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Income Tax Law and Practice Overview

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Income Tax Law and Practice Overview

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21UCM14 Income tax law and practice-I

PAAVENDHAR COLLEGE OF ARTS & SCIENCE

DEPARTMENT OF COMMERCE
Subject: Income tax law and practice-I Class: III [Link]

Syllabus
UNIT-I
Income Tax Act 1961 –- Objectives of Taxation –- Canons of Taxation- Tax System in India -
Basic concepts and Definitions –- Assesses–- Person -– Previous year -– Assessment year –
Income –- Casual income -– Gross total income -– Total income.
UNIT- II
Basis of charge- – Scope of total income- – Residence and tax liability –- Incomes which do not
form part of total income.
UNIT- III
Heads of income –- Income under salaries –- Definition, features -– Computation of salary
income –- PF –- Allowances –- Perquisites -– Other items included in salary –- Deduction under
salary -– Tax –-Rebate, relief of income tax.
UNIT- IV
Income from House property –- Definition –- Basis of charge –- exempted HP incomes –
computation of income from HP –- Gross annual value -– Net annual value –- Deductions – Let
out and self -– Occupied houses.
UNIT -V
Business and Profession - Definition of business and profession - Profits and gains in business
and profession - Income chargeable under profits and gains- – Deductions –- Specific
allowances – -Deemed profit –- Computation of business income and professional income- –
Depreciation.

Unit-I
Introduction
The concept of taxation is as old as civilization. The principle of “welfare state” extends
the rate of government as unlimited. The scope of functions of the government is not restricted
to any particular limit and widens from time to time. With reference to developing country like
India, taxes are the most important way of collecting funds for government activities
1. Explain the brief history of income tax in india. ( 5 Marks)
The origin of the word “tax” is from “taxation” which means an estimate. The tax is a
compulsory payment that has to be made by an individual or other person to central
government, state government and local government. Tax is based on certain well established
rules or criteria such as income earned, property owned or expenditure made. It may be defined
as legal execution by the state for purposes of the state. Taxes may be classified as direct and
indirect taxes. Direct tax is one which is demanded from the very person to whom it is intended
or desired. Indirect taxes on other hand are a tax which is paid by one person and borne by
another person.
James Wilson introduced first income tax act in 1860, who later become (British) India’s
first finance member. This act lapsed in 1865. Thereafter act II of 1886 was the next land mark.
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21UCM14 Income tax law and practice-I
The Indian income tax act 1922 which came in to being as a result of the recommendations of
the all India income tax committee is a milestone in the evolution of direct tax laws in India. The
act of 1922 remained in force till 1961. Meanwhile in 1956 the government had referred the act
of the commission to recast it. The income tax bill giving effect to its recommendations was
submitted in the Lok sabha in April 1961. The bill received the assent of the president on
September 13, 1961.

[Link] is mean by tax?

 Tax is a compulsory payment imposed on persons and companies to meet the
expenditure incurred by the government for common benefit of the people in the
country.
[Link] is assesses?
 An Assesses may be any individual liable to pay taxes for himself or to pay tax on behalf
of somebody else.
Types of Assesses
 As per the Income Tax Act, they can be classified into different categories as follows:
1. Normal Assesses
2. Representative assesses
3. Deemed assesses
4. Assesses-in-default
Normal assesses
 An individual who pays tax for the total income earned during a financial year or the
loss incurred by him. Also, if any person is liable to pay any interest or penalty to the
government or entitled to get any refund under the act is considered normal assesses.
 Moreover, any person against whom proceedings under Income Tax Act are going on,
irrespective of the fact whether any tax or other amount is payable by him or not is also a
normal assesses.
Representative assesses
 A person who is responsible to pay tax for the income or loss caused by a third party. It
generally happens in case person liable for tax payment is a non-resident, minor, or
lunatic. They cannot file tax by themselves. Therefore, It can either be an agent or
guardian who need to comply with the rules on their behalf.
Deemed assesses
 An individual who is responsible to pay the tax by the legal authorities. It can be:
 Every person who is deemed to be an assesses under the Act
 Every person in respect of whom any proceeding under this Act has been taken for the
assessment of the income/loss of any other person in respect of whom he is assessable or
the amount of refund due to him or to such other person.
Assesses in default
 Assesses in default that person not Paid the tax to the government

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Meaning of Canons of Taxation:
By canons of taxation we simply mean the characteristics or qualities which a good tax
system should possess. In fact, canons of taxation are related to the administrative part of a
tax. Adam Smith first devised the principles or canons of taxation in 1776.

Even in the 21st century, Smithian canons of taxation are applied by the modern
governments while imposing and collecting taxes.

[Link] of Canons of Taxation:

In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of taxation are:

i. Canon of Equality:

Canon of equality states that the burden of taxation must be distributed equally or
equitably among the taxpayers. However, this sort of equality robs of justice because not all
taxpayers have the same ability to pay taxes. Rich people are capable of paying more taxes
than poor people. Thus, justice demands that a person having greater ability to pay must
pay large taxes.

ii. Canon of Certainty:

The tax which an individual has to pay should be certain and not arbitrary. According to A.
Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax
liability, ought all to be clear and plain to the contributor and to everyone. Thus, canon of
certainty embraces a lot of things. It must be certain to the taxpayer as well as to the tax -
levying authority.

iii. Canon of Economy:

This canon implies that the cost of collecting a tax should be as minimum as possible. Any
tax that involves high administrative cost and unusual delay in assessment and high
collection of taxes should be avoided altogether.

iv. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the greates t
convenience not only to the taxpayer but also to the [Link] canons of taxation
are observed, of course, not always faithfully, by modern governments. Hence these are
basic and classic canons of taxation.

We now present other canons of taxation:

i. Canon of Productivity:

According to a well-known classical economist in the field of public finance, Charles F.

Bastable, taxes must be productive or cost-effective. This implies that the revenue yield
from any tax must be a sizable one. Further, this canon states that only those taxes should
be imposed that do not hamper productive effort of the community. A tax is said to be a
productive one only when it acts as an incentive to production.

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21UCM14 Income tax law and practice-I
ii. Canon of Elasticity:

Modern economists attach great importance to the canon of elasticity. This canon implies
that a tax should be flexible or elastic in [Link] should be levied in such a way that the rate
of taxes can be changed according to exigencies of the situation.

iii. Canon of Simplicity:

Every tax must be simple and intelligible to the people so that the taxpayer is able to
calculate it without taking the help of tax consultants. A complex as well as a complicated
tax is bound to yield undesirable side-effects. It may encourage taxpayers to evade taxes if
the tax system is found to be complicated.

iv. Canon of Diversity:

Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic
or diverse in nature rather than having a single or two taxes. Diversification in a tax
structure will demand involvement of the majority of the sectors of the population.

[Link] the Importance of Taxation. ( 5/10 Marks)

Importance of taxation are as follows.
 Tax is one of the most important sources of revenue to the government. These sources
may be direct or indirect.
 Taxes are not only sources of revenue to the government but also useful to control
inflation and improving balance of trade in country.
 Taxation policy of the country plays a vital role in the working of our economy.
 The taxation is an exercise in the collective solution of individual problems.
 In our present day economic structure income tax plays a vital role as a measure of
removal of economic disparity.
 The government uses tax policy in pursuits of its several economic and social objectives.
 It is also most important instrument for ensuring social justice, equal distribution of
wealth and mobilization of savings etc.
 The taxes levied by the government form a pool of resources to be used for collective
benefit of the public.
 State can discourage consumption of harmful and undesirable goods by levying
prohibitive rates of tax.
 Imports of undesirable products can be curbed by imposing prohibitively high import
duties. Exports can be encouraged by cutting duties and taxes on export.
7. Enumerate the Objectives of Taxations. ( 5 Marks)
The basic objective of taxation is to raise resources for the State. In fact, experts like
David. A. wells contend that “Taxation is for revenue only and a so called tax which looks to
anything besides the securing of revenue is not a tax, but an unconstitutional exercise of the
taxing power
Different objectives of taxation may be summed up as under.
1. Objective of raising revenue.

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2. Regulatory objectives.
a. Regulating consumption.
b. Regulating production.
c. Regulating imports and exports.
d. Regulating the effects of inflation, depression etc.
3. Developmental objectives.
a. Objective of economic development.
b. Objective of capital formation.
c. Objective of increasing employment opportunities.
4. Objectives of reducing inequalities.
a. Reduction in economic disparities.
b. Reduction in regional imbalances.
[Link] is a Person under Income Tax Act?
 Definition of “Person” is given u/s 2(31) of the Income Tax Act 1961. The term ‘person’
under the Income-tax Act includes natural as well as artificial persons. Also, It can be an
association of persons or a body of individuals or a local authority or an artificial
juridical person.
Types of Person
The 7 categories of “persons” mentioned under the Income Tax Act:
 Individual
 Hindu Undivided Family
 Partnership Firm
 Company
 Association of Persons (AOP) or Body of Individuals (BOI)
 Local Authority
 Artificial Judicial Body (not covered under any of the above-mentioned categories)
 What is by income?
 It generally means a monetary return whether received in cash or kind. The income tax
department does not make any distinction between temporary and permanent income.
The temporary income or one-time income is taxable.
[Link] are the types of income?
 Aside from diversification, there are other ways to generate income known as the seven
streams of income;
 Earned Income.
 Profit Income.
 Interest Income.
 Dividend Income.
 Rental Income.
 Capital Gains Income.
 Royalty Income.
[Link] is mean by Assessment year?

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21UCM14 Income tax law and practice-I
 An assessment year is the period during which your prior year's income is assessed for
ITR filing reasons. An assessment year begins on April 1 and concludes on March 31 of
the following year. So, you will be filing ITR for AY 2022-23.
What is mean by previous year?
 Previous Year (PY) as per section 3 of Income Tax Act, 1961 is a year in which income is
earned. This income is taxed in the next year which is called assessment year. Previous
Year (PY) is also a period of twelve months starting from 1st April and ending on 31st
March.
What Do You Understand by Total Income/Gross Total Income?
The total of all your taxable income from the preceding year is your gross total income. It will
also include any profit or loss carried forward from previous years and any income after
adjusting for clubbing provisions.

