
(c) ₹ 40,000
(d) ₹ 20,000

22. [Link] borrowed loan of ₹ 10 lakhs for higher education in India in the year 2008-2009. He
completed the course study in 2011-12. He started repayment of the loan from April 2013.
He paid interest of ₹ 41,000 and principal of ₹ 1,20,000 during the financial year 2019-2020.
The amount eligible for deduction u.s. 80E would be
(a) ₹ 1,20,000
(b) ₹ 1,61,000
(c) ₹ 41,000
(d) ₹ 1,00,000 (monetary limit)

23. Mr.X (age 36) furnishes the following interest income:

Savings A/c Fixed Deposit R.D.

Interest on various bank a/cs Rs.5,000 Rs.21,000 Rs.6,000
Interest on various post office a/cs Rs.4,000 Rs.12,000 Rs.3,000

What shall be the deduction u.s.80TTA? Will your answer differ if Mr.X is 63 years old?

24. Mr.A (aged 63), a resident Indian, paid for himself through account payee cheque, health
insurance premium of Rs.2,10,000 for 5 years in one lump sum on 28.03.2020. The eligible
amount of deduction u.s.80D for A.Y.2020-21 would be Rs………………….

a. Rs.50,000 c. Rs.30,000
b. Nil d. Rs.42,000

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250

CHAPTER – 16 ADVANCE TAX PROVISIONS

Advance tax is payable by every person where the final tax payable after adjusting TDS is
Rs.10,000 or more. Advance payment of tax is also known as “Pay as you Earn” scheme.

The assessee is required to estimate his CURRENT INCOME for the year under various heads
and pay advance tax on due dates. However, in the case of, income by way of CAPITAL GAINS
and CASUAL INCOME, assessee is required to pay advance tax only after such income is earned.

Note: Tax paid before 31st March of the relevant previous year is called “Advance Tax”
e.g. tax paid between 01.04.2019 and 31.03.2020 shall be treated as advance tax paid for the
previous year 2019-20. Any tax paid after 31st March is to be treated as Self-assessment tax.

What is self-assessment tax?

‘Self-Assessment Tax’ means balance tax payable by the assessee on the returned income after
adjusting TDS and Advance tax.

Important: Tds credit can be taken only if it is deducted by the payer. If tax is not
deducted at source then no credit can be taken by the assessee.

Advance tax payable by assesse covered u.s.44AD & 44ADA:

An assessee who has opted Section 44AD or Section 44ADA, shall pay the whole amount of
Advance Tax in one installment on or before 15th March.

NOT APPLICABLE FOR SENIOR CITIZENS:

Advance tax provisions are NOT applicable in the case of a RESIDENT SENIOR CITIZEN not
having income by way of business or profession.

For all assesses:

Advance tax is payable as follows: For all assesses
• On or before June 15 15% of advance tax
• On or before September 15 45% of advance tax
• On or before December 15 75% of advance tax
• On or before March 15 100% of advance tax

1. Discuss whether the following assesses are liable to pay advance tax for AY 2020-21:

• Where the total income of Mr.X (a non-resident) is Rs.3,50,000 (tds: nil)

• Where the total income of Mr.Y (a resident) is Rs.6,00,000 (tds: Rs.23,800)
• Turnover of Mr.A Rs.1,50,00,000; He has opted for section 44 AD.
• Gross receipts of a Doctor Rs.34,00,000. He has opted for section 44ADA.
• A senior citizen having pension income of Rs.3 lakhs and property income of Rs.5 lakhs
• Total income of Mr.R (a resident), aged 64 years is Rs.15,00,000 (having business income)
251

2. Under section 208, obligation to pay advance tax arises in every case where the advance tax
payable is Rs.10,000 or more. State exception to this rule.

3. The following details are provided by Mr.P, an individual, for the assessment year 2020-21.
Total estimated tax payable Rs.2,00,000
TDS (estimated but not deducted) Rs.55,000

Determine the advance tax payable with their due dates for the assessment year 2020-2021.

4. The estimated Total Income of Mr.R is Rs.9,00,000 which includes Rs.1,00,000 on account of
LTCG on sale of jewellery earned on 26.09.2019. Compute the advance tax payable by R,
assuming Rs.11,000 has been deducted at source.

INTEREST UNDER SECTION 234 A, B & C:

Interest u.s.234 A:
a. When interest is charged: If return is not filed before due date and tax is still due
b. Rate of Interest: 1% p.m. or part of a month on the tax due
c. Period of interest: From 1st day immediately following the due date till
taxes are paid

note: Self-assessment tax paid before the due date and return submitted after due date:
If entire amount of taxes are paid before the due date of filing return, no interest
shall be charged for mere delay in filing the tax return.

note: Interest is to be calculated on the amount of tax due rounded off in multiples of
Rs.100 ignoring fraction. For eg. Tax due Rs.35730 or Rs.35,780; Interest will be
computed on Rs.35,700.

5. Taxable income of Mr.A for the year ending 31.03.2020 is Rs.10,00,000. Tax deducted at
source is Rs.37,000. Advance tax paid is Rs.25,000. Due date of filing return of income is 31st
July, 2020. Self-assessment tax including interest was paid on 25th September 2020 and
return was filed by Mr.A on the same day. Compute the interest payable u.s.234 A.

Would your answer differ if he had paid the self-assessment tax on 30.07.2020 but filed his
return of income on 31.10.2020.
252

Interest u.s.234 B:
a. When interest is charged: Failure to pay advance tax (or) advance tax paid is less than
90% of the “assessed tax”.

b. Rate of Interest: 1% p.m. or part of a month of the tax due commencing from 1st
April of the relevant assessment year and ending till the entire
tax is paid.

Note: For A.Y.2020-21, interest will be charged from 01.04.2020, if

advance tax is not paid before 31.03.2020.

Note: “Assessed tax” means Original tax (-) TDS

Interest u.s.234 C:
a. When interest is charged: If the installments paid are not proper (i.e. amount paid is less
than the installment due)

b. Rate of Interest: 1% p.m. or part of a month

note: Interest u.s.234 C will be charged only up to 31st March of the relevant previous year.
Interest u.s.234 B will be charged from 1st of April of the relevant assessment year.

Note: An assessee is required to pay first two installments of 15% and 45% of the
“assessed tax” in advance on the due dates. However, interest u.s.234C shall not be
charged if the assessee had paid atleast 12% and 36% of the “assessed tax”.

Non-applicability of interest under section 234C in certain cases:

Interest u.s.234C shall not be charged, where such shortfall is on account of under-estimate or
failure to estimate:–

a. Capital gains;
b. Causal income;
c. Income under the head “Profits and gains of business or profession” in cases where
the income arises under the said head for the first time;
d. Dividend in aggregate exceeding of Rs.10 lakhs received during the previous year.

However, the assessee should have paid the whole of the amount of tax in the remaining
instalments which are due or where no such instalments are due, by 31st March of the
financial year.
253

6. Tax on total income of Mr.X for the previous year 2019-20 is Rs.4,80,000. Tax deducted at
source Rs.80,000. Compute interest under section 234B in the following situations if:

a. No advance tax is paid by Mr.X and self-assessment tax is paid on 10.09.2020; or

b. Advance tax paid on 31.03.20 is Rs.3,75,000

7. Original tax due Rs.1,00,000; Tax deducted at source Rs.40,000; Compute interest payable
under section 234C in the following situations if:

a. No advance tax is paid by the assesse; or

b. Advance tax paid on:

15.06.2019 Rs.5,000
15.09.2019 Rs.10,000
15.12.2019 Rs.15,000
15.03.2020 Rs.20,000

c. Advance tax paid on:

15.06.2019 Rs.8,000
15.09.2019 Rs.14,000
15.12.2019 Rs.18,000
15.03.2020 Rs.14,000
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Section Item Limit Tds rate Remarks

192 Salary basic exemption Slab rate At the time of payment
192A P.F. amount Rs.50,000 or more 10% Premature withdrawal

194A Interest Rs.5,000/Rs.40,000 10% On time deposits (50k for senr cit)

194B Casual Income >Rs.10,000 30% At the time of payment

194BB Horse races >Rs.10,000 30% At the time of payment

194C Contract payment >Rs.30,000 or Rs.1 lakh 1% or 2% Nil for transport operators

194D Insurance commission >Rs.15,000 5% Payment or credit ([Link])

194DA Life Insc maturity Rs.1 lac or more 1% No tds if exempt u.s.10(10D)

194E Non-resident sportsman Any amount 20.8% basic rate + cess applicable

194G Commn on sale of lottery >Rs.15,000 5% Payment or credit ([Link])

194H Commission/Brokerage >Rs.15,000 5% Payment or credit ([Link])

194I Rent >Rs.2,40,000 p.a. 10% or 2% Payment or credit ([Link])

194IA Purchase of imm property Rs.50 lakhs or more 1% N.A. for agrl land in rural area

194IB Payment of rent > Rs.50,000 p.m. 5% Applicable for non-audit cases

194IC Payment under specified

agreement Any amount 10% No tds for consideration in kind

194J Professional services >Rs.30,000 10%

Director fee no limit specified 10% Payment or credit ([Link])

194LA Compensation from Govt > Rs.2,50,000 10% ****

194M Contract/Prof fee/Commn > Rs.50 lakhs 5% Applicable for non-audit cases
194N Cash withdrawal > 1 crore 2% By Banks, Post office or Co-op soc
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CHAPTER – 16 TAX DEDUCTED AT SOURCE

1. When tax is required to be deducted at source?
Tax is required to be deducted at source either at the time of making the payment (or) at the
time of giving credit to the account of the payee, whichever is earlier. However, in few cases, tax
shall be deducted only at the time of making the payment.

2. State whether an “individual” is required to comply tds provisions.

Companies & Firms have to compulsorily comply with TDS provisions. However, others have
to comply with tds provisions only if the assessee was subject to Tax Audit u.s.44 AB during the
immediately preceding previous year.

3. State the consequences of non-deduction or non-remittance of tax at source.

If no tax has been deducted at source or if deducted but not remitted to the Government in
time, the expenditure shall be disallowed to the extent of 30% while computing business
income under section 40 (a) (ia).

4. When tds is required to be remitted to the Government?

The TDS amount has to be remitted within ONE WEEK FROM THE END OF THE MONTH
during which such tax was liable to be deducted. However, tds relating to the month of
MARCH, can be remitted before 30th of April.

5. Failure to furnish PAN will attract higher rate of tds.

Every person shall furnish his PAN to the person responsible for deducting such tax. In case
there is a failure to do so, tax shall be deducted at the HIGHER of the following rates:

At the rates specified in the section (or) 20%

6. Can tax be deducted at lower rates? (or) When payment can be made without tds?
The assessee can apply for lower deduction or no deduction of tax at source provided an
application is made to the A.O. and certificate is obtained to that effect.

7. What are the due dates for filing e-tds returns.

Due date of filing of e-tds return:

Quarter ending Due date

30th June On or before 31st July
30th September On or before 31st October
31st December On or before 31st January
31st March On or before 31st May of the following financial year

OTHER POINTS:
a. Tax shall be deducted only on business payments and not on personal payments
(also refer Section 194M)
b. No TDS shall be made on payments made to Government, Banks
256

Problems:
1. Mr.Y, an individual whose total sales in business during the year ending 31.03.2019 was
Rs.3.20 crores, pays Rs.9 lakhs by cheque on 1.1.2020 to a contractor for construction of his
business premises in full and final settlement. Whether Y has to deduct tds?

2. SBI pays Rs.1,00,000 p.m. as rent to the Central Government for a building in which one of its
branches is situated. Whether SBI has to deduct tax at source?

Section 192: TDS ON SALARIES:

1. When tax has to be deducted: At the time of payment
2. Rate of TDS: Slab rates
3. Limit: If salary exceeds the basic exemption

Note: The employee can declare his other incomes, if any, to the employer for the purpose
of tax deduction.

Note: No loss can be declared to the employer except loss from house property.

3. A disbursing officer of an employee is requested by the employee to deduct more tax than what
is warranted on his salary to cover his income from house property. Is it possible to do so?

4. An employee says that he has loss from self-occupied property due to payment of interest and
he would like less tax to be deducted from his salary on a certificate from him. Can the
disbursing officer concede to his request?

Section 192A: PREMATURE WITHDRAWAL FROM

PROVIDENT FUND:

1. When tax has to be deducted: At the time of payment

2. Rate of TDS: 10% (42.744% if PAN is not furnished)
3. Limit: Rs.50,000 or more

Note: Tax shall be deducted on the amount withdrawn only in case where the employee has
not completed five years of continuous service.

5. [Link], an employee of M/[Link] Ltd. since 10.04.2016 resigned on 31.03.2020 and

withdrew Rs.60,000 being the balance in his EPF account. State with reasons whether the
provisions of Chapter XVII-B are attracted and if so, what is the net amount receivable by
[Link]?
257

Section 194A: TDS ON INTEREST OTHER THAN INT ON SECURITIES

1. When to deduct tax: Payment or credit (whichever is earlier)

2. Rate of TDS: 10%
3. Limit: If the amount of interest exceeds Rs.5,000

Note: Time deposits with (banks, post office or co-operative banks)

are required to deduct tax only if the interest exceeds
Rs.40,000 (Rs.50,000 for senior citizen). Time deposits
include fixed deposits and recurring deposits.

Note: TDS is not attracted in the following cases:

a. Interest on savings account;
b. Interest paid by a firm to its partner;
c. Interest on the compensation amount awarded by the Motor Accidents Claims
Tribunal where interest payment does not exceed Rs.50,000.

6. Examine the TDS implications under section 194A in the cases mentioned hereunder:
On 1.10.2019, Mr.H made a six-month fixed deposit of Rs.10 lakhs @ 9% p.a. with ABC Co-
operative Bank. The fixed deposit matures on 31.03.2020

On 1.6.2019, Mr.G made three nine month fixed deposit of Rs.3 lakh each carrying interest @
9% with ‘A’ Branch, ‘B’ Branch and ‘C’ Branch of SBI, a bank which has adopted CBS. The fixed
deposits mature on 29.02.2020.

On 1.4.2019, Mr.R started a 1 year recurring deposit of Rs.80,000 per month @ 8% p.a. with
PQR Bank. The recurring deposit matures on 31.03.2020 and interest amount is Rs.41,600.

7. Nathan Gramin Bank, which does not have core banking facility, has paid the following amounts
as interest to Mrs.H, a resident individual on 31.03.2020:

Particulars Branch I Branch II

Interest on fixed deposit Rs.24,000 Rs.28,000
Interest on recurring deposit Rs.14,000 Rs.9,200
Total Rs.38,000 Rs.37,200

What is the amount of tax to be deducted at source? Will the answer differ, if the bank has core
banking facility?
258

Section 194B: TDS ON CASUAL INCOME

1. When tax is deducted: At the time of payment
2. Rate of TDS: 30%
3. Limit: If income exceeds Rs.10,000

Note: In a case where the winnings are in kind, the person responsible for paying shall, before
releasing the winnings, ensure that tax has been paid in respect of the winnings.

8. X won the first prize in a lottery ticket on 15.01.2020 and the prize was a Car worth Rs.5 lakhs.
What is the procedure to be adopted before handing over the car to X?

9. A TV channel pays Rs.15,00,000 on 1.11.2019 as prize money to the winner of a quiz

programme, “who will become a millionaire”?

Section 194BB: TDS ON WINNINGS FROM HORSE RACE

1. When tax is deducted: At the time of payment
2. Rate of TDS: 30%
3. Limit: If income exceeds Rs.10,000

Section 194C: TDS ON CONTRACT PAYMENTS

1. Contract of WORK: Payment made to a contractor for carrying out any WORK, in
connection with a contract or a sub-contract.

2. Rate of TDS: 1% in case payment is made to an individual or huf

2% in case payment is made to others (eg. firm or company)

No tds in case payment is made to a truck operator, if he

furnishes PAN and also gives a declaration that he does not
own more than ten trucks.

3. Limit for deduction: Single contract exceeding Rs.30,000 or the aggregate of all the
contracts exceeds Rs.1,00,000 in a year

4. Time of deduction: Payment or credit (whichever is earlier)

Note: “Work” includes:

• advertising;
• broadcasting and telecasting including production of programmes;
• catering;
• carriage of goods or passengers by any mode of transport other than by railways;
• manufacturing or supplying a product according to the requirement or specification
of the customer by using material purchased from such customer.
259

Explanation:
However, “WORK” does not include manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased from a person other
than such customer”. Such a contract is a contract for ‘sale’.

Note: Where any sum paid to the contractor by an individual and such sum is incurred
exclusively for PERSONAL PURPOSES, tax shall not be deducted at source.

10. Godrej Ltd. gives cloth to Mr.X and asks Mr.X to stitch shirts as per the specifications given by
Godrej Ltd. Mr.X charges in his invoice Rs.200 per shirt for stitching 10,000 shirts and raises a
bill for Rs.20,00,000. Discuss whether Godrej Ltd. has to deduct tax at source.

11. ABC Ltd. makes the following payments to Mr.X, a contractor, for contract work during the
previous year 2019-20:

Rs.20,000 on 1.05.2019
Rs.25,000 on 1.08.2019
Rs.28,000 on 1.12.2019

On 1.3.2020, a payment of Rs.30,000 is due to Mr.X on account of a contract work. Discuss

whether ABC Ltd. is liable to deduct tax at source u.s.194 C from payments made to Mr.X

12. Dr.A is an individual medical practitioner. His gross receipt from the medical practice for the
year ending 31.3.2019 was Rs.58 lakhs. Whereas the gross professional receipts for the year
ending 31.3.2020 is Rs.40 lakhs. During the financial year 2019-20, he makes the following
payments to a resident contractor for various activities:

Contract Name of the Description of Contract Amount

No. Contractor paid/credited
A Mr.X Medical equipment maintenance contract Rs.45,000
B Mr.X Household personal equipment maintenance
contract Rs.2,50,000

C Mr.Y Clinic furnishing contract Rs.30,000

D Mr.Y Clinic furnishing contract Rs.30,000
E Mr.Y Clinic furnishing contract Rs.30,000
F Mr.Y Clinic furnishing contract Rs.30,000

G Mr.M Personal catering contract in connection with

daughter’s wedding Rs.3,00,000

Examine the liability to deduct tax and the amount of TDS u/s. 194C for the A.Y. 2020-21.
260

13. By virtue of an agreement with a nationalized bank, a catering organization (a sole proprietary
concern) receives a sum of Rs.50,000 p.m. towards supply of food, water, snacks, etc, during
office hours to the employees of the bank.

14. State the concessions granted to transport operators in the context of cash payments
u/s.40A(3) and deduction of tax at source u/s.194C.

Section 194D: TDS ON INSURANCE COMMISSION

1. Who will deduct tax: Insurance companies on payments made to insurance agents
2. Rate of TDS: 5%
3. Limit: If payment exceeds Rs.15,000

Section 194DA: MATURITY AMOUNT FROM INSURANCE COMPANY

1. Who will deduct tax: Insurance companies at the time of payment
2. Rate of TDS: 5% on the amount of INCOME (w.e.f. 01.09.2019)
3. Limit: Maturity amount is Rs.1,00,000 or more

Note: Maturity amount received from Insurance company is exempt u.s.10(10D) if certain
conditions are satisfied. No tax shall be deducted if the maturity amount is exempt.

Note: ‘INCOME’ means: Amount received on maturity (-) total premium paid

Note: Before 01.09.2019: 1% on the maturity amount

15. Examine the applicability of Section 194DA in the following cases:

a. Mr.X, a resident, is due to receive Rs.4,50,000 on 31.3.2020, towards maturity proceeds of

LIC policy taken on 1.4.2017, for which the sum assured is Rs.4,00,000 and the annual
premium is Rs.1,25,000.

b. Mr.Y, a resident, is due to receive Rs.3,25,000 on 31.3.2020 on LIC policy taken on

31.03.2012, for which the sum assured is Rs.3,00,000 and annual premium is Rs.35,000

c. Mr.Z, a resident, is due to receive Rs.95,000 on 1.10.2019 towards maturity proceeds of

LIC policy taken on 1.10.2013 for which the sum assured is Rs.90,000. The annual
premium was Rs.12,000.
261

Section 194E: TDS ON PAYMENTS MADE TO NON-RESIDENT SPORTSMAN

1. Who will deduct tax: Any person making payment to any non-resident sportsman
(including an athlete) or an entertainer who is not a citizen of
India.

2. Rate of TDS: 20.8% (including cess) of such payments. If payment exceeds

Rs.50 lacs or one crore then surcharge is also applicable.

Note: Income received by a non-resident sportsman (including an athlete) by way of:

• participation in any game or sport in India (however, games like crossword puzzles,
horse races etc. are not included); or
• advertisement; or
• contribution of articles relating to any game or sport in India in newspapers,
magazines or journals.

16. Calculate the amount of tax to be deducted at source (TDS) on payment made to Ricky Ponting,
an Australian cricketer, by a newspaper for contribution of articles Rs.80,000.

Section 194G: COMMISSION ON THE SALE OF LOTTERY TICKETS

1. When tax is to be deducted: Payment or credit (whichever is earlier)
2. Limit for deduction: Commission exceeding Rs.15,000
3. Rate of TDS: 5%

Section 194H: TDS ON COMMISSION OR BROKERAGE

1. When tax is to be deducted: Payment or credit (whichever is earlier)
2. Limit for deduction: Commission exceeding Rs.15,000
3. Rate of TDS: 5% of such payments

Section 194I: TDS ON RENT

1. When tax is to be deducted: Payment or credit (whichever is earlier)
2. Limit for deduction: Rent exceeding Rs.2,40,000 p.a. for each co-owner
3. Rate of TDS: 2% in case of rent paid on plant and machinery
10% in case of land and building or furniture

Note: Rent means any payment under any lease or sub-lease

Note: No tds if the house owner furnishes declaration in Form 15G/15H to the tenant
262

SECTION 194-IA: TDS ON TRANSFER OF IMMOVABLE PROPERTY

1. When tax is to be deducted: Payment or credit (whichever is earlier)

2. Limit for deduction: Rs.50 lakhs or more payment to a resident
3. Rate of TDS: 1% on amount paid

Note: This section is not applicable if immovable property is an

agricultural land situated in a rural area

17. Mr.R sells his house property in Chennai as well as his agricultural land in rural area for a
consideration of Rs.60 lakhs and Rs.15 lakhs respectively to Mr.S on 1.8.2019. He purchased
the house property and land in 2018 for Rs.40 lakhs and Rs.10 lakhs respectively. The Stamp
Duty Value on the date of transfer was Rs.85 lakhs and Rs.20 lakhs.

Determine the tax implications in the hands of Mr.R and Mr.S and the TDS implications,
assuming both are resident Indians.

Section 194IB: TDS on rent paid on Immovable Property

Applicable for: Individuals & HUF (not covered by Tax Audit)

If covered by Tax Audit, tds is required to be deducted u.s.194I

Rate of tds: 5% (20% in case PAN not furnished)

Limit: Rent should exceed Rs.50,000 per month or part of the month

Time of deduction: Last month of the previous year or the last month of tenancy, if
the property is vacated (whichever is earlier)

Important: The amount of tds shall not exceed last month rent.

Deposit of tds: Within 30 days from the end of the month

18. Mr.A, a Chartered Accountant employed as CFO with Google India Ltd draws a salary of
Rs.5,00,000 p.m. He has taken on rent an independent house from Mr.B. With this
information, determine the amount of TDS u.s.194-IB for the financial year 2019-20 under the
following situations:

a. If the amount of rent is Rs.55,000 p.m.

b. If the amount of rent is Rs.55,000 p.m. and Mr.B does not furnish PAN;

c. If the amount of rent is Rs.55,000 p.m. and Mr.A vacates the property by 31 st July, 2019 and
Mr.B does not furnish PAN;
263

d. In case Mr.A is carrying on the profession of Chartered Accountancy (instead of

employment) and his gross receipts from the practice for the year ended 31st March, 2019
is Rs.60,00,000 and the rent paid for his residence to Mr.B is Rs.55,000 p.m.

Section 194IC: TDS on payment made under “Specified Agreement”

To whom applicable: Any person paying to a resident any consideration under a

specified agreement.

Rate of TDS: 10% on monetary consideration (20% if PAN not furnished)

Note: This section refers to TDS payments covered under Joint

Development Agreements covered u.s.45 (5A) (refer Cap Gains)

19. Mr.A, who has a piece of land, has entered into an agreement with XYZ Ltd., a real estate
developer. As per the terms of the agreement, Mr.A is entitled to receive 5 flats whose stamp
duty value as on the date of completion is Rs.70,00,000 and a monetary consideration of
Rs.30,00,000. Compute the tax to be deducted for A.Y.2020-21.

Section 194J: TDS ON PROFESSIONAL OR TECHNICAL SERVICES

1. Payments covered: a. Fees for professional services; or

b. Fees for technical services; or
c. Royalty; or
d. Non-compete fees; or
e. Remuneration to a director; or
f. Call centre services

2. Limit for deduction: Amount exceeding Rs.30,000 in aggregate in a year. The limit
of Rs.30,000 is applicable separately for each of the payments
mentioned above.

However, there is no such exemption limit for deduction of tax

on any remuneration payable to a director.

3. Rate of TDS: 10% for items ‘a’ to ‘e’ mentioned above; and
2% in case of an assessee engaged ONLY in the business of
operation of call centre services.