Gross Total Income:

Income tax is a crucial aspect of the financial landscape for individuals and businesses
alike. It is the amount of money that taxpayers are legally obligated to pay to the
government based on their income. The difference between gross income and total income
has significant implications for determining one’s income tax liability.
What are the 5 Heads of Income?
As per the Income Tax Act (ITA), 1961, you can earn income from different sources, termed
income heads. Your gross income is the aggregate of your earnings under all those heads,
including
Salary
Property
Business or profession
Capital gains
Other sources
ONE MARKS
UNIT-I
1. Income tax is a
A) Direct tax
B) Indirect tax
C) Total tax
D) Danger tax
2. The maximum amount on which income tax is not chargeable in case a co -operative society
is:
A) Rs.50,000
B) Rs.30,000
C) Rs.25,000
D) Nill
3. Education chess is lived in case of
A) Individual

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21UCM14 Income tax law and practice-I
B) Assessment Year
C) Previous Year
D) Accounting Year
23. A person includes
A) Only Individual
B) Only Individual and HUF
C) Individuals, HUF, Firm, Company only
D) Individuals, HUF, Company, Firm, AOP or BOI,Local Authority, Every Artificial Juridical
person
24. As per section 2(31), the following is not included in the definition of 'person'
A) An individual
B) Hindu undivided family
C) A company
D) A minor
25. All assesses are required to follow
A) Uniform previous year which must be calendar year only
B) Uniform previous year which must be financial year only
C) Any period of 12 months
D) Period starting from 1st July to 30th June only
26. The year in which the income is earned is known as
A) Previous year
B) Financial year
C) Both (A) or (B)
D) None of the above.
27. Agricultural income is :
A) Fully exempt
B) Partially exempt
C) Fully taxable
D) None of these
28. Under Income Tax Act partnership firm includes -
A) Limited liability partnership
B) Limited liability company
C) One-person company
D) Association of person
29. A.O.P should consist of
A) Individual only
B) Persons other than individual only
C) Both individual and non -individual persons.
D) None of these Individual
30. Municipality of Delhi falls under----- category of person-
A) Artificial juridical person
B) Local authority
C) Individual

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21UCM14 Income tax law and practice-I
D) Association of Person
UNIT II
BASIS OF CHARGE
RESIDENTIAL STATUS
Introduction
Tax is levied on total income of assessee. Under the provisions of income-tax act, 1961 the
total income of each person is based upon his residential status. Section 6 of the act divides the
assessable persons into three categories.
1. Ordinary resident.
2. Resident but not ordinarily resident.
3. Non-resident.
[Link] is meant by residential status? ( 5 Marks)
Residential status is a term coined under income tax act and has nothing to do with
nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for
income-tax purposes, whereas an American who is a citizen of America can be resident of India
for income-tax purposes. Residential status of a person depends upon the territorial connections
of the person with this country. i.e., for how many days he has physically stayed in India.
The residential status of different types of persons is determined differently. Similarly,
the residential status of the assessee is to be determined each year with reference to the
“previous year”. The residential status of the assessee may change from year to year. What is
essential is the status during the previous year and not in the assessment year.

[Link] the procedure to determine the residential status of an individual ( 5 /10 marks)
Resident status of Individual (Sec.6)

Resident [Sec.6(1)] Non – Resident

[Sec.2 (30)]

Ordinary Resident Not ordinary Resident

For the purpose of determining the residential status of an individual the act lay down
two types of conditions namely, basic conditions and additional conditions. These are discussed
as follows.

Basic Conditions[SEC 6(1)]

(a) He is in India in the previous year for a period of 182 days or more. (OR)
(b) He is India for a period of 60 days or more during the previous year And 365 days or more

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during four years immediately preceding the previous year.

Exceptions
However the condition as per Sec 6(1)(a) is alone applicable in the following cases.
1. In the case of an Indian citizen who is going outside India for a job and his contract for
such employment outside India has been approved by the central government.
2. In the case of an Indian citizen who is going outside India as a member of the crew of an
Indian ship.
3. In the case of persons who are Indian citizens or persons of Indian origin living outside
India when they come to visit India.
Additional conditions [SEC 6(6)]
a. He has been resident in India in at least 2 out of 10 previous year (according to basic
condition noted above) immediately preceding the relevant previous year.
b. He has been in India for a period of 730 days or more during 7 years immediately preceding
the relevant previous year.

[Link] calculating number of days for stay in India both, day of departure from India and day
of arrival in India are to be counted as stay in India.

I. Resident (ordinary resident) [SEC 6(1)]

Ordinary resident = Satisfying any one of two basic conditions + Satisfying both the
additional conditions.

II. Not ordinarily resident [SEC 6(6)]

Not ordinarily resident = Satisfying any one of the two basic conditions + Satisfying none
or any one of the additional conditions.

III. Non resident

Under section 2(30) of the income-tax act, 1961 an assessee who does not fulfill any of the
two basic conditions would be regarded as ‘non-resident’ assessee during the relevant previous
year for all purposes of this act.

Explanation
 Meaning of stay in India
It means stay any where within Indian geographical territory.
 Stay may be continuous or intermittent
Stay in India for specified days should not necessarily be continuous. In such a case
the stay in India will be counted by adding stay in India on each different occasion.
 Stay need not be at one place
A person must stay within Indian territory and where he stays is not an important
consideration.
 Object of stay is not important
It is immaterial whether he stays in India for business purposes or on a personal

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21UCM14 Income tax law and practice-I
purposes or visits India as a tourists.

Residential status of individual

[Link] Status Basic Conditions Additional

Conditions
1. Resident Satisfied -
2. Resident and ordinary Resident [OR] Satisfied Satisfied
3. Resident and Not Ordinary Resident Satisfied Not Satisfied
[NOR]
4. Non-Resident [NR] Not Satisfied -

[Link] short note on residential status of HUF ( 5 Marks)

Residential status of HUF [ Section 6(2)]

Resident Non – resident [Sec 2 (3)]

Ordinary Resident Not – Ordinarily Resident

Ordinary Resident: [Section 6(2)]
If control or management of such HUF was wholly or partially in India during relevant
the previous year.

Not Ordinary Resident:[Section 6(6)(b)]

This status is allowed only to HUF along with individuals. A HUF will be ‘not ordinarily
resident’ if
a. Its manger (Karta) has not been resident in India in nine out of ten previous years preceding
the relevant accounting year (or)
b. The manager had not during the seven previous years preceding the relevant previous year
been present in India for a period or periods amounting in all to 730 days.

Non Resident: [Section 2(30)]

HUF shall be non-resident in India if the control and management of affairs is situated
wholly outside India.

6. Explain the concept of residential status of firm and aop, or boi ( 5 Marks)
Ordinary Resident [Sec (2)]
If control or management of such a firm, an association of persons (AOP) or body of
individuals (BOI) was wholly or partially in India during the relevant previous year. The

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control and management of affairs refers to the controlling and directing power, the head and
the brain. It means that decision-making power for vital affairs is situated in India. The control
and management means de-facto control and management and not merely the right to control
or manage.
Not Ordinary Resident:
A firm, an association of persons (AOP) or body of individuals (BOI) cannot claim this
status.
Non Resident:
If control or management of such a firm, an association of persons (AOP) or body of
individuals (BOI) was wholly outside India during relevant previous year.

[Link] the concept of residential status of a company [ SEC 6(3)]. ( 5 Marks)

The residential status of a company is to be determined on the basis of its incorporation
or registration. Section 6(3) provides the following tests in this connection.

Resident:
A company is resident in India if :
a. It is an India company, or
b. During the previous year, control and management of its affairs is situated wholly in
India
Not Ordinary Resident:
A company can not have this status. It can either be resident or non resident.
Non Resident:
A company shall be ‘non resident’ if it is not resident in India during the relevant
accounting. It means that, a company whose control and management is situated wholly or
partially outside India, will be non resident company.

8. Write short note on residential status of every other person. ( 5 Marks)

Every other person includes body of individuals, a local authority and an artificial
juridical person. They are either ‘Resident’ or ‘Non-resident’ but they cannot be not ordinarily
resident.
The test to be applied shall be the of control and management. If it is situated wholly
outside India, the assessee will be non-resident. If the control and management is wholly or
partially situated in India, the status will be that of ‘Resident’.
INCIDENCE OF TAX (SCOPE OF TOTAL INCOME)

9. Explain the scope of total income OR

Scope of total income of ‘a resident’ [SECTION 5(1)]

a) Income received or deemed to be received in India during the relevant accounting year. The
place and date of accrual is immaterial.
b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
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21UCM14 Income tax law and practice-I
c) Income accruing during the relevant accounting year outside India whether it is brought or
not in India during the year.

Scope of income = Indian income + Foreign income

Scope of total income of ‘not ordinarily resident’ [section 5(1)]

a) Income received or deemed to be received in India during the relevant accounting year.
The date and place of accrual is immaterial.
b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
c) Income accruing or deemed to accrue or deemed to be received outside India during the
relevant accounting year from a business set up in and controlled from India.

Scope of income = Indian income + One particular type of foreign

income

Scope of total income of ‘non-resident’ [section 5(2)]

Scope of income = Indian income

Summarized chart
Different types of status
[Link] Different kinds of incomes Resident Not Non
ordinarily resident
resident
1 Income received or deemed to be received in India. It is Taxable Taxable Taxable
immaterial whether it is earned in India or in a foreign
country.
2 Income earned in India whether received, paid in India Taxable Taxable Taxable
or outside India.
3 Income earned and received outside India from a Taxable Taxable Not
business controlled or profession set up in India. Income Taxable
may or may not be remitted to India
4 Income earned or received outside India from a business Taxable Not Taxable Not
controlled or profession set-up outside India. Taxable
5 Income earned and received outside India from any Taxable Not Taxable Not
other source (except income under point 3). Taxable
6 Income earned and received outside India in the years Not Not Taxable Not

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21UCM14 Income tax law and practice-I
preceding the previous year in question and if the same Taxable Taxable
is remitted to India during the current precious year.
Note
1. Gift received from a person other than relative is taxable provided the amount is above Rs.50,
000. [The whole amount should be taxed] Sec 56(2) (vi). If it is received outside India, it is
taxable only for OR. If it is received in India, it is taxable for all.
2. Dividend from an Indian company is not taxable u/s 10(34).
3. Salary drawn outside India from an Indian company is taxable only for residents. But if service
is rendered in India, then that portion is taxable to all.