Note: Where any sum paid by an individual and such sum is incurred exclusively for
PERSONAL PURPOSES of such individual, tax shall not be deducted at source.
264

20. X Ltd credited Rs.28,000 towards fees for professional services and Rs.22,000 towards fees for
technical services to the account of ABC Ltd in its books of account on 6.9.2019. The total sum
of Rs.50,000 was paid by cheque to ABC Ltd on 18.12.2019. Examine whether tds is applicable.

21. XYZ Ltd is a back office engaged as a call centre for ICICI with effect from 01.06.2019. During
the financial year 2019-20, ICICI has paid a sum of Rs.2 crores towards call centre services
provided by XYZ Ltd. Determine the amount of TDS u.s.194J. Would your answer differ if XYZ
Ltd is also engaged in the business of providing cab services to HDFC Ltd.

Section 194LA: PAYMENT OF COMPENSATION BY GOVERNMENT

ON ACQUISITION OF IMMOVABLE PROPERTY
When to deduct tax: Payment or credit (whichever is earlier)
Limit for deduction: Should exceed Rs.2,50,000
Rate of TDS: 10%

Section 194M: Contract payments, Professional payments or

Commission payments w.e.f. 01.09.2019:
1. Who will deduct tax: Individuals or HUF who are not subject to Tax Audit u.s.44AB

2. Limit: Should exceed Rs.50 lakhs

3. Rate of Tds: 5%

Note: If the assessee is subject to Tax Audit then Section 194C or

Section 194J or Section 194H shall be applicable.

22. Examine whether tds provisions would be attracted in the following cases, and if so, under
which section. Also specify the rate of tds applicable in each case. Assume that all payments
are made to residents.

[Link], an individual carrying on retail business with turnover of Rs.2.5 crores in the
previous year 2018-19 made the following payments:

A. Contract payment for repair of residential house Rs.5 lakhs.

B. Payment of commission to [Link] for business purpose Rs.80,000

[Link], a wholesale trader who declares profit u.s.44AD for P.Y.2018-19 and P.Y.2019-20
made contract payment for reconstruction of residential house Rs.20 lakhs in January, 2020;
Rs.15 lakhs in February, 2020 and Rs.20 lakhs in March, 2020.
265

[Link], a salaried individual paid brokerage for buying a residential house in March,
2020 amounting to Rs.51 lakhs.

[Link], a pensioner made contract payment during October-November, 2019 for

reconstruction of residential house amounting to Rs.48 lakhs.

Section 194N: TDS on CASH withdrawal w.e.f. 01.09.2019

1. Who will deduct tax: Banks, Post Office or a Co-operative society

2. Limit: Cash withdrawal exceeds Rs.1 crore in aggregate

3. Rate of TDS: 2% of cash withdrawal.

Additional Problems:
23. State with reasons, whether tax deduction at source provisions are applicable to the following
transactions and if so, the rate of tax deduction:

a. An Insurance Company paid Rs.50,000 as Insurance Commission to its agent [Link]

b. Interest on compensation amount awarded by the Motor Accidents Claims Tribunal to
Mr.R: Rs.70,000
c. AB Ltd. allowed a discount of Rs.50,000 to XY & Co. (a firm) on prompt payments of its dues
towards supply of automobile parts.

24. Ashwin doing textiles business furnishes you the following information:

Turnover for the financial year:

2018-19 Rs.2,05,00,000
2019-20 Rs.95,00,000

State whether the provisions of tax deduction at source are attracted for the following
expenses incurred during the financial year 2019-20:

a. Interest paid to Indian Bank on term loan Rs.92,800

b. Advertisement expenses to R (two individual payments of
Rs.24,000 and Rs.34,000) Rs.58,000
c. Shop rent paid to (one payee) Rs.2,50,000
d. Brokerage paid to B, a sub-broker Rs.16,000
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25. State the applicability of TDS provisions and TDS amount in the following cases:

a. Rent paid for hire of machinery by B Ltd. to [Link] Rs.2,80,000

b. Fee paid to Dr.R by Sundar (HUF) Rs.35,000 for surgery performed to a member of the
family.

c. ABC Ltd paid Rs.19,000 to one of its Directors as sitting fees on 01.01.2020
d. Mr.X sold his house to Mr.Y on 01.02.2020 for Rs.60 lakhs

26. State in brief the applicability of tax deduction at source provisions, the rate and the
amount of tax deduction in the following cases for the financial year 2019-20:

1. Rs.27,000 paid to Jacques Kallis, a South African Cricketer, by an Indian newspaper agency
on 02.12.2019 for contribution of articles in relation to the sport of cricket

2. Payment made by a company to sub-contractor Rs.3,00,000 with outstanding balance of

Rs.1,20,000 shown in the books as on 31.03.2020

3. Winning from horse race Rs.1,50,000

4. Rs.2,00,000 paid to Mr.A, resident Individual on 22.02.2020 by the State of Uttar Pradesh
on compulsory acquisition of his urban land.

27. Compute the amount of tds on the following payments made by M/s.S Ltd during the financial
year 2019-20 as per the provisions of the Income-tax Act, 1961.

S. No. Date Nate of Payment

1. 01.10.19 Paid Rs.2 lacs to Mr.R a transporter who owns 6 trucks and having
PAN. Declaration is also given by Mr.R.

2. 01.11.19 Payment of fee for technical services of Rs.25,000 and Royalty of

Rs.20,000 to [Link] who is having PAN

3. 30.06.19 Payment of Rs.25,000 to X Ltd for repair of building

4. 01.01.2020 Payment of Rs.2,00,000 made to Mr.A for purchase of diaries made

according to specifications of S Ltd. However, no material was
supplied for such diaries to Mr.A by S Ltd.

5. 01.01.2020 Payment of commission of Rs.16,000 to Mr.Y

6. 01.01.2020 Fees paid to Mr.K Rs.25,000 who is a Director of S Ltd. Mr.K is not an
employee of S Ltd
267

28. Examine whether tax is required to be deducted at source from the following payments made
by P Ltd. if so, state the amount of tax to be deducted.

a. Commission of Rs.18,000 paid to Mr.V, an agent;

b. Payment of Rs.3 lacs to M/[Link] Printers for purchase of calendars according to

specifications of P Ltd. No materials were supplied by P Ltd. to M/[Link] Printers.

c. Royalty of Rs.32,000 paid to Mr.R, a resident of India.

29. Mr.X, a salaried individual, pays rent of Rs.55,000 p.m. to Mr.Y from June, 2019. Is he required
to deduct tax at source? If so, when is he required to deduct tax? Also compute the amount of
tax to be deducted at source. Would your answer change if Mr.X vacated the premises on 31st
December, 2019? Also, what would be your answer if Mr.Y does not provide his PAN to Mr.X?

LATE FILING OF TDS RETURN:

Late fee of Rs.200 per day subject to a maximum of tds amount u.s.234E

30. Mr.M is regular in deducting tax at source and depositing the same. In respect of the quarter
ended 31st December, 2019 a sum of Rs.80,000 was deducted at source from the contractors.
The statement of tax deducted at source under section 200 was filed on 23rd March, 2020 for
the quarter ended 31.12.2019.

a. Is there any delay on the part of Mr.M in filing the statement of TDS?
b. How much amount can be levied on Mr.M for such default under section 234E?

FAILURE TO DEDUCT TDS (OR) FAILURE TO DEPOSIT TDS AMOUNT ON TIME:

Failure to deduct tds:

Shall attract simple interest @ 1% p.m. or part of a month commencing from the date on which
the liability to deduct tds arises to the date on which such tax was actually deducted.

Failure to deposit tds on time:

Shall attract simple interest @ 1.5% p.m. or part of a month from the date on which tax was
deducted to the date on which such tax is actually paid.

31. An amount of ₹ 40,000 was paid to Mr.X on 1.7.2019 towards fees for his professional services
without deduction of tax at source. Subsequently, another payment of ₹50,000 was due to him
on 28.2.2020, from which tax @ 10% (amounting to Rs.9,000) on the entire amount of
Rs.90,000 was deducted. However, this tax of Rs.9,000 was deposited only on 22.06.2020.
Compute interest payable under section 201(1A).
268

Answers to problems in TDS:

1. Mr.Y was subject to Tax Audit u.s.44AB of the Income-tax Act during the preceding previous year
2018-19. Hence tds provisions are attracted for A.Y.2020-21. Mr.Y is required to deduct tax at source
on the payment made.

2. Payments made to Government or Banks are not subject to tax deduction. Hence SBI is not required
to deduct tax at source on payments made to Central Government.

3. Yes. Any income earned by the employee can be declared to the employer for tax deduction.
4. Yes. Loss from house property can be declared to the employer.
5. Tds u.s.192A @ 10%. Amount received by [Link] is Rs.54,000 (60,000 – 6,000)

6. A. Tax is required to be deducted u.s.194A @ 10% by the co-operative bank on the interest payment
if the limit exceeds Rs.40,000. Interest amount Rs.45,000 (10 lakhs x 9% x 6/12). Tds amount
Rs.4,500.

B. Since the bank adopts core banking solutions, the aggregate of interest payment on fixed deposits in all
the branches of SBI should be considered for the limit. Total interest Rs.60,750 (> Rs.40,000) from
all the branches of SBI. Tax has to be deducted @ 10% on Rs.60,750; Rs.6,075 has to be deducted at
source. (300000 x 9% x 9/12) x 3

C. Time deposits also include recurring deposits. Tax @ 10% has to be deducted on interest of Rs.41,600.
Limit Rs.40,000 and tds amount Rs.4,160.

7. Case A: No core banking facility available:

Branch I: Total interest (Rs.38,000) does not exceed Rs.40,000, hence tds u.s.194A is nil
Branch II: Total interest (Rs.37,200) does not exceed Rs.40,000, hence tds u.s.194A is nil

Case B: If core banking facility is available:

The aggregate of interest income from all the branches of the bank should be considered for tds. The
aggregate interest of both the branches is Rs.75,200 which is more than the limit of Rs.40,000. Hence
tds u.s.194A @ 10% is Rs.7,520.

Note: Time deposits include both fixed deposit and recurring deposit.

8. Tax on casual income u.s.194B @ 30% if the limit exceeds Rs.10,000. However, in case where the
winnings are in kind, the person responsible for paying shall, before releasing the winnings, ensure
that tax has been paid in respect of the winnings. Amount of tds Rs.1,50,000.

9. Section 194B; Limit Rs.10,000; Tds rate 30% with or without pan; Tds amount Rs.4,50,000
269

10. Godrej Ltd has to deduct tax u.s.194C. The material (cloth) is supplied by Godrej Ltd. Mr.X has to do
only the stitching job. Hence it is a contract of work. Tax will be deducted @ 1% on the payment
made as the contractor is an individual. Tds amount Rs.20,000.

11. Date Amount TDS Payment made

1.05.19 20,000 nil 20,000
1.08.19 25,000 nil 25,000
1.12.19 28,000 nil 28,000
1.03.20 30,000 1,030 28,970
Total 1,03,000

12. Gross receipts of Dr.A for the previous year ended 31.03.2019 exceeds Rs.50 lakhs. He was subject
to Tax Audit u.s.44AB for the immediately preceding previous year 2018-19. Tds provisions are
therefore applicable for the current assessment year 2020-21.

A. Tds @ 1% u.s.194C Rs.450

B. TDS u.s.194C is not attracted since the payment is for personal purpose and tds u.s.194M is
not attracted as aggregate does not exceed Rs.50 lakhs.

C. Payment of all the contracts exceed Rs.1,00,000. Therefore, tds @ 1% is Rs.1,200

D. TDS u.s.194C is not attracted since the payment is for personal purpose and tds u.s.194M is
not attracted as aggregate does not exceed Rs.50 lakhs.

13. “Work” includes catering also. Hence tax is required to be deducted at source @ 1% on the payment
made u.s.194C. Tds Rs.500 p.m.

14. Cash payment can be made up to Rs.35,000 without attracting disallowance u.s.40A(3). Tds u.s.194C
is not attracted if the transport operator furnishes pan and gives a declaration that he does not own
more than 10 trucks.

15. A. Policy issued after 01.04.12. (i.e. on 01.04.2017)

Premium paid is Rs.1,25,000 which is more than 10% of sum assured (Rs.40,000)
Therefore, maturity amount is not exempt u.s.10(10D).
Tds @ 5% on income of Rs.75,000 as the maturity amount exceeds Rs.1,00,000.
Income = Rs.4,50,000 (-) Rs.3,75,000 (1,25,000 x 3) = Rs.75,000
TDS amount u.s.194DA is Rs.3,750.