10. Explain the different types of income ( 5 Marks)

Broadly income can be divided into two categories:
a) Indian income
b) Foreign income
a)Indian income:
Indian income is called by various words and names. These are:
 Income earned in India.
 Income accrues and arises in India.
 Income received or deemed to be received in India.
 Income payable in India. Income may have been earned in a foreign country but it is
payable in India.
 Income earned (or accrues) in India but it is received or payable outside India.
b)Foreign income :
Following types of incomes are called foreign incomes:
 Income earned (or accrues) outside India and also received outside India.
 Any income which is not earned or accrues or arises in India.
11. Explain the incomes which do not form part of total income ( 5 /10 Marks)
Section 10 of the income tax act deals with exempted incomes. Exempted incomes are
those incomes, which do not form part of the total income. In other words, these incomes are
not included in the total income of an assessee for income-tax purposes.

[Link]. Section Exempted incomes

1. 10(1) Agricultural income
2. 10(2) Receipt from Hindu undivided family
3. 10(2A) Partner’s share in the firm
4. 10(4)(i) Interest on securities / bonds for non-residents
5. 10(4)(ii) Interest on external account of a non-resident
6. 10(4B) Interest on specific saving certificates
7. 10(5) Value of leave travel concession
8. 10(6A) Tax paid on behalf of a foreign company
9. 10(6B) Tax paid on behalf of non-residents / foreign companies in respect of other
incomes.

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10. 10(6C) Royalty or free for technical services
11. 10(7) Allowances or perquisites for services rendered outside India
12. 10(8B) Income in connection under a technical assistance programmee
13. 10(10) Gratuity
14. 10(10A) Commuted pension
15. 10(10AA) Leave encashment
16. 10(10B) Any compensation to an employee
17. 10(10BB) Payment under Bhopal gas leak disaster (processing of claims) act 1985
18. 10(10C) Voluntary retirement payment
19. 10(10CC) Tax paid by employer on income by way of perquisites on behalf of an
employee
20. 10(11) Provident fund payment including interest
21. 10(12) Accumulated balance of recognized provident fund
22. 10(13) Superannuation fund payment
23. 10(13A) House rent allowance
24. 10(15)(iib) Interest on capital investment bonds
25. 10(15)(iiic) Interest payable to European investment bank
26. 10(15)(iv)(i) Interest on retirement benefits
27. 10(15)(v) Interest on securities and deposits
28. 10(15)(vi) Interest on gold deposit bonds, 1999
29. 10 (17) Allowances to MPs and MLAs not exceeding Rs.2,500 p.m. [W.e.f. AY 2007-08,
constituency allowance received is also exempted without any limit]
30. 10(17A) Amount in connection with cash or kind award instituted by central or state
government.

ONE MARK QUESTIONS

1. Income deemed to accrue or arise in India is taxable is case of:

a) Resident only
b) Both R & OR and R but NOR
c) Non-resident
d) All of the above
2. Income which accrues or arise outside India and is also received outside India is taxable in
case of :
a) Resident only
b) Not ordinary resident only
c) Both R & OR and R but NOR
d) None of the above
3. Income which accrues outside India from a business controlled from India is taxable in case
of :
a) Resident only

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21UCM14 Income tax law and practice-I
b) Not ordinary resident
c) Both R & OR and R but NOR
d) None of the above
4. Residential status is determined based on nos. of days stay in :
a) Previous year
b) Assessment year
c) Accounting year
d) None of these
5. Total Income of a person is determined on the basis of :
a) Residential status in India
b) Citizenship in India
c) None of the above
d) Both of the above
6. Infourge Ltd. is registered in London the control and management of its affairs are situated in
India Infourge Ltd. shall be :
a) Resident only
b) Both ordinarily resident and NOR
c) Not ordinarily resident in India
d) None of the above
7. Incomes which accrue or arise outside India but are received directly into India are taxable
for case of:
a) Resident only
b) Both ordinary resident and NOR
c) Non-resident
d) All the assesses
8. Success Ltd. is an Indian company whose entire control and management of its affairs is
situated outside India success Ltd is :
a) Resident in India
b) Non-resident in India
c) Not ordinarily resident in India
d) None of these
9. Martin Crow a foreign national visited India during the previous year for 180 days. Earlier to
this he never visited India. Martin Crow in this case shall be:
a) Resident in India
b) Non-resident
c) Not ordinarily resident in India
d) None of these
10. Residential status is to be determined for :
a) Previous year
b) Assessment year
c) Accounting year
d) None of these
11. Which of the following is the basis of taxing Cross - Border transactions: -

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21UCM14 Income tax law and practice-I
a) Residence of the taxpayer

b) Where is the Source of income

c) Both A and B

d) Neither A nor B

12. Under Residence based taxation, taxation of an individual is based on : -

a) Country of their residence

b) Whether the source of income is in or outside the country of residence

c) Both A and B

d) Neither A nor B

13. Under Residence based taxation, taxation of an companies is based on : -

a) Both A and B

b) Neither A nor B

14. Assessee includes : -

a) Individual, HUF, Firm, Company, AOP/BOI, etc.;

b) Any person by whom any Tax is payable under the Income Tax Act

c) Any person by whom penalty or interest is payable under the Income Tax Act

d) All of the above

15. A person who is a Resident in India , should be so covered with the provision of
a) Section 6

b) Section 9

c) Section 90

[Link]-resident’’ means
a) a person who is not a "resident";

b) a person who is a "resident",

c) For the purposes of Section 92, Section 93 and Section 168 includes a person who is not

d) ordinarily resident within the meaning of clause (6) of section 6.

e) Both A and C

17. A, is a NRI, who is resident but not ordinarily resident within the meaning of Section 6(6).
He received dividend from an Indian company where he owns 51%. For the purpose of
Transfer Pricing provisions, he would be considered a : -

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21UCM14 Income tax law and practice-I
a) Non resident

b) Residen

18. Resident taxpayers are liable to pay tax on their : -

a) Global income

b) Only India sourced income

c) Only Foreign income.

19. Non - Resident taxpayers are liable to pay tax on their : -

a) Global income

b) Only India sourced income

c) Only Foreign income.

20. On the basis of their Residential Status, taxpayers are classified into : -
a) Resident and not ordinarily resident

b) Non Resident

c) Resident and ordinarily resident

d) Either of the above

21.. An individual is said to be resident in India in any previous year, if he satisfies any --- of
the basic conditions : -
a) One

b) Both

c) Both the Basic conditions and at least one additional condition

22. Which one of the following is not a basic condition to determine residential status of an
individual : -
a) He has been in India during the previous year for a total period of 182 days or more ;

b) He has been in India during the previous year for a total period of 182 days or less ;

c) He has been in India during the 4 years immediately preceding the previous year for total

d) period of 365 days or more and has been in India for at least 60 days in the previous year .

e) Both A and C

[Link] individual is said to be non resident in India in any previous year, if he satisfies any ---
of the basic conditions : -
a) One

b) Both

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c) None

24. Abraham, an Indian citizen, left India during previous year 2016-17, for the purpose of
employment outside India on August 31, 2016. He was in India during the 4 years immediately
preceding the previous year for total period of more than 365 days . He would be a : -
a) Resident in India

b) Non Resident in India

25. A person is said to be of indian origin if : -

a) He was born in undivided India or

b) Either of his parents were born in undivided India

c) Either of his grandparents were born in undivided India.

d) All of the abov

26. A person , who is a resident, is said to be RESIDENT AND ORDINARILY RESIDENT if he

satisfies ---- of the additional conditions specified under section 6(6) : -
a) One

b) Both

c) None

27. An individual is said to be a resident but not ordinarily resident (RNOR) if he ----- any of the
additional conditions.
a) Fails to satisfy

b) Satisfies

28. Which of the following can be RNOR/ROR : -

a) Individuals and
b) HUFs
c) Company
d) Both A and B
29. Residential status is to be determined on : -
a) Every five years
b) Year to Year basis
c) Initial Year of incorporation
d) Both A and B
30. “Stay in India” to determine residential status includes : -
a) Stay in the territorial waters of India

b) Stay in a ship or boat moored in the territorial waters of India

c) Date of departure as well as the date of arrival in India

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21UCM14 Income tax law and practice-I
d) All of the above

UNIT-III
INCOME FROM SALARY
[Link] do you mean by heads of income?
Section 14 of income tax act 1961 provides for the computation of total income of an
assessee which is divided under five heads of income. Each head of income has its own method
of computation. These five heads are
 Income from “Salaries”
 Income from “House property”,
 Income from “Profits and gains of Business or profession”,
 Income from “Capital Gains”,
 Income from “Other sources”
Define salary [SEC 17(1)]
According to Section 17(1) of Income Tax Act, Salaries will include the following receipts
 Wages
 Any annuity or pension
 Any gratuity.
 Any fees, commission, perquisites or profit in lieu of or in addition to any salary or
wages.
 Any advance of salary.
 Any payment received by an employee in respect of any period of leave not availed
of by him.
 The total sum accredited to the credit of employees recognized provident fund to
the extent chargeable to tax.
 Transferred balance in a recognized provident fund to the extent it is taxable.
[Link] the basis of chargeability of salary.( under section 15)
 The following incomes are chargeable to income tax under the head “Salaries”
 Salary due from the present or former employer in the previous year, where
paid or not.
 Salary paid or allowed in the previous year on behalf of the present or former
employer, due or paid in advance.
 Arrears of salary paid or allowed in the previous year by or on behalf of the
present or former employer, if not charged to income tax in any earlier previous year.