B. Policy issued before 01.04.12. (i.e. on 31.03.2012)

Premium paid is Rs.35,000 which is less than 20% of sum assured (Rs.60,000)
Therefore, maturity amount is exempt u.s.10(10D). No Tds

C. Policy issued after 01.04.12. (i.e. on 01.10.2013)

Premium paid is Rs.12,000 which is more than 10% of sum assured (Rs.9,000)
Therefore, maturity amount is not exempt u.s.10(10D).
Maturity amount does not exceed Rs.1,00,000.
TDS amount u.s.194DA is Nil.
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16. U.S.194E tds @ 20.8% on payment to non-resident sportsman. Tds amount Rs.16,640.

17. In the hands of Mr.R:

A. Capital Gains on sale of house at Chennai:

Sale consideration (as per section 50C) 85 lakhs (85 / 60 x 100 > 105%)
Less: Cost of acquisition 40 lakhs
Short term capital gain (<24 months) 45 lakhs

B. On sale of agricultural land in rural area:

Not a capital asset. No capital gain tax

In the hands of Mr.S:

A. Income from other sources:

The house is purchased for an inadequate consideration. Hence the difference between stamp duty
value and purchase price is taxable.
Taxable amount Rs.25 lakhs (85 – 60) (difference is > 5% and also > Rs.50,000)

B. Agricultural land in rural area is not a capital asset. Gift provisions are not applicable.

C. TDS provisions:
U/s.194IA tax has to be deducted at source @ 1% if the purchase price is Rs.50 lakhs or more.
Therefore, tds amount Rs.60,000 (60 lakhs x 1%)

18. Tds Rs.33,000 (55,000 x 12 x 5%) shall be deducted in the month of March, 2020
being the last month of the previous year.

Tds Rs.55,000 (55,000 x 12 x 20% = Rs.1,32,000; but cannot exceed rent payable for the last month)
Tds Rs.44,000 (55,000 x 4 x 20%) to be deducted at the time of vacating the property being July 2019.

Since subject to Tax Audit, Section 194I is applicable. TDS (55,000 x 12 x 10%) Rs.66,000

19. i. In respect of non-monetary consideration: Nil.

ii. In respect of monetary consideration: TDS Rs.3,00,000 being 10% of Rs.30,00,000

20. Section 194J; Limit Rs.30,000 should be considered separately for each item. Tds rate 10%. Fees for
professional services does not exceed Rs.30,000 and fees for technical services does not exceed
Rs.30,000; tds nil.

21. If XYZ Ltd is engaged in providing call centre services only:

Tds @ 2% u.s.194J on Rs.2 crores is Rs.4,00,000
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If XYZ Ltd is also engaged in providing CAB services (multiple businesses):

Tds shall be deducted @ 10% u.s.194J on Rs.2 crores which is Rs.20,00,000

22. [Link]: Subject to Tax Audit for A.Y.2019-20. Tds provisions are attracted for A.Y.20-21

Contract payment for residential house:

Section 194C is not attracted as it is personal payment
Section 194M is not attracted as the amount does not exceed Rs.50 lakhs. Hence tds: nil

Payment of commission to [Link] for business purpose

Section 194H: Tds is required to be deducted @ 5% on Rs.80,000. Tds Rs.1,600

Rajesh: Contract payment for reconstruction of residential house:

Section 194M: The aggregate amount exceeds Rs.50 lacs. Tds @ 5% on Rs.55 lacs: Rs.2.75 lacs
Section 194C is not applicable as [Link] is not subject to Tax Audit in the P.Y.2018-19

Satish: Payment of brokerage for buying a residential house:

Section 194M: Amount exceeds Rs.50 lacs. Tds @ 5% on Rs.51 lacs: Rs.2.55 lacs
Section 194H is not applicable as [Link] is a salaried employee (not subject to Tax Audit)

Dheeraj: Contract payment made during Oct-Nov. 2019 for reconstruction of res house:
Section 194M: Amount does not exceed Rs.50 lacs. Hence no tds
Section 194C is not applicable as [Link] is a pensioner (not subject to Tax Audit)

23. Section 194D; Limit Rs.15,000; Tds rate 5%; Tds amount Rs.2,500
Section 194A; Limit Rs.50,000; Tds rate 10%; Tds amount Rs.7,000
Discount to customers not subject to tds.

24. Turnover during the immediately preceding previous year 18-19 exceeds Rs.1 crore. [Link] was
subject to tax audit for A.Y.2019-20. Tds provisions are applicable for A.Y.2020-21.

a. Payment to banks are not subject to tds.

b. Section 194C; Limit Rs.30,000 in case of a single contract or Rs.1,00,000 in case of all the
contracts; Tds rate 1%; Tds amount Rs.340

c. Section 194I; Limit Rs.2,40,000; Tds rate 10%; Tds amount Rs.25,000

d. Section 194H; Limit Rs.15,000; Tds rate 5%; Tds amount Rs.800

25. Section 194I; Limit Rs.2,40,000; Tds rate 2%; Tds amount Rs.5,600
272

TDS u.s.194J is not attracted since the payment is for personal purpose and tds u.s.194M is not attracted as
aggregate does not exceed Rs.50 lakhs.

Section 194J; Limit not specified; Tds rate 10%; Tds Rs.1,900
Section 194IA; Limit Rs.50 lakhs or more; Tds rate 1%; Tds Rs.60,000

26. Section 194E; Limit not specified; Tds rate 20.8%; Tds amount Rs.5,616
Section 194C; Limit Rs.30,000 or Rs.1,00,000; Tds rate 1%; Tds amount Rs.4,200
Section 194BB; Limit Rs.5,000; Tds rate 30%; Tds amount Rs.45,000
Section 194LA; Limit Rs.2,50,000; Tds rate 10%; Tds amount nil

27. a. No tds (PAN and declaration is furnished)

b. No tds (limit Rs.30,000 should be applied for each and every item separately)
c. Amount does not exceed Rs.30,000. No tds
d. Contract of sale. No tds (not a contract of work)
e. Tds u.s.194H @ 5% Rs.800
f. Tds u.s.194J @ 10% Rs.2,500

28. a. Tds u.s.194H @ 5% Rs.900

b. Contract of sale. No tds (not a contract of work)
c. Tds u.s.194J @ 10% Rs.3,200

29. Rent paid by Mr.X exceeds Rs.50,000 p.m. Hence, he is required to deduct tax at source u.s.194IB.
Mr.X is required to deduct tds from the amount of rent payable in March, 2020. Amount of tds
Rs.27,500 (55,000 x 10 x 5%).
If Mr.X vacated the premises on 31.12.2019 then he is required to deduct tax from the amount of rent
payable in December, 2019. Tds Rs.19,250 (55,000 x 7 x 5%).
If Mr.Y does not provide his PAN to Mr.X, tax would be deductible @ 20% instead of 5%.
Tax would be Rs.1,10,000 (55,000 x 10 x 20%) but the same has to be restricted to Rs.55,000 being
the rent for March, 2020.

30. Tds return for the quarter ended 31.12.2019 to be filed on or before 31.01.2020. Actual date of filing
23.03.2020. Hence there is a delay of 52 days (29+23).

Late fee is charged @ Rs.200 per day of default. Late fee payable is Rs.10,400 (52 x 200) (or) actual amount
of tds Rs.80,000 (whichever is less). Therefore, late fee under section 234E is Rs.10,400.

31. Interest is computed as under:

Date on which tds is liable to be deducted: 01.07.2019
Date on which tds is actually deducted: 28.02.2020
Delay 8 months

Date on which tds is actually deducted: 28.02.2020

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Date on which tds was actually deposited: 22.06.2020

Delay 4 months (28.02.20 to 27.03.20; 28.03.20 to 27.04.20; 28.04.20 to 27.05.20 and
28.05.20 to 27.06.20)

1% on tax deductible but not deposited i.e. 1% on Rs.4,000 for 8 months Rs.320
1.5% on tax deducted but not deposited i.e. 1.5% on Rs.9,000 for 4 months Rs.540
Total interest payable Rs.860
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CHAPTER – 16 TAX COLLECTION AT SOURCE

a. WHAT IS TCS?
Tax Collection at Source (TCS) means collection of tax at source at prescribed rates by the
seller from the buyer of certain specified

i. Goods; or
ii. Services; or
iii. a motor vehicle

b. Goods specified under section 206C(1):

Nature of Goods specified Percentage

(a) Alcoholic liquor for human consumption 1%
(b) Tendu leaves 5%
(c) Timber obtained under a forest lease 2.5%
(d) Timber obtained by any mode other than (c) 2.5%
(e) Any other forest produce not being timber or tendu leaves 2.5%
(f) Scrap 1%
(g) Minerals, being coal or lignite or iron ore 1%

c. Sub-section (1C) provides for collection of tax by every person who grants a lease or a
licence or enters into a contract or otherwise transfers any right or interest in any:

- parking lot or
- toll plaza or
- a mine or a quarry

to another person for the use of such parking lot or toll plaza or mine or quarry for the
purposes of business. The applicable TCS rate is 2%.

d. Section 206C(IF) provides that every person, being a seller, who receives any amount as
consideration for sale of a MOTOR VEHICLE of the value exceeding Rs.10 lakhs, shall
collect tax from the buyer @ 1% of the sale consideration.

e. Non-applicability of TCS [Section 206C(1A)]

No TCS if goods referred to in section 206C(1) are to be utilised for the purpose of
manufacturing, processing or producing articles or things or for the purposes of
generation of power and NOT for trading purposes.
275

f. TCS ON SALE OF MOTOR VEHICLE (VALUE > 10 LAKHS)

Every person being a seller who receives any amount as consideration for sale of motor
vehicle of value exceeding Rs.10,00,000 shall collect 1% of the sale consideration as
income-tax at the time of receipt of such amount.

OTHER PROVISIONS IN RESPECT OF TCS ON SALE OF MOTOR VEHICLE:

a. TCS is applicable only at retail level and not on sale of motor vehicles by
manufacturers to dealers or distributors.

b. It is applicable on sale of any motor vehicle (ordinary or luxury) of the value

exceeding Rs.10 lakhs.

c. It is applicable on each sale of a Motor Vehicle and not on aggregate value of sale
during the year.

d. The above provisions are applicable whether the payment is made in cash or by any
other mode.

e. An individual,if he was subject to audit u.s.44AB in the immediately preceding

financial year, is also liable to collect tax at source @ 1% on sale of motor car by him.

1. When a motor car is sold for Rs.12 lakhs by a dealer to a buyer holding PAN, the amount of
tax collectible at source shall be:

(a) Rs.12,000 (1%)

(b) Rs.24,000 (2%)
(c) Rs.1,20,000 (10%)
(d) Nil

2. Rahil & Co., a partnership firm is having a car dealership show-room. They have purchased
cars for Rs.2 crores from XYZ Ltd., car manufacturers, the cost of each car being more than
Rs.12 lakhs. They sell the cars to individual buyers at a price yielding 10% margin on cost.
State whether there will be any obligation to collect tax in the above two situations.

Answer:
TCS is applicable only at retail level and not on sale of motor vehicles by manufacturers to
dealers or distributors. Hence there is no obligation to collect tax when the cars are sold by
car manufacturers to Rahil & Co. (the dealers). However, tax is required to be collected by
Rahil & Co from individual buyers when they sell the cars to them (at retail level).
276

3. H Ltd., a manufacturer of luxury cars sold 50 cars on 01.09.2019 to NMP Ltd, its dealer,
each car cost Rs.20 lakhs.

Answer:
H Ltd., a manufacturer, is not required to collect tax at source from NMP Ltd., the dealer on
receipt of consideration for sale of motor cars.

4. Amin Co. (p) Ltd is a dealer of motor cars manufactured by Zeet Ltd. Amin Co. (P) Ltd paid
through banking channel Rs.110 lakhs to Zeet Ltd. for purchase of cars in January 2020. Of
the total motor cars so purchased, 4 motor cars cost Rs.11 lakhs each and 7 motor cars are
for the balance amount. Decide whether any TDS/TCS provisions will apply. Will your
answer be different if Amin Co. (P) Ltd. is not a dealer of motor cars and had acquired the
same for the purpose of plying cars on hire?

Answer:
A. If Amin Co (P) Ltd is a dealer of motor cars: No TCS

B. If Amin Co (P) Ltd is not a dealer of motor cars but uses for plying cars on hire:
TCS (11 lakhs x 1% x 4) Rs.44,000
For the remaining 7 cars: TCS is nil (cost is < 10 lakhs each)

5. What are clarifications made by CBDT with respect to Section 206C (1F) relating to the
following issues:

i. Whether TCS on sale of motor vehicle is applicable only to luxury car?

ii. Whether TCS is applicable on each sale or aggregate value of sale of motor vehicle,
exceeding Rs.10 lakhs?
iii. Whether TCS is applicable in case of an individual?
iv. Whether TCS on sale of motor vehicle is at retail level also or only by manufacturer
to distributor or dealer?