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 As per the provisions of Section 15 the amount of salary due, advance salary
and arrear salary received in the previous year from the present or former
employer is considered while calculating income from salary.
 Any salary, bonus, commission or remuneration, by whatever name called due
to or received by a partner of a firm from the firm shall not be regarded as
salary for the purpose of this section.
4. Explain the essential features of salary( or)
Explain characteristics of salary
For any payment to be made taxable under the head salaries it must fulfill the following
characteristics. In case any receipt is not covered under any of these features it will not come
under this head.
 Employer employee relationship
 An income can be taxable under the head salaries only if there is a relationship of
an employer and employee is that of payer and payee.
 Basis of charge
 The salary is chargeable to tax on due or receipt basis whichever is earlier
irrespective of method of accounting followed by the assesses.
 Place of accrual
 The salary will be deemed to accrue or arise at a place where services are rendered
 Employment and profession
 Employment should be distinguished from profession. If employment is merely
incidental to the exercise of a profession, the gains from such employment are not
chargeable to tax under the head “Salaries”.
 Tax free salary
 Tax free salary means the employer himself pays the tax which is due on the
salary of his employee.
 Fore going of salary
 Once salary has been earned by an employee, it become taxable in his hands
though he may subsequently waive the right to receive the same from the
employer.
 Salary paid by Foreign Government /Enterprises.
 Salary paid by Foreign Government/Enterprises to its employees serving in India
is taxable under the head salaries unless it is specifically exempted under sec 10.
 Previous year for salary
 Previous year for the income under the head salaries shall always be financial year
of the Government of India (April to May).
[Link] the procedure for computation of salary income or format for computation of taxable
income from salary.
Computation of income from salary of Mr…….. For the assessment year 2010-2011
PARTICULARS AMOUNT

Basic salary:
Under the grade system basic salary is to be calculated by considering the date of
appointment and annual increment.
Dearness allowance(DA):
It is always fully taxable, however inclusion of DA for the purpose of various
calculations is depend upon the factor whether it form part of salary for retirement benefits or
not. In the absence of specific information, it is assumed that D.A is not forming part of salary.
Commission:
Advance salary:
In case an assessee receives some salary in advance in a previous year which was
actually not due in that year, it shall be taxable in the year of receipt. For the purpose of
calculations it is not to be considered.
Arrear salary:
Any amount of salary received from present or past employer during relevant previous
year and which relates to some earlier previous years, is treated as arrears of salary. It is taxable
on receipt basis and for the purpose of calculations it is not to be considered.
6. What is meant by allowances?
As per Oxford dictionary the word allowance means,” any amount or sum allowed
regularly”. These allowances are given to an employee to meet some their specific type of loss
or expenditure of the employee or to help him to meet certain type of expenses. These are
divided in to three categories on the basis of their tax treatment.

Allowances [ Section 17(3)]

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Fully Exempted Fully taxable Partially

taxable

Special allowances House rent allowance

Entertainment allowance

Fully exempted Fully taxable Partially taxable

1. Foreign 1. Dearness allowance, 1. House rent allowance.
allowance only in Additional Dearness 2. Entertainment allowance for government
case of Allowance, High Cost employees.
Government of living allowance. 3. Allowances covered U/S 10(14)
employees 2. City Compensatory  Helper Allowance
posted out side Allowance.  Uniform Allowance
India. 3. Capital Compensatory  Academic Allowance
2. House rent Allowance.  Conveyance Allowance
allowance given 4. Lunch Allowance.  Traveling Allowance
to judges of High 5. Tiffin Allowance  Any special Allowance in the nature of
court and 6. Marriage Allowance Composite Hill Compensatory
supreme court 7. Family Allowance Allowance or High Attitude
3. Sumptuary 8. Deputation Allowance Allowance or Uncongenial Climate
allowance given 9. Wardenship Allowance Allowance or Snow Bound Area
to judges of High 10. Non-Practicing Allowance or Avalanche Allowance
court and Allowance  Any Special Compensatory Allowance
supreme court 11. Project Allowance in the nature of border area or remote
4. Allowances from 12. Overtime Allowance area or difficult area or disturbed area
U.N.O 13. Fixed Medical Allowance
Allowance  Transport Allowance
14. Entertainment  Tribal Area Allowance
Allowance  Running Allowance given to
15. Water and Electricity employees of transport sector.
Allowance  Children Education Allowance
16. Servant Allowance  Hostel Expenditure Allowance
 Compensatory Field Area Allowance
 Compensatory Modified Field Area
Allowance.
 Special allowance in the nature of
counter insurgency allowance given to

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21UCM14 Income tax law and practice-I
the members of armed forces
operating in the areas away from their
permanent locations for a period of
more than 30 days.

Special Allowances Sec. 10 (14):

1. Conveyance or traveling allowances Amount spent for the performance of official
(Expenses on transfer is also to be treated as duties.
official purpose
2. Helper allowance - do -
3. Uniform allowance - do -
4. Academic allowance and research Amount spent for academic and research
purposes.
5. Travailing / transfer / Daily allowance Daily expenses incurred due absence from his
place of work while on tour or journey in
connection with transfer
6 Allowances to a transport employee to meet 70% of such allowance or Rs. 6,000/-p.m.
his personal expenses while running the whichever is less.
vehicle
7. Children education allowance Actual allowance (or) Rs.100 per month per
child whichever is less (subject to a maximum
of two children)
8. Children Hostel allowance Actual allowance or Rs.300 per month per
child whichever is less (subject to a maximum
of two children)
9. Any special allowance in the nature of Exemption allowed up to Rs. 300 p.m to Rs.
composite hill compensatory allowance / 7,000 p.m.
High altitude allowance / uncongenial
climate allowance / snow bound area
allowance / Avalanche allowance
10 Any special compensatory allowance in the Exemption allowed up to Rs. 200 p.m to Rs.
nature of Border area allowance / Remote 1,300 p.m.
area allowance / difficult area allowance/
disturbed area allowance.
11 Compensatory field area allowance Exemption allowed up to Rs. 2,600 p.m
12 Compensatory modified field area allowance Exemption allowed up to Rs. 1,000 p.m
13 Counter insurgency allowance / Exemption allowed up to Rs. 3,900 p.m
compensatory field area allowance

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21UCM14 Income tax law and practice-I
14 Highly active field area allowance Exemption allowed up to Rs. 4,200 p.m
15 Underground allowance given to coal mine Exemption allowed up to Rs. 800 p.m
workers.
16 Island duty allowance given to armed forces Exemption allowed up to Rs. 3,250 p.m
posted in Andaman & Nicobar and
Lakshadweep group of islands
17 Tribal area allowance Exemption allowed up to Rs. 200 p.m in the
states of Madya Pradesh, Tamil nadu, Utter
Pradesh, Karnataka, Tripura, Assam, West
Bengal, Bihar and Orissa.
18 Transport allowance for the journey between Actual or Rs.800 per month whichever is less.
office and residence.
19 Transport allowance to a blind or Actual or Rs.1,600 per month whichever is
handicapped employee for the journey less.
between office and resid02ence

EXPLAIN DEARNESS ALLOWANCE

Employees having fixed income suffer the most due to rise in prices and to compensate
their loss, they are paid such allowances. So DA nothing but additional salary and it is fully
taxable.

[Link] entertainment allowance (EA). [Section 16(ii)]

This allowance is fully taxable irrespective of any expenditure incurred on entertainment
of guests or customers. But in case any amount is reimbursed against any expenditure incurred
by employee on entertainment of guests or customers it shall be fully exempted.
U/s 16(ii) a deduction is allowed to those persons who receive this allowance. This
deduction isadmissible only to Government employees for an amount equal to least of
following.

a. Statutory limit Rs. 5,000 (Or)

b. 1/5th of basic salary only (Or)
c. Actual EA received during the year

Determine the deduction of EA from salary if

 Shri Sankar is a Government employee since 1974
 Shri Sankar is an employer of RBI since April 1953 and receiving entertainment
allowance since then.
 He is an employee of Cavin Ltd since 1952 and receiving entertainment allowance
since then.
[Link] is meant by house rent allowance(HRA)? [Section 10(13 A)]
Employees living in hired (rented) houses

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21UCM14 Income tax law and practice-I
 Sometimes the employer does not provide rent free accommodation but instead
makes a provision to pay some amount in cash; so that the employee may be
compensated to some extent as far as rent is concerned.
 The amount of cash paid is known as house rent allowance. Out of the total HRA
received an amount equal to the minimum of the following three items is exempted
from tax u/s 10(13A) read with Rule 2A and balance, if any will be added in the
salary of the employee for tax purpose. The three items are

1. 50% of salary in the case of principal cities and 40% of salary in the case of other cities (Or)
2. Amount of rent paid for the accommodation over 10% of salary (Or)
3. Actual house rent allowance

Principal cities: Chennai, Delhi, Mumbai, Calcutta

Meaning of salary = Basic + DA(Enters)+Commission on turn over

9. Explain Provident Fund (PF) and their features.

 To encourage savings for the social security of the employees, the Government has set
up various kinds of Provident funds.
 The employee contributes a fixed percentage of his salary towards these funds and in
many cases employer also contributes.
 The whole contribution along with interest is credited to employees account. He will
get payment out of this fund at the time of retirement and at some other important
occasions. If the employee dies, his heirs will get the full payment.
[Link] the different kinds of provident funds and their tax treatment
Provident funds are of four kinds
 Statutory Provident Funds (SPF).
 It is the oldest type of fund. Generally this fund is maintained by government
or semi government departments. This fund was started with a view of
promoting savings amongst government employees.
 Recognized Provident Funds (RPF)
 As the name suggests it is a fund to which the commissioner of income tax has
given the recognition as required under the income tax act. Generally this
fund is maintained by industrial undertakings, business houses, banks etc.
 Unrecognized Provident Funds (URPF)
 It is the provident fund which is not recognized by the commissioner of
income tax. The employee and the employer both contribute towards this
fund.
 Public Provident Funds (PPF)
 On July 1, 1968 a new fund known as public provident fund was started so
that self employed people may also enjoy the benefit of deduction u/s 80C.
Self employed people are doctors, lawyers, accountants, actors, traders,
pensioners. Its working is very simple. The interested people can open their
account in state bank of India and its subsidiaries.

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21UCM14 Income tax law and practice-I
[Link] of taxable income as regards provident funds.
PARTICULARS SPF RPF URPF PPF
Employee own Eligible for Eligible for Not eligible for Eligible for
contribution Deduction U/S Deduction U/S Deduction U/S 80C Deduction
80C 80C U/S 80C
Employer Fully exempted Amount Ignore for the time being Not taxable
contribution exceeding 12% of
salary is taxable
Interest credited Fully exempted Amount Ignore for the time being Fully exempt
exceeding 9.5% of
salary is taxable
Salary= Basic + DA (if it is forming part of salary)+Commission(if it is fixed percentage on
sales)
12. Explain the other items included in salary (RETIREMENT BENEFITS)
 Gratuity.
 Pension.
 Earned leave.
 Profits in lieu of salary.
What is meant by earned leave salary?
 Employees are entitled to various types of leave while they are in service. The leave
may either be availed by them at any time during the service.
 In the case these are not availed of, these may either lapse or these are allowed to be
encashed every year or these are accumulated and encashed after retirement or death
depending upon the rules of the employee’s concern. It is taxable as follows.
Meaning of salary
*Basic + DA (if it is forming part of salary) +Commission(if it is fixed percentage on sales)
Average salary
*It means average of salary drawn by employee during 10 months immediately
preceding his retirement.
Leave salary [ Section 10(10AA)]

Government Employees Non Government Employees

Fully Exempt Any payment received as the cash equivalent of the
leave salary to his credit at the time of superannuation or
on leaving the service shall be exemptedup to least of the
following amounts.
 Actual amount received.
 Amount calculated at average salary for 10 months.
 Notified limit of Rs. 3,00,000
 The cash equivalent of the leave salary to his credit
at the time of retirement. This amount is to be
calculated by taking leave for one moth (30 Days)
III [Link] for every one year of service less leavePage 28
already
availed of.
21UCM14 Income tax law and practice-I

[Link] the term gratuity and its tax treatment .