Answer:
i. It is applicable on sale of any motor vehicle (ordinary or luxury)

ii. It is applicable on each sale and not on aggregate value of sale.

iii. An individual, if he was subject to audit u.s.44AB in the immediately preceding

financial year, is also liable to collect tax at source @ 1% on sale of motor car by him.

iv. TCS is applicable only at retail level and not on sale of motor vehicles by
manufacturers to dealers or distributors.
277

g. Main differences between TDS and TCS:

TDS TCS
(1) TDS is tax deduction at source TCS is tax collection at source.

(2) Person responsible for paying is required Seller of certain goods or provider of
to deduct tax at source at the prescribed rate. services is responsible for collecting tax at
source at the prescribed rate from the buyer.

(3) Generally, tax is required to be deducted Generally, tax is required to be collected at

at the time of credit to the account of the source at the time of debiting of the amount
payee or at the time of payment, whichever is payable to the account of the buyer or at the
earlier. time of receipt of such amount from the said
buyer, whichever is earlier.

h. “BUYER”: For sub-section (1) and (1C) of section 206C(specified goods or services) means:

A ‘buyer’ is a person who obtains goods of the nature specified therein, but does not include:–

(A) a public sector company, the Central Govt, a State Govt, and an embassy, a high commission,
legation, commission, consulate and the trade representation of a foreign State and a club, or

(B) a buyer in the retail sale of such goods purchased by him for personal consumption

i. “BUYER”: For sub-section (1F) of section 206C (motor vehicle) means:

A ‘buyer’ is a person who obtains in any sale, a motor vehicle, but does not include:–

(A) the Central Government, a State Government and an embassy, a High Commission, legation,
commission, consulate and the trade representation of a foreign State; or

(B) a local authority; or

j. “SELLER” includes:
The Central Government; a State Government;
any local authority; a corporation;
any company; firm;
authority established by or under a Central, State or Provincial Act, or

Seller also includes an individual or a HUF whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the monetary limits specified under section 44AB
during the financial year immediately preceding the financial year in which the goods of the nature
specified are sold.
278

CHAPTER – 17 ASSESSMENT PROCEDURE

Due date of filing return of income – Section 139(1):

• Any assessee who is required to furnish

Transfer Pricing Report 30th November

• A Company 30th September

• A person whose accounts are required to be

audited u.s.44 AB or under any other law 30th September

• Working partner of a firm whose accounts are

required to be audited u.s.44 AB 30th September

• In the case of any other assessee 31st July

Who are required to furnish return of income?

1. Every COMPANY or a FIRM is compulsorily required to file return of income irrespective of
income or loss.

2. Every other person (individuals or huf) is required to furnish return of income if his total
income without giving effect to:
a. Chapter VI-A deductions; or
b. Section 54, 54B, 54D, 54EC, 54F exceeds the basic exemption.

3. Mandatory filing of IT returns in certain cases:

An individual who is not required to furnish a return u.s.139(1), is required to file income-
tax return before the due date, if such person:

a. has deposited an amount or aggregate of the amounts exceeding Rs.1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or

b. has incurred expenditure of an amount or aggregate of the amounts exceeding Rs.2

lakhs for himself or any other person for travel to a foreign country; or

c. has incurred expenditure of an amount or aggregate of the amount exceeding Rs.1

lakh towards consumption of electricity; or

d. fulfils such other prescribed conditions.

279

4. Mandatory filing of return by resident person in certain cases:

An individual, being a resident and ordinary resident in India, who is not required to furnish
a return under section 139(1) and who at any time during the previous year:

a) holds, as a BENEFICIAL OWNER or otherwise, any asset (including any financial

interest in any entity) located outside India or has signing authority in any account
located outside India; or

b) is a BENEFICIARY of any asset (including any financial interest in any entity) located
outside India,

shall furnish, on or before the due date, a return in respect of his income or loss for the
previous year.

a) ‘Beneficial owner’ means an individual who has provided, directly or indirectly,

consideration for the asset for the immediate or future benefit, direct or indirect, of
himself or any other person.

b) ‘Beneficiary’ means an individual who derives benefit from the asset during the
previous year and the consideration for such asset has been provided by any person
other than such beneficiary.

Late fee for delay in filing return of income – Section 234F:

Total income exceeds Rs.5 lakhs:

a. If filed on or before 31st December : Rs.5,000
b. If filed after 31st December : Rs.10,000

Total income of a person does not exceed Rs.5 lakhs : Rs.1,000

Problems:
1. For filing returns of income in respect of various entities, the Income-tax Act, 1961 has prescribed (a)
One due date (b) Two due dates (c) Three due dates (d) Four due dates.

2. As per section 139(1), filing of returns is compulsory irrespective of whether profit is earned or loss is
incurred, in case of (a) companies only (b) firms only (c) both companies and firms (d) All assesses.

3. The due date of filing of return for a company with a business loss of Rs.1,30,000 for A.Y. 2020-21 is:–
(a) 31st July, 2020 (b) 30th September, 2020 (c) 31st October, 2020 (d) 31st August, 2020

4. The due date for filing of a return of income for a company for A.Y.2020-21 is:
(a) 31st July, 2020 (b) 30th September, 2020 (c) 31st October, 2020 (d) 31st August, 2020
280

5. Time limit for filing return u.s.139(1) in the case of Mr.A having total turnover of Rs.160 lakhs for the
year ended 31.03.2020, whether or not opting to offer presumptive income u.s.44AD, is 30 th September
2020. Do you agree?

Solution:
If Section 44AD is opted: Not subject to Tax Audit; 31st July, 2020
If Section 44AD is not opted: Subject to Tax Audit; 30th September, 2020

6. Mr.R furnishes the following particulars for the year ending 31.03.2020:
Income from other sources Rs.1,00,000
LTCG on sale of residential house Rs.72 lakhs
Exemption available u.s.54 Rs.72 lakhs
Examine whether Mr.R should file return of income for A.Y.2020-21.

7. Mr.A furnishes the following particulars for the year ending 31.03.2020:
Income from business Rs.3,30,000;
Income from other sources Rs.10,000;
LTCG on sale of urban land Rs.24 lakhs. Amount invested in NHAI bonds Rs.23 lakhs
Deductions under Chapter VI A Rs.2,00,000.
Examine whether Mr.A should file return of income for A.Y.2020-21.

8. Mr.R has taxable income of Rs.1,75,000 during the p.y. 2019-20. Is he required to file his IT return?
However, he is required to file his IT return if:
a. He has deposited an amount exceeding Rs………..in his current account in a bank
b. His electricity bill exceeds Rs………….
c. His expenditure on foreign travel exceeds Rs………..

9. Discuss, with reasons, whether the following statements are correct:

Mahesh, a resident and ordinary resident in India and having a house property and a bank account
outside India, is not required to file return of income for Assessment Year 2020-21, if his total income is
below the maximum amount not liable to tax.

Solution:
Mahesh is a resident and ordinary resident for A.Y.2020-21. He has a house property and a bank
account outside India. Hence, he is required to file return of income for A.Y.2020-21 even if his total
income is below the basic exemption (Rs.2,50,000).

10. Mr.X has a total income of Rs.7 lakhs for A.Y. 2020-21. He files his return of income for A.Y. 2020-21 on
13th January, 2021. He is liable to pay fee of:– (a) Rs.1,000 u.s. 234F
(b) Rs.5,000 u.s. 234F (c) Rs.10,000 u.s.234F (d) Not liable to pay any fee

11. Mr.Y has a total income of Rs.4,50,000 for A.Y.2020-21. He furnishes his return of income for A.Y.
2020-21 on 2nd December, 2020. He is liable to pay fee of:– (a) Rs.1,000 u.s.234F (b) Rs.5,000 u.s. 234F
(c) Rs.10,000 u.s. 234F (d) Not liable to pay any fee

12. Mr. Z, a salaried individual, has a total income of Rs.8 lakhs for A.Y. 2020-21. He furnishes his return of
income for A.Y. 2020-21 on 28th August, 2020. He is liable to pay fee of:– (a) Rs.1,000 u.s.234F (b)
Rs.5,000 u.s.234F (c) Rs.10,000 u.s.234F (d) Not liable to pay any fee.
281

BELATED RETURN u.s.139 (4)

A belated return can be filed at any time:
a. before the end of the relevant assessment year; or
b. before completion of assessment (whichever is earlier).

Mr.A, who earns only salary for the p.y. 2019-20 (AY 2020-21) ought to have filed return of income on
or before 31.07.2020, being the time limit allowed u.s.139(1). In case if he has not filed the return on
or before 31.07.2020, he may file a belated return on or before 31.03.2021, which is the end of the
relevant assessment year. In case his assessment is completed by the A.O., say by 31.12.2020, the
corresponding time limit for furnishing belated return u.s.139(4) also concludes by 31.12.2020.

Note: a. A belated return shall attract interest u.s.234 A if there is any tax due
b. A belated return shall attract late fee
c. Losses cannot be carried forward

Problem:
Mr.S, whose income consists of salary income only, files his return of income for A.Y. 2020-21 on 2nd
April 2021. Is the return a valid return?

Solution:
“Due date” for filing Income-tax return for A.Y. 2020-21 in the case of an assessee having salary
income only is 31st July, 2020. A belated return can be filed on or before 31st March, 2021 (i.e. before
the end of the relevant assessment year). In the present case, assessee files his return only on 2 nd April,
2021. Hence the return filed is not a valid return.

REVISED RETURN u.s.139 (5)

If an assesse, after furnishing the return of income, discovers ANY OMISSION OR ANY
WRONG STATEMENT in the return filed, he may furnish a revised return.

A revised return can be filed at any time:

a. before the end of the relevant assessment year; or
b. before completion of assessment (whichever is earlier).

Revised return filed shall replace the original return for all purposes.

Example:
For Assessment Year 2020-21
Due date for filing ITR: 31st July, 2020
A belated return can be filed before 31st March, 2021
The return filed (in time or belatedly) can be revised before 31st March, 2021.

Note:
a. A revised return can be revised again.
b. A belated return can also be revised.
282

Problems:
1. Mr.Y filed a return of income on 28.01.2021 (belated return) for A.Y.20-21 returning a taxable income
of Rs.10,00,000. Later, on 01.02.2021 he filed a revised return declaring a reduced taxable income of
Rs.6,00,000. As on 01.02.2021 assessment order was not passed. Advise on the validity of the return?

Solution:
A belated return can also be revised. A revised return can be filed before the end of the relevant
assessment year (i.e. before 31st March, 2021). A revised return was filed by the assessee on
01.02.2021 reducing the taxable income to Rs.6,00,000. A revised return filed shall replace the
original return for all purposes. The return filed is a valid return in law.

2. Mr.V submits his return of income on 12.09.2020 for A.Y.2020-21 consisting of income under the head
house property and other sources. On 21.01.2021, he realized that he had not claimed deduction
u.s.80TTA in respect of his interest on savings bank account. He wants to revise his return of income.
Can he do so? Discuss. Would your answer be different if he discovered this omission on 21.04.2021?

Solution:
Mr.V is not subject to Tax Audit. Due date for filing return of income for A.Y.2020-21 is 31st July, 2020.

A return furnished u.s.139(1) or a belated return u.s.139(4) can be revised. Thus, a belated return can
also be revised. Therefore, Mr.V can revise the return of income filed by him in January 2021, to claim
deduction u.s.80TTA, since the time limit for filing a revised return is up to the end of the relevant
assessment year, which is 31.03.2021.

However, he cannot revise return had he discovered this omission only on 21.04.2021, since it is
beyond 31.03.2021, being the end of A.Y.2020-21.

3. Explain with brief reasons whether the return of income can be revised u.s.139(5) of the Income-tax
Act, 1961 in the following cases:
a. Belated return filed under section 139(4).
b. Return already revised once under section 139(5).
c. Return of loss filed under section 139(3).

Solution:
Any person who has furnished a return u.s.139(1) or 139(4) can file a revised return at any time before
the end of the relevant assessment year or before completion of assessment, whichever is earlier, if he
discovers any omission or any wrong statement in the return filed earlier. Accordingly,

(i) A belated return filed u.s.139(4) can be revised.

(ii) A return revised earlier can be revised again as the first revised return replaces the original
return. Therefore, if the assessee discovers any omission or wrong statement in such a revised
return, he can furnish a second revised return within the prescribed time i.e. within the end of
the relevant assessment year or before the completion of assessment, whichever is earlier.

(iii) A return of loss filed u.s.139(3) is deemed to be return filed u.s.139(1), and therefore, can be
revised u.s.139(5).
283

DEFECTIVE RETURN:
The A.O. may intimate the defect in the return of income to the assesse. The assesse may be
called upon to rectify the defect within 15 days from the date of intimation. The Assessing
Officer has the discretion to extend the time period beyond 15 days, on an application
made by the assessee.

If the return is not so rectified within 15 days or within the extended time, the AO shall
treat the return of income as an invalid return.