Gratuity refers to a lump sum payment made by an employer to his employee at the time
of leaving job in appreciation of his long and loyal services. Subject to the Provisions of Sec
10(10) gratuity received by an employee is exempt as follows.

Gratuity [ Section 10(10)]

Government Employees Non Government Employees

Fully Exempted

Covered by Payment of Not Covered by Payment of Gratuity Act

Gratuity Act 1972 1972
*Government employee:
Any death cum retirement gratuity received by government employee is fully exempt.
Meaning of government employee:
 Government employee includes
 Employees of central government.
 Employees of state government.
 Employees of local authority.
 Employees working in defence.
 Employees of statutory corporations .
*Non-government employees:
Non Government employees- Covered by Payment of Gratuity Act 1972
Any gratuity received by such an employee shall be exempt to the extent of least of the
following.
 15 days salary ( 7 days in case of employees working in seasonal factories) for each
completed year of service or part thereof in excess of six months on the basis of
monthly salary last drawn.
 Notified limit Rs. 3,50,000.
 Gratuity actually received by the employee.
Hints
 While calculating length of service period exceeding 6 months is to be taken as full
year. Thus part of the year up to 6 months is to be ignored.
 Calculation of 15 days salary

Monthly salary last drawn

15 days salary = --------------------------------- x 15 Days
26 Days
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21UCM14 Income tax law and practice-I
Meaning of salary
Salary = Basic salary + DA( whether enters or not)
Non Government employees- Not Covered by Payment of Gratuity Act 1972
Least of the following three amounts shall be exempt
 ½ month salary for every completed year of service on the basis of average salary
drawn during 10 months immediately preceding the month of retirement.
 Maximum notified limit Rs. 3,50,000.
 Gratuity actually received by the employee.

½ Month salary = Average salary drawn during 10 months

immediately preceding the month of retirement x ½

Meaning of salary
Salary = Basic salary + DA ( Enters) + Commission on turnover.
[Link] is meant by pension?
Pension is a payment received by an employee after his retirement.

Pension

Uncommuted pension Commuted pension

Fully taxable

Government employees Non-Government employee

(Fully exempted)

If employee receives Gratuity also If employee does not receive Gratuity

(Exempted amount shall be commuted value of (Exempted amount shall be
commuted value
One third (1/3) of pension) of One half (1/2)of pension)
 Uncommuted pension:
 It is monthly payment of pension. It refers to the periodic / regular pension
(Generally monthly) received by an employee from ex employer after
retirement and until such an employee dies.
 Commuted pension:
 It is a lump sum payment instead of monthly payment.
[Link] short note on profits in lieu of salary [ Sec 17(3)]
Profit in lieu of salary includes

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21UCM14 Income tax law and practice-I
 The amount of any compensation due to or received by an assessee from his
employer or from former employer in connection with termination of his
employment or modification of the terms and conditions relating thereto.
 Any payment received by an assessee from an employer or from former employer or
from a provident fund or from any other fund to the extent to which it does not
consist of contributions by the assessee.
 Any sun received under a key man insurance policy including the sum allocated by
way of bonus or such policy.
 Any amount due to or received whether in lump sum or other wise by any assessee
from any person in the following cases.
 Before joining any employment with that person.
 After cessation of his employment with that person
 Leave travel concession is included or considered as profit in lieu of salary but
exempted u/s 10
[Link] the meaning of perquisites [ Section 17(2)]
Perquisite means any benefit attached to an office or position in addition to salary or
wages. Perquisites may be given in cash or kind. If perquisites are given in kind it should be
capable of being measured in terms of money.
Perquisites

Taxable in all cases . Fully exempted specified cases only

I. PERQUISITES TAXABLE FOR ALL EMPLOYEES.
[Link] PERQUISITES TAXABLE FOR ALL Taxable value of perquisites
EMPLOYEES
1. Rent free accommodation Refer page no
2. Concessional accommodation Refer page no
3. Obligation of employee met by employer (Gas Actual expenses met by the employer
and electricity bill, Education of children bills,
Income tax , professional tax, Salary of domestic
servants etc)
4. Any amount of life insurance premium paid by Actual amount paid.
employer on the life of employee during the
previous year
5. Value of specified security or sweat equity Fair market value of specified security
shares allotted or transferred. or sweat equity shares on the date on
which option is exercised by the
employee less amount charged or
recovered from the employee.

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21UCM14 Income tax law and practice-I
6. Contribution to approved superannuation fund Amount of contribution LESS Rs
of the employee in excess of Rs. 1,00,000 1,00,000

7 Other fringe benefits.

7. a Interest free or concessional loan The rate of interest charged by SBI as
on the first day of the relevant
previous year in respect of loan for the
same purpose advanced by it.
7. b Traveling, touring accommodation Where facilities provided to all
employees
Amount spent by employer LESS
amount recovered from employee
Where these facilities are not
provided to all employees.
Value of facilities offered by other
agencies LESS amount recovered
from employee
7. c Food or beverage facility Amount spent by employer LESS
Amount charged / recovered by
employer from employee.
7. d Gift or voucher or token facility If gift is received in cash or convertible
in to money is fully taxable
If gift is in kid, then an excess of Rs.
5,000 is taxable.
7. e Credit card facility Expenditure incurred by employer
LESS
( expenditure on its use for official
purposes + any amount received or
recovered from the employee)
7. f Club facility Amount spent or reimbursed by the
employer.
7. g Use of movable assets 10% of cost of that asset.
7. h Transfer of movable assets Actual cost minus depreciation at the
following rates for each completed
year of use by the employer.
a. Electronic items ( 50% p.a on WDV
basis)
b. Motor car or other conveyance ((
20% p.a on WDV basis)
c. Any other item (10% p.a on actual
cost basis)

Rent free accommodation

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21UCM14 Income tax law and practice-I
Meaning of accommodation
It shall include a house, farm house, flat, hotel accommodation, guest house, a caravan,
mobile home, ship etc. For the valuation of rent free accommodation the employees have been
classified in to two categories
VALUATION OF RENT FREE ACCOMODATION
For unfurnished accommodation (Central and state Government employees).

The taxable value of perquisite in respect of accommodation provided to employees is equal to the
license fee which would have been determined by the central or state government in accordance
with the rules framed by the government for allotment of house to its staff.

For unfurnished accommodation (Private and other non government employees)

Value of rent free house
In cities the population of which is more than 25 Lakhs as 15% of salary
per census of 2001
Owned In cities the population of which is exceeding 10 Lakhs 10% of salary
by but not exceeding 25 Lakhs as per census of 2001
employer In cities and towns the population of which is 10 Lakhs or 7.5 % of salary
less than 10 Lakhs as per census of 2001
Hotel accommodation (For less than 15 days on transfer Fully exempted
from one place to another)
Hotel accommodation (For more than 15 days on transfer 24% of salary or actual bill
from one place to another) Which ever is less is taxable
Hired by - 15% of salary or actual rent
employer paid or payable by
employer which ever is less
is taxable in all cities.
For furnished accommodation. (For all employees)
The term furniture here includes radio sets, television sets, refrigerators, air conditioners and
other house hold appliances.
If furniture is owned by employer. Value of unfurnished house + 10% p.a
of cost of furniture
If furniture is hired by employer. Value of unfurnished house + Actual
hire charges paid or payable by
employer
For concessional accommodation.
It means that employer has given a house to his employee for which he is charging a part of the rent.
Value of concessional accommodation = Value of rent free accommodation less rent paid by
employee
MOTOR CAR
A. Motor car is owned or hired by employer and its running and maintenance expenses are met
or reimbursed by employer:
Car is fully used in the performance of official duties of the employee:
III [Link] Page 33
21UCM14 Income tax law and practice-I

Value of Perk = Nil

Car is fully used for the private, personal or family purposes of the employee:
Value of Perk:
Actual expenses incurred by the employer on running and ****
maintenance of car ****
Add: Salary of chauffer ****
Normal wear and tear of car (10% of actual cost) ****
Less: any amount paid or re-imbursed by employee ****
****
Value of Perk

 Car is used partly in the performance of duties and partly for private or personal
purposes:
The expenses on maintenance and running are met or reimbursed by the employer
 Where cubic capacity of engine does not exceed 1.6 litres Rs. 1,800 p.m
 Where cubic capacity of engine exceeds 1.6 litres Rs. 2,400 p.m
The expenses on running and maintenance for private or personal use are fully met by
employee himself
 Where cubic capacity of engine does not exceed 1.6 litres Rs. 600 p.m
 Where cubic capacity of engine exceeds 1.6 litres Rs. 900 p.m
Facility of Chauffeur
Value of perk = Amount specified for use of car + Rs. 900 p.m for drivers salary.
Education facility for children:
If employer provides free education to the members of the household of employee
reasonable amount which employee would heave spent on similar type of education in same or
nearby locality is taxable.
Free transport allowed by employer engaged in transport business:
If conveyance is hired or ticket is purchased by employer, actual expenses are taxable. It
shall be reduced by any amount paid by the employee.
Medical facilities:
Medical facility other than exempted medical facility is a perk taxable in case of specified
employees only. But if medical bills are in the name of employee and payment is made /
reimbursed by employer then it is a perk taxable in case of all employees because it is an
obligation met by employer.
Tax on employment [ Section 16(iii)]
In case any amount of professional tax is paid by the employee or by his employer on his
behalf it is fully allowed as deduction.
EXPLAIN THE CONCEPT OF REBATE OF TAX
Deduction
Standard Deduction Section 16 (i)
It is not allowed with effect from the assessment year 2006 – 07.
Entertainment allowances: [16 (ii)]

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Tax on Employment [Sec. 16 (iii)]
In case any sum is paid by the assessee on account of a tax on employment with the
meaning of clause (2) of article 276 of the constitution leviable by or under any law, such
amount shall be fully allowed as deduction. The example of this tax is professional tax levied
by any State Government.
ONE MARK QUESTIONS
[Link] is allowed only to ……………..
a) Government employee
b) Private Employee
c) Businessman
d) None of the above
2. Employers contribution to RPF to exempt up to of salary.
a) 12%
b) 18%
c) 9.5%
d) None of the above
3. Interest credited to RPF is exempt up to p.a.
a) 12%
b) 18%
c) 9.5%
d) None of the above
4. Allowance deduction is allowed only to Government employees.
a) Entertainment
b) House Rent
c) Travel
d) None of these3. Singer is a……
D) None of the above

5. Profession tax deduction is allowed on…basis.

a) payment
b) Receipt
c) Accrual
d) None of the above
6. Arrears of salary are taxable in the year of ……………….
a) payment
b) Receipt
c) Accrual
d) None of the above
7. Telephone provided at the residence of an employee by employer is perquisite.
a) Non-taxable
b) Taxable
c) Exempt

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21UCM14 Income tax law and practice-I
d) None of the above
8. Wages paid by the employer for the domestic servants employed by the employee is ……….
perquisite.
a) Non-taxable
b) Taxable
c) Exempt
d) None of the above
9. Employer-employee relationship determines the of salary.
a) Scope
b) Limit
c) None of the above
10. Relationship is necessary for taxing the remuneration under the head income from salary.
a) employer-employee
b) employee-employee
c) None of the above
[Link] income is chargeable under the head of salary under of IncomeTax Act, 1961.
a) section 15

b) section 20

c) section 14

d) section 16

12.. Pension is under the salary head.

a) fully taxable

b) partially taxable

c) not taxable

d) none of the above

13. The salary of Member of Parliament is taxable under the head .

a) salary

b) income from other sources

c) income from business

d) all of the above

14. The death-cum-retirement gratuity received by the Government Employeeor employee of

local authority is .
a) partially exempted

b) fully exempted

c) half taxable

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d) none of the above

15. Gratuity is defined as per section …

a) 10(10)

b) 10(10AA)

c) 10(10A)

d) None of the above

16. Bonus paid by the employer to the employee is

a) Fully Taxable

b) Partly Taxable

c) Fully Exempted

d) None of these

17. When an URPF is recognized, the balance so transferred is called

a) Recognized Balance

b) Transferred Balance

c) Transferred PF

d) None of the Above

18. Salary is defied as per section

a) 17(1)

b) 17(2)

c) 16(1)

d) None of the Above

[Link] made by an employer to employee monthly, other than salary is called

a) Bonus

b) Allowances

c) Benefits

d) None of these

20. HRA is …
a) Fully Taxable

b) Fully Exempted

c) Partly Taxable
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21UCM14 Income tax law and practice-I
d) None of these

21. Which Rule explain the taxation of HRA

a) 2A

b) 2

c) 2AA

d) 2AAA

22. If the assessee is living in own house HRA is

a) Fully Taxable

b) Partly Taxable

c) Fully Exempted

d) None of these

23. Entertainment allowance is allowed as a deduction as per section

a) 16(i)

b) 16(iii)

c) 16

d) 16(ii)

[Link] education allowance received by an employee from his employer is Rs.100 per
month per child for 3 children Taxable education allowance will be.
a) Rs. 300

b) Rs.480

c) Nil

d) Rs.1,20

25. The assessment period for income tax on salary is .

a) only more than 12 months

b) 12 months and less than 12 months

c) only 12 months

d) 12 months and more than 12 months

[Link] income is to be rounded off to nearest multiple of .and taxis to be rounded off to
nearest multiple of .
a) ten rupee

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21UCM14 Income tax law and practice-I
b) hundred, ten

c) ten, ten

d) rupee, rupee

27. The maximum limit for the claim of deduction under salary headContributions to certain
pension funds of LIC or any other insurer is .
a) up to ` 2,00,000

b) up to ` 1,50,000

c) up to ` 1,75,000

d) none of the above

28. Encashment of earned leave is given by… of Income Tax Act, 1961.
a) section 10(10aa)

b) section 12(10a)

c) section 15(10b)

d) none of the above

29. Compensation received on voluntary retirement is given by of IncomeTax Act, 1961.

a) section 10(10d)

b) section 10(10c)

c) section 10(10e)

d) section 11(10d)

30. Income Tax Act defines the perquisites and their valuation.
a) section 18

b) section17

c) section 18(c)

d) section 17(c)

UNIT IV

INCOME FROM HOUSE PROPERTY (IFHP)

[Link] the meaning of IFHP
The income from houses, buildings, bungalows, godownsetc is to be computed and
assessed to tax under the head “Income from house property”. The income under this head is

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21UCM14 Income tax law and practice-I
not based upon the actual income from the property but upon notional income or the annual
value of that building.
Definition
Section 22 of the Income tax Act says:
The annual value of property consisting of any building or lands appurtenant thereto of
which the assessee is the owner, other than such portions of such property as he may occupy for
the purposes of any business or profession carried on by him the profits of which are chargeable
to income tax, shall be chargeable to income tax under the head ‘Income from House Property’.
[Link] the meaning of (a) unrealized rent (b) unrealized rent recovery (c) arrear rent (d)
composite rent (e) standard rent (f) actual rent (g) sub-letting
Unrealized rent.
It is the amount of rent due from the tenant but became irrecoverable. The unrealized
rent is reduced from actual rent receivable in the previous year.
Unrealized rent recovery
It refers to the unrealized rent allowed in the earlier years preceding the current previous
year, but realized during the current PY. It will be deemed as income of the year in which it is
received, so, it will be a deemed income for the current PY.
Arrear rent
When any arrear of rent is recovered during the current PY then the excess amount after
allowing standard deduction at 30% from such arrear should be taken as income. The income is
to be included with the property income.
Composite rent
Composite rent refers to the total amount received by the owner towards rent of the
property and charges for different services provided, such as lift, security ,air – conditioner, etc.
Composite Rent = Property Rent + Rent for previous provided
Standard rent
It is the amount of rent fixed under the rent Control Act.
Actual rent
It is the amount actually received as rent from the tenant in respect of house property
which is let out.
Sub letting
When main tenant lets out full or part of the hired building to another person, it is called
Sub – Letting, Income from sub – letting, if any, is taxable under the head Income from other
sources and not under the head House property. Out of actual rent received, actual expenses
relating to sub – let portion are allowed to be deducted.
[Link] do you mean by deemed owner of house property?
According to sec. 27 of Income – tax Act the assessee in following cases is deemed to be the
owner of the house property, though not owner of the house property.
 An individual who transfers otherwise than for adequate consideration any house
property to his or her spouse, not being a transfer in connection with an agreement to
live apart or to a minor child not being a married daughter, shall be deemed to the
owner of the house property so transferred.

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21UCM14 Income tax law and practice-I
 The holder of an impartible estate shall be deemed to be the individual owner of all
the properties comprised in the estate.
 A member of a co-operative society to whom a building or part there of is allotted or
leased under a house building scheme of the society, shall be deemed to be the owner
of that building or part thereof.
[Link] are all the essential conditions required for basis of chargeability?
 Building or land appurtenant thereto.
 The assessee should be the owner of the property.
 Property is not used for purposes of assessee’s business or profession.
 Rent received from Quarters let to employees of assessee’s own business will not be
taxable under this head
 In case of dispute about ownership the person who receives rent shall be liable to pay
tax till the dispute about ownership is settled.
 Income from sub letting is not taxable under this head.
[Link] are all the exempted incomes from house property?
 Agricultural house property.
 House property held for charitable purposes.
 Self occupied but vacant house
 House used for own business or profession.
 Property held by registered trade union.
 House property held by a local authority
 House property held by a scientific research institution.
 House property held at a political party.
 House property held by a university and any other educational institution working
for spreading education and not to earn profit.
 House property held by a hospital or medical institution working for the spreading of
medical services to people and are not meant for earning profit.
 A palace owned by a former ruler of Indian states.
 One self occupied house.

[Link] you calculate or compute income from house property?

Let – Out House properties / Let out House (L/O)
It refers to the house, which has been let out by the owner or to the tenant. There is no
restriction as to how many houses can be let out. Owner can claim all deductions. There is no
restriction on the amount of deduction that can be claimed. Municipal tax, standard deduction
and interest on borrowed capital are the deductions which can be claimed by the owner.
Let – out house properties
Gross Annual value XXXX
Less : Local or municipal tax paid by the owner XXXX
Unrealised rent XXXX XXXX
Net Annual value XXXX

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21UCM14 Income tax law and practice-I
Less : Deduction u/s 24 std. deduction @ 30 % of NAV XXXX
Interest on loan for borrowed for construction, repair, reconstruction
(or) acquisition of house property. XXXX XXXX
Income / Loss from HP ?????
2. Deemed to be let out house properties:
Where an assessee occupies more than one house for his residence, then one house of his
choice alone will be treated as self – occupied (house of greater annual value) and the others as
let – out. For these houses treated as Let – Out, income will be calculated in the same manner as
like Let – out house properties.
II. Self – occupied House Properties / Self – Occupied House (S/O)
Self – Occupied house refers to the house, which has been occupied by the owner
himself. The owner can claim ‘Nil” Gross Annual Value for one self – occupied house. It is not
necessary that the owner should occupy only one house. He can occupy more than one house.
But for tax purposes only one house will be considered as self – occupied. The choice of
identifying self – occupied house is left to the discretion of the owner. Usually, the house that
has high Gross Annual Value, will be borrowed capital are the deductions which can be claimed
by the owner.
Net Annual value Nil

Less : Interest on money borrowed XXX

--------
Loss from HP (- ) ???
-------

[Link] THE ANNUAL VALUE

For the purpose of Section 22, the annual value of any property shall be deemed to be
a. The sum for which the properly might reasonably be expected to be let from year to
year;
OR
b. Where the property or any part of property is let and the actual rent received or
receivable by the owner in respect thereof is in excess of the sum referred to in clause
(a), the amount so received or receivable;
OR
c. Where the property is let and was vacant during the whole or any part of the previous
year and owing to such vacancy the actual rent received or receivable by the owner in
respect thereof is less than the sum referred to in clause (a), the amount so received or
receivable.
[Link] do you mean by gross annual value?
 The term annual value is very important as calculation of income from house
property depends upon correctly calculated annual value.
 It takes into consideration not only the rent received but also the expected rent a
house can fetch under the given situation and not only once but from year to year.