Where, however, the assessee rectifies the defect after the expiry of the period of 15 days
or within the extended period, but before assessment is made, the Assessing Officer can
condone the delay and treat the return as a valid return.

PERMANENT ACCOUNT NUMBER (PAN).

i. The following persons are required to apply and obtain PAN

a. Every person whose total income or the total income of any other person in respect of
which he is assessable under this Act during any previous year exceeded the basic
exemption limit; or

b. Any person carrying business or profession whose turnover or gross receipts is likely to
exceed Rs.5,00,000 in any previous year; or

c. Every person, being a resident, other than an individual, which enters into a financial
transaction of an amount aggregating to Rs.2,50,000 or more in a financial year; or

d. Every person who is the managing director, director, partner, trustee, author, founder,
karta, chief executive officer, principal officer or office bearer of the person mentioned in
(c) above or any person competent to act on behalf of such person.

ii. PAN (10 alphanumeric characters) is required for the following purposes:

a. Purchase of UNITS OF MUTUAL FUND exceeding Rs.50,000

b. Purchase of DEBENTURES of a company exceeding Rs.50,000
c. Purchase of BONDS with RBI exceeding Rs.50,000
d. Purchase of SHARES in a company exceeding Rs.2,00,000
e. Sale or purchase of SHARES NOT LISTED in a recognized stock exchange exceeding
Rs.1,00,000 per transaction.
f. Sale or purchase of securities (other than shares) exceeding Rs.1,00,000

g. Sale or purchase of any IMMOVABLE PROPERTY value or SDV exceeding Rs.10 lakhs
h. Sale or purchase of MOTOR VEHICLE other than a two wheeler (no minimum amount)
284

i. Making an application for issue of a CREDIT CARD OR A DEBIT CARD

j. Opening a DEMAT account
k. CASH DEPOSIT exceeding Rs.50,000 with a bank/post office during any one day

l. TIME DEPOSIT WITH A BANK or A POST OFFICE exceeding Rs.50,000 or aggregate

exceeding Rs.5 lakhs during a financial year

m. Payment of LIFE INSURANCE PREMIUM aggregating to more than Rs.50,000 in a year to

an insurer

n. Payment in CASH exceeding Rs.50,000 to a HOTEL OR RESTAURANT against a bill or

bills at any one time.

o. Payment in CASH exceeding Rs.50,000 in connection with TRAVEL TO ANY FOREIGN

COUNTRY or payment for purchase of any FOREIGN CURRENCY at any one time.

p. Sale or purchase of goods or services of any nature other than those specified above for
an amount exceeding Rs 2 lakh per transaction.

1. Pertaining to the following transactions, what is the, minimum amount above which quoting of
Permanent Account Number is mandatory?

a. Sale or purchase of Car

b. Payment to a hotel or restaurant against a bill or bills at any one time.
c. Payment in connection with travel to any foreign country.
d. Payment to the Reserve Bank of India for acquiring bonds issued by it.
e. A Time Deposit with a Post Office.
f. Payment as Life Insurance Premium to an insurer.
g. Sale or purchase, of shares of a company not listed in a recognized stock exchange.
h. Sale or purchase of any immovable property.

Solution:
a. Quoting of PAN is compulsory (no minimum amount specified)
b. Payment in cash to hotels if bill amount exceeds Rs.50,000 at one time
c. Payment in cash exceeding Rs.50,000 in connection with travel to any foreign country at
one time.
d. Exceeding Rs.50,000
e. Time deposit with a bank or a post office exceeding Rs.50,000 or aggregate exceeding Rs.5
lakhs during a financial year
f. Payment of life insurance premium exceeding Rs.50,000 in a year to an insurer
g. Applying for purchase of shares in an unlisted company exceeding Rs.1,00,000
h. Sale or purchase of any immovable property value exceeding Rs.10 lakhs
285

SUBMISSION OF RETURNS THROUGH TAX RETURN PREPARERS:

“Tax Return Preparer” can be any individual, who has been authorized by the CBDT to
assist the “specified class of persons” in preparing and filing their return of income and
affix his signature on such return.

“Specified class or classes of persons” shall mean any person, other than
• a company or
• a person whose accounts are required to be audited u.s.44 AB or
• whose accounts are required to be audited under any other law for the time being in
force

Educational Qualification for TRPs

“Tax Return Preparer” shall be an individual who holds a bachelor degree from a
recognized Indian University or has passed the intermediate examination conducted by the
Institute of Chartered Accountants of India or Institute of Company Secretaries of India or .
Institute of Cost Accountants of India.

However, TRPs do not include:

• a Chartered Accountant;
• a Legal Practitioner who is entitled to practice in any civil court in India and
• any officer of a Scheduled Bank with which the assessee maintains a current account
or has other regular dealings.

Problem:
Mrs.H, an individual, engaged in the business of Beauty Parlour, has got her books of account for the
financial year ended on 31st March, 2020, audited u.s.44 AB. Her total income for the A.Y.2020-21 is
Rs.6,75,000. She wants to furnish her return of income for A.Y. 2020-21 through a tax return preparer.
Can she do so?

Solution:
Section 139B provides a scheme for submission of return of income for any assessment year through a
tax return preparer. However, it is not applicable to persons whose books of account are required to
be audited under section 44AB. Therefore, Mrs.H cannot furnish her return of income for A.Y.2020-21
through a tax return preparer
286

Section 140 – Who shall verify the return of income:

Assessee Verified by
a. Individual the individual himself

When absent from India: the individual himself; or any person duly
authorized by him holding a valid power of
attorney from the individual

Where he is mentally incapacitated: his guardian; or any other person

competent to act on his behalf

Where for any other reason he is not able to any person duly authorized by him
verify the return holding a valid power of attorney from the
individual

b. HUF Karta
Where Karta is absent from India or is Any other adult member (male or
mentally incapacitated female) of the family

c. Company Managing Director

Where MD is unable to verify Any other director
Where company is not resident in India Any person who holds a valid POA
When the company is in liquidation The liquidator

Where the management of the company

has been taken over by Central Govt or any
State Government under any law The principal officer of the company

Where an application for corporate insolvency Insolvency Professional appointed by

resolution process has been admitted by the such Adjudicating Authority
Adjudicating Authority under the Insolvency
and Bankruptcy Code, 2016

d. Partnership firm Managing Partner

When the managing partner is unable to verify Any other partner (not being a minor)
Limited Liability Partnership Designated Partner
When the designated partner is unable to verify Any Partner of the LLP

e. Local Authority Principal Officer

f. Political party Chief Executive Officer

g. Association of Persons Any Member or Principal Officer

287

Problem:
1. Specify the persons who are authorized to sign the return of income.
a. Political Party c. Local Authority
b. AOP d. LLP

Solution: Political Party: Chief Executive Officer of such party

AOP: Any Member or Principal Officer
Local authority: Principal Officer
LLP: Designated partner

2. Where the Karta of an HUF is absent from India, the return of income can be signed by any male
member of the family. Give reasoning for the statement to be true or false.

Solution: Any other adult member of HUF, can sign the return of income. Thus a male member who is
not an adult cannot sign the return of income. An adult member, whether male or female, can sign the
return of income.

3. Specify the persons who are authorized to verify u.s.140, the return of income filed u.s.139 of the
Income-tax Act, 1961 in case of a company.

4. [Link] filed his Return of Income for the AY 2020-21 on 30.03.2021. Can he revise such return of
income? If so why?

Solution: Yes. A belated return can be revised. A revised return can be filed within one year from the
end of the relevant assessment year or before completion of assessment whichever is earlier. In this
case, he can file a revised return on or before 31.03.2021 assuming assessment is not completed.

5. Explain the term “return of loss” under the Income-tax Act, 1961. Can any loss be carried forward even
if return of loss has not been filed as required?

Solution:
A return of loss is a return which shows certain losses. Section 80 provides that the losses specified
therein cannot be carried forward, unless such losses are determined in pursuance of return filed
under the provisions of section 139(3).

Section 139(3) states that to carry forward the losses specified therein, the return should be filed
within the time specified in section 139(1).

Following losses cannot be carried forward in the case of a belated filing:

Business loss; Speculative business loss; Specified business loss u.s.35AD; Loss under the head “capital
gains” and loss from the activity of owning and maintaining race horses.

However, loss from house property and unabsorbed depreciation can be carried forward even if return
of loss has not been filed in time.
288

QUOTING OF AADHAR NUMBER [SECTION 139AA]

1. Mandatory quoting of Aadhar Number:

Every person is required to mandatorily quote Aadhar Number:

(a) in the application form for allotment of PAN

(b) in the return of income

2. Mandatory quoting of Enrolment Id, where person does not have Aadhar Number:
If a person does not have Aadhar Number, he is required to quote Enrolment ID of Aadhar
application form in the application form for allotment of PAN or in the return of income
furnished by him. Enrolment ID means a 28 digit Enrolment Identification Number issued
to a resident at the time of enrolment.

3. Intimation of Aadhar Number to prescribed Authority:

Every person who has been allotted PAN and who is eligible to obtain Aadhar Number,
shall intimate his Aadhar Number to prescribed authority on or before a date as may be
notified by the Central Government.

4. Consequences of failure to intimate Aadhar Number:

If a person fails to intimate the Aadhar Number, the PAN allotted to such person shall be
deemed to be invalid and the other provisions of the Act shall apply, as if the person had
not applied for PAN.

5. The provisions of quoting Aadhar shall not apply in the following cases:
a. Individuals residing in the States of Assam, Jammu and Kashmir and Meghalaya;
b. Non-resident;
c. Very senior citizen;
d. Not a citizen of India.

Inter-changeability of PAN with the Aadhaar Number:

Every person who is required to furnish or intimate or quote his PAN may furnish or
intimate or quote his Aadhaar number in lieu of the PAN w.e.f. 01.09.2019 if he:

- has not been allotted a PAN but possesses the Aadhaar number
- has been allotted a PAN and has intimated his Aadhaar number to prescribed
authority.

PAN would be allotted in prescribed manner to a person who has not been allotted a PAN
but possesses Aadhaar number.
289

SELF-ASSESSMENT – SECTION 140A

Where any tax is payable on the basis of any return required to be furnished under section
139, after taking into account –

(i) the amount of tax, already paid,

(ii) the tax deducted or collected at source

the assessee shall be liable to pay such tax together with interest and fees payable under
any provision of this Act for any delay in furnishing the return or any default or delay in
payment of advance tax before furnishing the return.

Order of adjustment of amount paid by the assessee:

Where the amount paid by the assessee u.s.140A falls short of the aggregate of the tax,
interest and fees, the amount so paid shall first be adjusted towards the fees payable and
thereafter towards interest and the balance shall be adjusted towards the tax payable.

Additional problems:
1. Arjun's total income for A.Y. 2020-21 is ₹ 10 lakhs consisting of salary, capital gain and income from
other sources. After considering TDS and advance tax a sum of ₹ 50,000 towards tax is still payable.
Because of various reasons he could not file his return of income within the prescribed time limit.

Arjun approaches you for advice on the following issues:

i. Whether he can file a return of income on 1st December, 2020?

ii. Whether he will be able to revise his return of income, in case he discovers any omission or
mistake in his return filed on 01.12.2020?

iii. What amount of interest and penalty, he will be subjected to for the defaults, if any, for the
relevant assessment year.

Solution:
A belated return can be filed before the end of the relevant assessment year (i.e. before 31 st March,
2021). Accordingly, [Link] can file his return of income on 1st December, 2020.

A belated return can be revised. A revised return replaces the original return for all purposes. A
revised return can be filed before the end of the relevant AY. (i.e. before 31st March, 2021).
Accordingly, [Link] will be able to revise his return of income filed on 01.12.2020; before
31.03.2021.

Interest under section 234A for late filing: 50,000 x 1% x 5 = Rs.2,500 (From Aug to Dec)

Late fee is Rs.5,000.

290

2. Paras aged 55 years is resident of India. During the F.Y. 2019-20, interest of Rs.2,88,000 was credited
to his Non-resident (External) Account with SBI. Rs.30,000, being interest on fixed deposit with SBI,
was credited to his saving bank account during this period. He also earned Rs.3,000 as interest on this
saving account. Is Paras required to file return of income? What will be your answer, if he had
incurred Rs.3 lakhs as travel expenditure of self and spouse to US to stay with his married daughter for
some time?

Solution:

Computation of total income of [Link] for A.Y.2020-21

Income from other sources:

Interest earned from Non-resident (External) Account exempt u.s.10(4)
Interest on fixed deposit with SBI 30,000
Interest on savings bank account 3,000
Gross Total Income 33,000
Less: Section 80TTA 3,000
Total Income 30,000

Interest from NRE A/c is exempt u.s.10(4), assuming that [Link] has been permitted by RBI to
maintain the aforesaid account.