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21UCM14 Income tax law and practice-I
 It is something like notional rent which could have been derived, had the property
being let out.
 Even if the property is neither let-out nor self occupied there will be annual value
of the house property taxable under this head. It is otherwise called as Gross
Annual Value
[Link] the terms municipal rental value and rental value / fair rental value
Municipal value.
This is the value as determined by the municipal authorities for levying municipal taxes
on house property.
Fair rental Value:
Fair rent is a rent which a similar property can fetch in a similar locality.
Net annual value:
It is the amount available after deducting municipal tax or local tax paid by the owner
from the gross annual value. It acts as a base to calculate standard deduction u/s 24.
[Link] the determination of annual value of house property in different situations.
I. House property let out throughout the year
Step 1- Compare the municipal value and fair rent and take the amount WEH.
Step 2- Limit the amount as per step 1 to Standard rent under rent control act, if
applicable to the area. The resultant amount is Expected Rent (ER).
Step 3- Compare expected rent with actual rent and determine the Higher value. The
resultant amount is Gross Annual Value.
Step 4- From GAV deduct municipal taxes actually paid by the owner of the house, the
resultant answer is Net Annual Value.
[Link] property let out throughout the year and there is unrealised rent
Step 1- Compare the municipal value and fair rent and take the amount WEH.
Step 2- Limit the amount as per step 1 to Standard rent under rent control act, if
applicable to the area. The resultant amount is Expected Rent (ER).
Step 3- Compare expected rent with actual rent (Which is calculated by deducting
unrealized rent from rent receivable) and determine the Higher value. The resultant
amount is Gross Annual Value.
Step 4- From GAV deduct municipal taxes actually paid by the owner of the house, the
resultant answer is Net Annual Value.
[Link] property let out but remained vacant for part of the year.
Step 1- Determine actual rent on the basis of number of months actually occupied by the
tenant. This is taken as Gross annual value.
Step 2- From GAV deduct municipal taxes actually paid by the owner of the house, the
resultant answer is Net Annual Value.
IV. House property let out with unrealised rent and vacant for the part of the year.
Step 1- Determine actual rent on the basis of number of months actually occupied by the
tenant and then deduct unrealized rent. This is taken as Gross annual value.
Step 2- From GAV deduct municipal taxes actually paid by the owner of the house, the
resultant answer is Net Annual Value.
V. House property self occupied for residence.

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21UCM14 Income tax law and practice-I
Annual value is taken as Nil.
VI. More than one house property used for self occupation.
 When more than one house is self occupied by the assessee for residential purposes,
only one house is treated as self occupied and all other houses will be deemed to be
let out.
 The house property of higher Gross annual value is to be treated as self occupied.
 The annual value of the deemed to be let out house property is to be calculated on the
basis of the provisions applicable to the let out house.
VII. Part of the house property self occupied and another part of the house property is let out.
 If units are inseparable and it is treated as one house then no benefit of self
occupation shall be allowed.
 If units are separable each unit or part is to be treated as a separate house and it shall
get respective treatment.
VIII. House property self occupied part of the year and let out part of the year.
Whole property is treated as let out house property and no benefit of self occupancy shall
be allowed. But actual rent is taken only for number of months house property is actually let-
out.
[Link] are all the deductions from income form the house property U/S 24?
While calculating house property income, deduction are allowed out of net annual value(
NAV). These deductions are as follows.

Deductions

In case of let out / deemed to be let-out In case of self occupied

house

Standard deduction u/s 24(a) Interest on money borrowed u/s 24(b) Interest on money
borrowed u/s 24(b)

Standard Deduction [section 24(a)]

in case of let out /deemed to be let out house
S.D = 30% of NAV
In case of self occupied house: S.D = NIL
[Link] on housing loan/ interest on borrowed capital [Section 24(b)]
Housing loan means loan taken /amount borrowed for purchase, construction, repairs or
renovation etc of house property. Interest paid / payable on housing loan is allowed as
deduction while computing house property income.
Tax treatment of interest on housing loan
Let out / deemed to be let out
Amount of deduction = Actual interest ( No limit)
In case of self occupied house.

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21UCM14 Income tax law and practice-I
INCOME FROM HOUSE PROPERTY
1. Gross Annual Value of a SOP is …………….
a) Nil
b) 50,000
c) None of the above
2. Municipal tax is a deduction allowed on …………. basis.
a) Payment
b) due
c) None of the above
3. Municipal tax is allowed as a deduction if it is paid by the ……… of the property.
a) Owner
b) tenant
c) Owner or tenant
d) None of the above
4. Income is taxable under the head house property only when the assessee is the ……….. of
such house property.
a) Owner
b) tenant
c) Owner or tenant
d) None of the above
5. Arrears of rent shall be deemed to be income of the previous year in which such rent is
…………… after deducting ………….. of such amount.
a) received, 30%
b) received, 50%
d) None of the above
6. Income from House cannot be taxed under the head house property if the owner occupies the
property for his ……………...
a) business or profession
b) Living
c) None of the above
7. Arrears of rent received after the sale of property is taxable after deduction of % of such
amount.
a) 30%
b) 50%
c) None of the above
8. In case of self-occupied property, the deduction on account of interest on the money
borrowed for the purpose of construction of such house property cannot exceed
a) 2,00,000
b) 3,00,000
c) 5,00,000
d) None of the above
9. Fair rent of house is 2,50,000 and annual rent 2,80,000. Municipal taxes paid for 6 yrs. In
advance is 1,20,000. The Net annual value shall be ……………….

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21UCM14 Income tax law and practice-I
a) 1,20,000
b) 1,60,000
c) None of the above
10. For a self-occupied house property occupied in 2017-18 for which housing loan was availed,
the interest up to March 31, 2017 is 2,05,000 and thereafter the interest payable is 5000 per
month, the deduction available under section 24 in respect of interest for the year ended March
31, 2020 is ……….
a) 1,01,000
b) 1,05,000
c) None of the above
[Link] basis of charge Under the head income from house property under income tax act, 1961.
a) Rent Received

b) Gross Annual Value

c) Annual Value

d) None of the above

[Link] value is defined u/s

a) 23(1)

b) 22(1)

c) 21(1)

d) None of the above

13. The Income from House Property is taxable on individual even if property is not registered
in his
name
a) When the property has been transferred to spouse for inadequate consideration

b) Where the individual holds on importable estate

c) Where the property is transferred to a minor child for inadequate consideration

d) All of the above

14. Mr. A owns a house property. He lent it to Mr.B at 20,000 p.m. Mr.B sublet it to Mr. C on
monthly rent of ` 30,000 p.m. Rental income of A is taxable under the head ….
a) Income from Other Sources

b) Income from House Property

c) Income from Salary

d) None of this

1 5. For claiming the deduction for unrealised rent, the assessee must satisfy Which of the

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21UCM14 Income tax law and practice-I
following
a) Rule 4A

b) Rule 4

c) Section 4 A

d) None of this

16. The tax paid by the tenant is ?

a) Added to rent received

b) No adjustment

c) Added to Annual value

d) All of the above

17. What % is allowed as deduction from the annual value.

a) 20%

b) 25%

c) 30%

d) None of Above

18. which purposes are deductible from annual value for Interest on loan taken?
a) Construction

b) Purchase

c) Repair

d) All of the Above

19. Which of the following is not deductible from annual value?

a) Interest on loan taken for repairs

b) Interest on loan taken for reconstruction

c) Interest on unpaid interest

d) 3%

21. Annual value of self-occupied house is….

a) Nil

b) Equal to Municipal Value

c) Equal to Fair rent

d) None of the above

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21UCM14 Income tax law and practice-I
21. Foreign house property’s income is taxable in the case of
a) Non Resident

b) Not Ordinarily Resident

c) Ordinarily Resident

d) None of the above

22. Which of the following is deductible from the annual value of House Property ?
a) Municipal taxes paid by the owner during the previous year

b) Municipal taxes paid by the owner for the previous year

c) Municipal taxes paid by the owner

d) None of the abov

23. Which of the following conditions must be satisfied to charge the rental income under the
head Income of House Property:
a) The asssessee should be one of the property

b) The property should consist of any buildings or lands

c) The property should not be used by the owner for the purpose of business or professional
purpose

d) All of the above

24. Mr. A owns a house property. He lent it to Mr. B at ` 10,000 p.m. Mr. B sublet it to Mr. C on
monthly rent of ` 20,000 p.m. Rental income of Mr. B is taxable under the head
a) Income from Other Sources

b) Income from House Property

c) Income from Salary

d) None of the Above

25. Rule 4 includes

a) All of the Below

b) The defaulting tenant has vacated or steps have been taken to vacate the house

c) Tenancy must be bonafide

d) Tenancy must be bonafide

26. If the house remains vacant for the whole year, Then annual value will be
a) Equal to Fair rent

b) Equal to Municipal Value

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21UCM14 Income tax law and practice-I
c) Nil

d) None of the above

27. In incomre House Property, A sum equal to 30% is allowed as deduction from the annual
value as
a) Basic Deduction

b) Standard Deduction

c) Deduction

d) All of the above

28. Deductions from annual value is comes under section….

a) 24

b) 24A

c) 24AA

d) All of the above

29. Interest for pre-acquisition period is deductible in ………………. instalments

a) 7

b) 6

c) 5

d) 4

30. From the amount of arrears of rent received, … % Is allowed as deduction

a) 30%

b) 20%

c) 40%

d) 10%

UNIT V
INCOME FROM BUSINESS OR PROFESSION
SECTION 28 TO 44

[Link] is meant by business?