Since the total income before giving effect to Chapter VI-A deductions and exemption u.s.54, 54B,
54D, 54EC and 54F, is less than the basic exemption limit of Rs.2,50,000, he is not required to file
return of income for A.Y.2020-21.

If he has incurred expenditure of Rs.3 lakhs on foreign travel of self and spouse, he has to
mandatorily file his return of income on or before the due date u.s.139(1).
291

CHAPTER - 18: SPECIAL ECONOMIC ZONE – 10AA

Deduction u/s.10AA: Units located in SEZ deriving profits from export:

To whom available: Any assesse engaged in manufacture or production of any article

or thing or computer software in any SEZ.

Amount of deduction: 100% of export profits for first five assessment years

50% of export profits for next five assessment years

50% of export profits (or) amount transferred to “SEZ Re-

investment Allowance Reserve Account” whichever is less shall
be allowed as deduction for another five years.

Computation of deduction u.s.10AA:

Profits of SEZ unit (x) Export turnover of SEZ unit

Total turnover of SEZ unit

Computation of deduction u.s.10AA only after set-off of losses:

Deduction u.s.10AA shall be computed only after set-off of losses if any.

“Export Turnover” means consideration brought into India in convertible foreign exchange
within six months from the end of the previous year or within the time permitted by the RBI.

“Export Turnover” does not include:

Freight, telecommunication charges and insurance charges (FOB value of exports)

1. Y Ltd. furnishes you the following information for the year ended 31.03.2020

(in lacs)
Total turnover of Unit A located in Special Economic Zone 100
Export turnover of Unit A 50
Profit of the business of Unit A 30

Total turnover of Unit B located in Domestic Tariff Area 200

Profit of the business of Unit B 20

Compute deduction u.s.10AA for the A.Y.2020-21, assuming that Y Ltd. commenced
operations in SEZ and DTA in the year 2016-17.
292

2. Mrs.V, a resident individual, is running a SEZ unit, as well as a unit in Domestic Tariff Area
(DTA). She furnishes the following details relating to the year ended 31.03.2020, pertaining to
these two units
(Rs. in lakhs)
DTA unit SEZ unit
Export turnover 100 1000
Total turnover 400 1100
Net profit 50 220

Compute the deduction available u/s.10AA:

(i) When the SEZ unit had been set up on 12.03.2012; and
(ii) When the SEZ unit had been set up on 12.08.2017.

3. Rudra Ltd. has one unit at Special Economic Zone (SEZ) and other unit at Domestic Traffic Area
(DTA). The company provides the following details for the previous year 2019-20.

Particulars Rudra Ltd. (Rs.) Unit in DTA (Rs.)

Total Sales 6,00,00,000 2,00,00,000
Export Sales 4,60,00,000 1,60,00,000
Net Profit 80,00,000 20,00,000

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for the
Assessment Year 2020-21, in the following situations:

i. If both the units were set up and start manufacturing from 22-05-2012
ii. If both the units were set up and start manufacturing from 14-05-2016

Answer:
Total sales of SEZ unit: Rs.600 lakhs (-) Rs.200 lakhs = Rs.400 lakhs
Export sales of SEZ unit: Rs.460 lakhs (-) Rs.160 lakhs = Rs.300 lakhs
Net Profit of SEZ unit: Rs.80 lakhs (-) Rs.20 lakhs = Rs.60 lakhs

Case A: If both the units were set up and start manufacturing from 22.05.2012:
Deduction u.s.10AA: 60 lakhs x (300 lakhs/400 lakhs) x 50% = 22.5 lakhs (8th year)

Case B: If both the units were set up and start manufacturing from 14.05.2016:
Deduction u.s.10AA: 60 lakhs x (300 lakhs/400 lakhs) = 45 lakhs (4th year)

4. Krishna furnishes the following particulars for the previous year 2018-19 and 2019-20 in
respect of an industrial undertaking established in “Special Economic Zone” during the
financial year 2014-15.
2018-19 2019-20
Total sales 60,00,000 85,00,000
Export sales 48,00,000 55,00,000
Domestic sales 12,00,000 30,00,000
293

Money received in or brought to India

in convertible foreign exchange up to
30.09.2019 / 30.09.2020 43,20,000 40,00,000

Profit from the above undertaking 6,00,000 10,00,000

Total sales for F.Y. of 2019-20 includes freight of Rs.5 lacs for delivery of goods outside India.
Compute the amount of deduction available to [Link] under section 10AA.

Answer:

Note: Export turnover does not include freight and therefore Rs.5 lakhs has been excluded.
Export turnover is the sale proceeds received in India within 6 months from end of the
previous year.

For p.y. 2018-19 (5th year)

Profits of the undertaking Rs.6,00,000

Export turnover brought to India within 6 months Rs.43,20,000
Total turnover Rs.60,00,000

Amount of deduction u.s.10AA: 6 lacs x (43.2 lacs / 60 lacs) = Rs.4,32,000

For p.y. 2019-20 (6th year)

Profits of the undertaking Rs.10,00,000

Export turnover brought to India within 6 months (excluding freight) Rs.35,00,000
Total turnover Rs.80,00,000 (excluding freight of Rs.5 lakhs)

Amount of deduction u.s.10AA: 10 lacs x (35 lacs / 80 lacs) x 50% = Rs.2,18,750

294

CHAPTER - 19: ALTERNATIVE MINIMUM TAX

1. AMT provisions shall apply to any person who has claimed any deduction under:
a. Section 10AA
b. Section 35AD
c. Section 80JJAA, Section 80QQB & Section 80RRB

2. AMT provisions are applicable for all assesses except companies.

3. NO AMT: AMT provisions shall NOT apply to an Individual or HUF if the Adjusted Total
Income of such person does not exceed Rs.20 lakhs.

4. AMT rate is calculated @ 18.5% plus surcharge and education cess

5. Tax Liability is computed as under:

a. Tax on Total Income as per the normal provisions; and
b. AMT @ 18.5% on the Adjusted Total Income (whichever is higher)

6. Adjusted Total Income u.s.115JC is computed as follows:

Step 1: “Taxable Income” as per the normal provisions xxx

Step 2: Add: Deduction claimed (3 items):

u.s.80IA to 80RRB (except 80P) xxx
u.s.10AA xxx
u.s.35AD (net of depreciation allowed) xxx

Step 3: Adjusted Total Income xxx

7. AMT CREDIT: Excess tax paid on account of AMT shall be carried forward as “AMT Credit”
for a period of 15 years and can be set off against future tax liability.

8. For each assessment year, two computations are required to be made:

a. Total income under the normal provisions of the Act; and
b. Adjusted Total Income under the provisions of Section 115JC
295

PROBLEMS:

1. Compute the tax payable by Mr.A & by Mr.B for A.Y.2020-21:

Particulars Mr.A Mr.B

Total Income (after deduction u.s.10AA) 40,00,000 10,00,000
Deduction claimed u/s.10AA 25,00,000 8,50,000

Also compute the amount of AMT credit to be carried forward.

2. Mr.A, a resident individual and a software engineer, set up one unit in a special economic
zone in the year 2016-17 for development of the software. All the conditions of section 10AA
of the Income-tax Act stand fulfilled.

His P&L A/c. for the year ended 31st March, 2020 shows a net profit of Rs.25 lakhs.

The other details are as follows:

(a) Export turnover Rs.75 Lakhs.
(b) Domestic turnover Rs.25 Lakhs.

Debit side of the P&L A/c. includes corporation tax of Rs.5 Lakhs for office premises, which was not
paid due to certain dispute. Compute tax payable by Mr.A for the A. Y.2020-21.

3. Mr.X, an individual set up an unit in SEZ in the financial year 2015-16 for production of
washing machines. The unit fulfills all the conditions of Section 10AA.

During the financial year 2018-19, he has also set up a warehousing facility in a district of Tamil
Nadu for storage of agricultural produce. He fulfills 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 payment of which has been made by an account payee bank draft. The
warehouse became operational with effect from 1st April, 2019 and the expenditure of Rs.75
lakhs was capitalized in the books on that date.

Relevant details for the financial year 2019-20 are as follows:

Profit of unit located in SEZ Rs.40,00,000

Export sales of above unit Rs.80,00,000
Domestic sales of above unit Rs.20,00,000
Profit from operation of warehousing facility (before
considering deduction u.s.35AD) Rs.1,05,00,000

Compute income tax (including AMT u.s.115JC) payable by Mr.X for A.Y.2020-21
296
296

CHAPTER – 20: TOTAL INCOME AND TAX LIABILITY

1. Mrs.M, a resident individual, aged 63 years is a qualified medical practitioner. She runs her own clinic.
Income & Expenditure A/c. of Mrs.M for the year ending 31.03.2020 is as under:

She is working part-time with True Care Hospitals (P) Ltd. Her salary details are as under:
Basic pay Rs.13,000 p.m.; Transport allowance Rs.2,000 p.m. Further, during p.y.19-20, her son had
undergone a medical treatment in True Care Hospitals (P) Ltd. free of cost. The hospital would have
charged a sum of Rs.60,000 for a similar treatment to unrelated patients.

She owns a residential house. Ground floor of the house is self-occupied by her while first floor has
been rented out since 01.10.2019. The reconstruction of the house was started on 01.04.2019 and was
completed on 30.09.2019. The monthly rent is Rs.10,000. The tenant also pays Rs.3,000 p.m. as power
back-up charges. She took a housing loan of Rs.12 lakhs on 01.04.2019. Interest on housing loan for
the period 01.04.2019 to 30.09.2019 was Rs.60,000 and for the period 01.10.19 to 31.03.2020 was
Rs.40,000. During the year, she also paid municipal taxes for the f. y. 2018-19 Rs.5,000 and for
f.y.2019-20 Rs.5,000.

Other information:
a. Conveyance expenses include a sum of Rs.12,000 incurred for conveyance from house to True Care
Hospitals (P) Ltd. and vice-versa in relation to her employment.

b. Power & fuel expenses include a sum of Rs.6,000 incurred for generator fuel for providing power
back-up to the tenant.

c. Administrative expenses include a sum of Rs.10,000 paid as municipal taxes for her house.

d. Clinic equipments details are:

Opening w.d.v. of clinic equipments as on 01.04.2019 was Rs.1,00,000 and fresh purchase made on
28.08.2019 is Rs.25,000 which was paid in cash.

e. She availed a loan of Rs.8,00,000 from bank for higher education of her son. She repaid principal of
Rs.50,000 and interest of Rs.26,000 during p. y. 2019-20.

You are required to compute her net taxable income and net tax liability for the A.Y.2020-21.
297

2. Mr.X, a resident individual, aged 42 years, furnishes the following particulars relating to the year
ended 31-3-2020:

Analysis of his bank account in his ledger reveals the under-mentioned data:

i. Winnings from a TV Game show (Net) 70,000

ii. Gift received from mother's father 80,000
iii. Gift received from Rajesh, his close friend 60,000
iv. Interest on fixed deposit in the name of his minor son 11,500

v. Interest on capital received from Vidyut & Co., a 3,00,000

partnership firm in which he is a partner (@ 15% p.a.)

vi. Rent received for a vacant plot of land 3,70,000

vii. Interest on savings account with HDFC Bank 85,000

viii. Amount received from Sharks Pvt. Ltd., for a house at Salem 1,50,000
for which he had been in negotiation for enhanced rent three
years back. This has not been taxed in any earlier year. The house
was, however, sold off in March, 2019.

ix. Amount received under Keyman Insurance Policy 2,20,000

x. Dividend from domestic companies 1,00,000
xi. Lumpsum royalty received as a author of a books (eligible
for deduction u.s.80QQB) 9,00,000

xii. Amount forfeited by a buyer of his vacant plot, 3,10,000

since the buyer could not finalize the deal as per agreement.

Other information:
Donation given in cash to a charitable trust registered u.s.12AA 12,000

He owns agricultural lands at Colombo, Sri Lanka. He has derived

agricultural income therefrom 1,80,000

Public Provident Fund paid in the name of his minor daughter 75,000
Interest credited in the said PPF account during the year 8,900
Share of profits received from Z & Co. 1,90,000

Interest on loan borrowed from NBFC for purchase of electric vehicle

for personal use (loan sanctioned on 01.04.2019) 1,62,000

Expenditure on medical treatment (60%) disability on his dependant sister 24,000

Health Insurance premium paid by cheque on 01.12.2019 to insure the health

of spouse (this mediclaim policy is in force for 3 years) 60,000

Compute the total income of Mr.X and the tax payable for the A.Y.2020-21. Computation should
be made under proper heads of income.
298

3. X (55 years), a resident individual and practicing chartered accountant, furnishes the following
receipts and payments account for the previous year 2019-20:

Opening cash and bank balance on Staff salary, bonus and stipend
April 1, 2019 20,000 to articled clerks 20,50,000

Fee from professional services 39,78,500 Other general and

administrative expenses 12,00,000
Motor car loan from SBI @
10 % p.a. 2,00,000 Office rent 48,000
Life Insurance premium 23,000

Motor car (acquired in January

2020 - online payment) 4,00,000

Books bought (annual publication

by credit card) 22,000

Computer acquired on November

1, 2019 for professional use 25,000

Domestic drawings 2,50,000

Motor car maintenance 12,000
Deposit inPPF 1,40,000

Closing cash and bank balance

on March 31, 2020 10,000
------------ -----------------

- Motor car is used for both official and personal purposes. 1/4 of the motor car is for personal
purpose. No interest on car loan was paid during the year.

- X purchased a flat in Jaipur for Rs.15,00,000 in July 2013 cost of which was partly financed by a
loan from SBI of Rs.10,00,000 @ 10% p.a. interest, his own savings Rs.1,00,000 and a deposit from
Bank of Baroda for Rs.4,00,000. The flat was given to Bank of Baroda on lease for 10 years @ Rs.
40,000 per month. Municipal taxes paid by X is Rs. 4,200 p.a. House insurance is Rs. 1,000.

- He earned Rs. 1,00,000 in share speculation business and lost Rs. 1,50,000 in commodity
speculation business.

- X received a gift of Rs. 15,000 each from four of his family friends.
- Interest on savings account with Post Office Rs.18,000
- Expenditure on preventive health check-up in cash on his health Rs.7,200
- He contributed Rs.1,11,000 to PM Drought Relief Fund by way of bank draft.
- He donated to a registered political party Rs. 3,00,000 by way of cheque.
- He contribution to the National Pension Scheme set up by the Central Govt Rs.50,000

Compute the total income of X and the tax payable for the assessment year 2020-21.
299

4. [Link], a resident Individual aged 35 years, furnished the following information from
his Profit and Loss A/c for the year ended 31st March, 2020:

i. The net profit was ₹ 12,50,000

ii. The following was credited in the Profit & Loss Account:
a) Interest on government security ₹ 25,000
b) Dividend from a foreign company ₹ 38,000
c) Gold coins worth ₹ 55,000 received as a gift from his father

iii. Depreciation debited in the books of account was ₹ 85,000. Depreciation allowed as per
Income Tax Act, 1961 was ₹ 96,000

iv. Interest on loan amounting to ₹ 68,000 was in respect of capital borrowed for the
purchase of the new assets which has not been put to use till 31st March, 2020

v. General expenses included:

a) An expenditure of ₹20,500 which was paid by a bearer cheque
b) Compensation of ₹4,500 paid to an employee while terminating his service in
business unit

vi. He purchased a new house on 30.04.2019 with a loan borrowed from HDFC (a housing
finance company). The stamp duty value of the property was Rs.40 lakhs. The house
was let out from 01.05.2019 for Rs.15,000 p.m. The loan was sanctioned on 01.04.2019.
[Link] does not own any other residential house on the date of sanction of loan.
No municipal tax was paid. Interest on loan paid during the year amounted to
Rs.5,20,000. No principal amount was repaid during the year. Stamp duty charges paid
for getting the property registered amounted to Rs.3,00,000.

vii. He contributed the following amounts by cheque:

a) ₹ 45,000 in Sukanya Samridhi Scheme in the name of his minor daughter

b) ₹ 20,000 to the Swachh Bharat Kosh set up by the Central Government

c) Interest on loan taken from a bank by him for his son’s higher education amounted
to Rs.60,000. Principal amount repaid to the bank amounted to Rs.40,000

d) ₹ 28,000 towards premium for health insurance and ₹ 2,500 on account of

preventive health check up for self and his wife

e) ₹ 55,000 on account of medical expenses of his father aged 72 years (no insurance
scheme had been availed on the health of his father)

You are required to compute the total income of for the A.Y. 2020-21.
300

5. [Link] Kumar, resident, aged 62, furnishes the following information pertaining
to the year ended 31-3-2020:
₹
Pension received (net of tds) 8,27,000
Short-term capital gains (from sale of listed shares) 65,000
Long-term capital gains (from sale of listed shares) 1,24,000
Interest on fixed deposit from bank (net of tds) 1,44,000
Loss from let out property 2,30,000

Pertaining to technical consultancy services provided by him:

Gross receipts 51,60,000

Expenses:
Rent for premises 5,44,000
Salaries 11,20,000
Miscellaneous expenditure (revenue) 3,91,000
Conveyance 3,00,000

Contribution to PPF 1,10,000

Premium on Life insurance policy taken on 10-7-2017

(sum assured ₹ 5,00,000) 60,000

Mediclaim Insurance Premium for self (paid otherwise than by cash) 27,000
Preventive health checkup expenses (in cash) 6,000

Donation given in cash to a charitable trust registered u.s.12AA

(eligible for deduction u.s.80G) of the Income-tax Act, 1961 4,000

Interest received from Post Office Savings A/c 18,000

Additional information:
• TDS from pension ₹ 25,000
• TDS on interest on fixed deposit Rs.16,000
• 1/4th of conveyance expenses is estimated for personal use.
• Listed shares were sold in recognized stock exchange.

Compute the total income of the assessee for the assessment year 2020-21, under
proper heads of income.
301

6. Mrs.A provides the following information for the financial year ending 31-3-2020.
Compute her total income and tax payable for A.Y.2020-21 as per IT. Act 1961.

Income/Receipts:
1. Salary from M/[Link] Technologies – Rs.60,000 per month (joined from 1st
March, 2019).

2. She is in receipt of HRA, Rs.15,000 per month and also educational allowance of
Rs.1,500 per month for all the three of her children.

3. She bought a truck (light commercial vehicle) on 01-08-2019 and has been
letting it on hire. She does not maintain books of account for this business. But
she declares for income tax purpose, that she is earning net income of Rs.11,000
per month from this business

4. She received Rs.8,500 as interest on Post Office Savings Bank Account.

5. She received Rs.60,000 as interest from Company Deposits.

6. Dividend received from various domestic companies Rs.14,00,000

Expenses / Payments:
1. Interest payable to bank Rs.1,000 per month on loan for the purchase of truck.

2. Total interest paid to bank for loan borrowed for investing in company deposits
is Rs.25,000.

3. Rent paid for residence is Rs.18,000 per month.

4. Tuition fees paid for the year 2019-20 for her three children is Rs.50,000,
Rs.30,000 & Rs.20,000, respectively, to educational institution situated in India.

5. Medical insurance premium for her and for her husband is Rs.30,000 (paid by
cheque) and Rs. 25,000 (paid by cash), respectively.

6. She has deposited during the year, in 5-year Post Office Recurring Deposit
Scheme, Rs. 20,000.

7. Interest paid on loan borrowed from NBFC for purchase of an electric vehicle
during the previous year 2019-20 Rs.1,75,000.
302

7. [Link] is a noted child specalist of Mumbai. His Income and Expenditure account for
the financial year ended 31-03-2020 is given below:

Expenditure (₹) Income (₹)

To Staff salary 12,78,000 By Fee receipts 58,76,000
To Administrative expenses 11,64,000 By Winning at TV game
To Medicine consumed 23,95,800 show (net of tds) 35,000
To Consumables 57,500 By LIC policy matured 1,15,000
To Depreciation 1,25,000 By Honorarium for giving
To Rent of clinic 1,20,000 lectures at seminars 24,000
To Donation to Swachh Bharat 51,000
To Excess of income
over expenditure 8,58,700

1) Depreciation computed as per Income-tax Rules, 1962 has been ascertained at ₹ 75,000.

2) Medicine consumed include cost of medicine for self and family of ₹18,000 and for treating
poor patients of ₹24,000 from whom he did not charge any fee either.

3) Salary includes ₹ 30,000 paid in cash to a computer specialist who computerized his
patient's data on 29th September, 2019 at 3 p.m.

4) He purchased a new house on 30.04.2019 with a loan borrowed from HDFC (a housing
finance company). The stamp duty value of the property was Rs.40 lakhs. The house is self
occupied. The loan was sanctioned on 01.04.2019. He does not own any other residential
house on the date of sanction of loan. Interest on loan paid during the year amounted to
Rs.5,20,000.

5) Donation to Swachh Bharat has been made by way of account payee cheque.

6) He has paid a sum of ₹ 25,000 for a Life Insurance Policy (sum assured ₹2,00,000) of
himself, which was taken on 1-07-2013.

7) He also contributed ₹ 1,20,000 towards Public Provident Fund.

8) [Link] also paid interest of ₹ 10,000 on loan taken for higher education of his
daughter

9) [Link] also made donation of ₹ 1,00,000 to a charitable trust registered & eligible on
deduction under Income-tax Act, 1961.

Compute total income and tax payable by [Link] for the A.Y. 2020-21.
303

CHAPTER - 21: INCOMES EXEMPT U.S.10

1. State with reasons in brief whether the following statements are true or false with reference to
the provisions of the Income-tax Act, 1961:

a. Mr. A, a member of a HUF, received ₹ 10,000 as his share from the income of the HUF. The same is
to be included in his chargeable income.

b. Share of profit received by a partner from his firm is exempt u.s.10(2A)

c. Payment to Bhopal Gas Victims is fully exempt.

d. Compensation on account of disaster received from a local authority by an individual or his/her

legal heir is taxable

e. Mr. Roy received a sum of ₹ 20 lakh on 31.3.2020 from LIC of India in respect of a policy, where
the sum assured was ₹15 lakh, taken on 1.10.2004 and for which a one-time premium of ₹ 10 lakh
was paid. Mr. Roy claims that the amount is totally exempt u.s.10(10D) of the IT Act, 1961.

f. Maturity amount received from LIC is exempt but maturity amount received from keyman
insurance policy is taxable.

g. Amount withdrawn from Public Provident Fund as per relevant rules.

h. Scholarship granted to meet the cost of education shall be fully exempt.

i. Daily allowance received by MP / MLA is fully exempt.

j. Pension received by a recipient of gallantry award is exempt from income-tax.

k. Pension received by the widow of the member of the armed forces, who died during the course of
operational duties is exempt from tax.

l. Exemption is available to a Sikkimese individual, only in respect of income from any source in the
State of Sikkim.

m. Income earned by a minor child not by way of skill or talent is fully exempt.

n. Dividend from domestic company received by a resident shareholder (being an individual, huf,
firm) shall be fully exempt.

o. Agricultural land in urban area used for agricultural purposes by the assessee for 10 years was
compulsorily acquired by Government of India and compensation fixed by it Rs.25 lacs.

p. Lumpsum amount received by a senior citizen from a bank under Reverse Mortgage Scheme is
exempt from tax under section 10(43)
304

Answer:

False: Share received by member out of the income of the HUF is exempt u.s.10(2)

True: Share of profit received by a partner is exempt in his hands u.s.10(2A)

True: Payment to Bhopal Gas Victims is fully exempt u.s.10(10BB)

False: As per section 10(10BC), any amount received as compensation by an individual or

his/her legal heir on account of any disaster from the Central Government, State
Government or a local authority is exempt from tax.

False: Policy issued before 01.04.2012. Premium paid is Rs.10 lakhs which is more than 20% of
sum assured (15 lakhs x 20%). Therefore, maturity amount received is fully taxable. Tds
shall be deducted @ 5% on the INCOME. Maturity amount is not exempt u.s.10(10D).

True: Maturity amount received from LIC shall be exempt from tax u.s.10(10D) provided the
premium paid does not exceed the prescribed %. Amount received from maturity of
keyman insurance policy is taxable either under the head ‘salaries’ or ‘business or
profession’ or ‘Income from other sources’.

True: Any amount withdrawn from PPF shall be exempt from tax u.s.10(11)

True: The value of scholarship granted to meet the cost of education would be exempt from
tax in the hands of recipient irrespective of the amount or source of scholarship. Section
10(16)

True: Daily allowance received by MP or MLA shall be fully exempt u.s.10(17)

True: Exempt from tax u.s.10(18). It includes pension received by an individual who has been
awarded ‘Param Vir Chakra’ or ‘Maha Vir Chakra’ or ‘Vir Chakra’ (gallantry award).

True: Exempt from tax under section 10(19)

False: Income from any source in the State of Sikkim, dividend income and interest on securities
is exempt in the hands of a Sikkimese individual. This exemption is not available to a
Sikkimese woman who, on or after 1st April, 2008, marries a non-Sikkimese individual.
Section 10(26AAA).

False: Income of a minor child is exempt up to Rs.1,500 u.s.10(32)

True: Dividend from a domestic company received by an individual, huf or firm being a resident
is exempt up to Rs.10 lacs u.s.10(34).

True: Exempt u.s.10(37) – Refer capital gains (section 54B)

True: Exempt u.s.10(43) – Refer capital gains (reverse mortgage scheme)

Common questions