 Business refers to the purchase and sale of commodity with a view to earn profit. It
includes any trade, commerce or manufacture or any adventure or any concern in the
nature of trade, commerce or manufacture.
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21UCM14 Income tax law and practice-I
 Any transaction with a motive of selling at profit is included under this concept.
 The business should be carried in the current previous year and the owner of the
business will be taxed for the business carried on by him or by his agent or by his
manager etc. This head is the most important source of tax collection for the
government.
[Link] the following terms a) business, b) profession, c) vocation
business [Sec. 2(13)]
It simply means any economic activity carried on for earning profits. Sec 2(3) has defined
the term as “any trade, commerce, manufacture or any adventure or concern in the nature of
trade, commerce and manufacture.”
PROFESSION
A profession is an occupation requiring purely intellectual skills or manual skill
controlled by the intellectual skill of the operator. E.g Lawyers, Accountant, Engineer, surgeon,
Author etc. So profession refers to those activities where the livelihood is earned by the persons
through their intellectual or manual skill.
Sec 2(36) defines ‘Profession’ to include Vocation. The word ‘Profession’ implies
professed attainments and special knowledge as distinguished from mere skill.
VOCATION
It implies natural ability of a person some particular work. The term “Vocation” is
expressed differently in different case laws, but all falling under the ordinary and accepted use
of the word profession. Tax experts, journalists, architects, cost accountants and management
accountants comes under this category.
[Link] the different methods of accounting.
The income tax authorities accept the following methods of accounting.
 Cash method:
Entries in the books are made when money is actually received or actually paid. No
account is maintained for outstanding, prepaid, accrued or unearned incomes.
 Mercantile system:
Under this system any income which relates to the current year whether it is received or
not, and any expenses whether actually paid or not is taken in to consideration for computing
the profits and losses of the business.
[Link] the tax treatment of valuation of stock.
Stock is valued according to the general principles of accounting. Generally the valuation
of stock in hand is done on the basis of cost or market price WEL. The assessee is free to adopt
any method, but once a method is adopted it has to be adhered to from year to year.
Under or over valuation of stock
The stocks may be either under valued or over valued. In such cases the profits of the
year if affected. To eliminate effect of such valuation correct value of the stock should be found
by the following procedures.
100
Correct value in case of under valuation = Value of stock x ---------------------------------------
(100- Rate of under valuation)

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21UCM14 Income tax law and practice-I
100
Correct value in case of Over valuation = Value of stock x ---------------------------------------
(100 + rate of under valuation)
[Link] the incomes which are chargeable to income tax under the head ‘profits and gains
of business or profession’ UNDER SEC 28
The scope of income chargeable to tax under the head “Profits and gains of business or
profession” is covered by Sec 28 of the act which lays down that the following income must be
charged to tax under this head.
 Profits and gains Sec 28(i)
 Compensation or other payment due to or received by persons in connection with
business or profession Sec 28(ii)
 Income of any trade or professional or similar association Sec 28(iii)
 Profit on sale of license [Sec 28(iii)a]
 Cash assistance [Sec 28(iii)b]
 Duty drawback of customs or excise [Sec 28(iii)c]
 Value of any benefit or perquisite Sec 28(iv)
 Salary, bonus, commission or remuneration and interest received by a partner
from a firm. Sec 28(v)
 Amount received under Keyman Insurance policy Sec 28(vi)
 Receipts in nature of ‘non compete fees’ and ‘exclusively rights’
 Speculation business
 Profit earned from an illegal business.

6. What are all the Admissible Deductions U/S 30 TO 37?

common deductions – U/S (30 – 35)
1. Rent, Rates, Taxes, Repairs and Insurance in the case of Building premises: (Sec.30)
Deduction is allowed regarding rent, rates, taxes, repairs and insurance premium paid
for the building premises where the assessee is carrying on his own business or profession.
2. Repairs and Insurance of Machinery, Plant and furniture (Sec. 31):
The following deductions shall be allowed in respect of repairs and insurance of
machinery, plant and furniture used for the purposes of the business or profession.
i. The amount paid on account of current repairs thereto.
ii. The amount of any premium paid in respect of insurance against the risk of damage or
destruction thereto.
3. Depreciation on Fixed Assets (Sec.32):
Depreciation on the fixed assets is very important item of deduction of any business.
4. Expenditure incurred in the field of scientific research Sec 35
Particulars Amount
allowed as
deduction
1. Revenue expenditure for assessee himself Full
2. Contribution to approved scientific research association, payment to an 125% is

III [Link] Page 51

21UCM14 Income tax law and practice-I
approved university, college or institution for scientific research allowed
3. Contribution to “National laboratory” 125% is
4. Capital expenditure allowed
i) On plant, machinery, equipment, building Full
ii) On land (acquisition) Not allowed
5. In case any capital expenditure (not being expenditure on land and
building) is incurred by company engaged in the manufacture or 150% is
production of drugs, pharmaceuticals, electronic equipments, computers, allowed
telecommunication equipments, chemicals or any other article or thing
notified by the Board, on scientific research and development facility as
is approved by the prescribed authority,
5. Expenditure on acquisition or purchase of patents or copy rights sec 35A
i) If expenditure is incurred up to 31/3/98 - 1/14th total expenditure is allowed as
deduction.
ii) If expenditure is incurred after 31/3/98 – 25% is allowed as depreciation..
6. Expenditure on Know how sec 35 (AB)
i) If expenditure is incurred up to 31/3/98.
 Know how (generally) - 1/6th is allowed as deduction
 If know how developed in Indian laboratory, university or institution-
1/3rd is allowed as deduction
ii) If expenditure is incurred after 31/3/98 (From 1st April 1998)
 Know how (generally) - – 25% is allowed as depreciation.
 If know how developed in Indian laboratory, university or institution –
25% is allowed as depreciation.
11. Amortization of certain preliminary Expenses: (Sec.35D):
U/s 350, the deduction is allowed only in case of an Indian Company or a person
resident in India. The deduction is in respect of the expenditure incurred after 31 st March 1970
and Expenditure may be of the type which was incurred
 Before the commencement of the business, or
 After the commencement of the business, or in connection with the extension of its
industrial undertaking or in connection with its setting up a new industrial unit.
Deduction = 1/5th of expenditure is allowed as deduction.
12. Expenditure on demerger or amalgamation Sec 35DD – 1/5th is allowed as deduction
13. Amortization of expenses on prospecting etc for development of certain minerals (Sec 35E)-
1/10th is allowed as deduction
14. OTHER DEDUCTIONS (SEC.36)
Following expenses are fully allowed as deductions
 Employees insurance
 Bonus
 Commission
 Employer contribution to RPF.
 ESI(Employees state insurance)
 Gratuity fund (Approved)
III [Link] Page 52
21UCM14 Income tax law and practice-I
 Super annuation fund (Approved)
 Interest on borrowed capital.
 Loss of animals (Otherwise than as stock in trade).
 Bad debts
15. Family planning expenditure sec 36(1)(ix)
 Revenue expenditure - Fully allowed as deduction
 Capital expenditure - 1/5th is allowed as deduction
[Link] incurred by a corporation or body corporate (w.e.f 1/4/02)
[Sec 36(1)(Xii)]- Full amount allowed as deduction.
[Link] DEDUCTIONS (SEC 37)
General Deductions (Sec 37):
Sec. 37 (i )says that any expenditure (not being expenditure of the nature described in
Sec.30 to 36) and not being in the nature of capital expenditure or personal expenses of the
assessee), laid out or expended wholly and exclusively for the purposes of the business or
profession shall be allowed in computing the income chargeable under the head, “Profits and
Gains of Business or profession”.
Note
 The expenditure should not be of the type of expenses already covered under
Sec.30 to 36 of this Act.
 Expenses should have been incurred in the relevant accounting year.
 Expenses should be in respect of the business carried on by the assessee and
the profits of which are to be computed and assessed, and should be incurred
after the business is set up.
 Expenses should not be in the nature of personal expenses of the assessee.
 The expenses should have been incurred totally and exclusively for the
purposes of the business of the assessee.
 Expenses are not of capital nature.
 The expenses are incidental to the business of the assessee and directly spring
from the carrying on of it.
 The reasonable expenditure towards payment of compensation to the
employees whose services have been terminated would ordinarily come under
the provisions of Sec. 37(1)
 Deposit made under own your Telephone (OYT).
[Link] the allowable deductions U/S SEC. 37.
1. All expenses and payments made for purchasing of raw materials, manufacture and sale
of goods
2. All expenses in the nature of advertisement to pushup sales and not covered u/s 37 (3)
3. Sales – tax and expenses to carry on business.
4. Day – to – day expense’s carry on business.
5. Some subscription to be compulsorily and to protect the business interests.
6. Reasonable expenses incurred and Diwali / pooja or other Festivals etc.
7. Reasonable expenses incurred at the time mahurt and Diwali. But no monetary ceiling
has been fixed by Board.

III [Link] Page 53

21UCM14 Income tax law and practice-I
8. Royalty paid in connection with the use of trademarks, patents, copy rights, etc.
9. Commission paid to procure orders.
10. Compensation paid to an agent in connection with the termination or modification in the
terms and conditions of his agency.
11. Installation expense’s of new telephone and payment made under ‘ own your Telephone
(O.Y.T) scheme.
12. Expenses incurred to oppose the threatened nationalization of the business.
13. Legal expenses incurred to claim damages or compensation in case of non – fulfillment of
a contract.
14. Pension, gratuity and other voluntary payment given to the employees.
15. Gifts given t the employees but such gifts should not fall in the category of perquisites.
16. Bonus paid on the basis of an industrial award.
17. Expenses incurred on employees welfare activities.
18. Embezzlement by an employee during the normal course of the business.
19. Amt spent or payable on delayed payment of cash.
[Link] the expenses “specific allowances” expressly disallowed U/S 40.
A. In the case of any Assessee u/s 40(a)
i. Reduction of tax at source: u/s 40 (a) (i):
With effect from 1.4.2004 deduction of interest, royalty, fees for technical services or
other sums chargeable under this Act shall be allowed to be debited only if tax is deducted at
source and is paid before the expiry of time prescribed u/s 200 (1).
ii. Any other tax:
Any firm paid on account of any rate of tax levied on the profits or gains of any business
or profession or assessed at a proportion of, or otherwise on the business of any such profits or
gains is not allowed.
iii. Weather tax levied on Business Assets:
Wealth tax which is levied on the assets of the business according to the wealth – tax Act,
1957, will be allowed.
iv. Salary payable out side India: It is related with under the head salary.
B. In the case of any firm [Sec. 40(b)].
 Any payment of interest any partner which is authorized by and is in a
accordance with the terms of partnership deed does not exceed 12% p.a.
C. General (disallowed)
 Drawings private or personal expenses of the proprietors partners etc.
 Any expenditure in the nature of capital expenditure.
 The amount paid as charity and presents. However, subscription is allowed.
 Any provision or reserve except the special reserve of the approved financial
corporations.
 Past losses charged to P & L a/c
 Any other expenditure which was incurred not necessarily, wholly and exclusively for
the purpose of the business or profession of the assessee.
 Income tax, wealth tax and any other tax which is imposed on income.
 Any provision for bad debts, taxation etc.

III [Link] Page 54

21UCM14 Income tax law and practice-I
 Depreciation in excess of the admissible amount under the provisions of the IT Act,
 Payments to relatives u/s 40A (2)
 Payments exceeding Rs. 20,000 u/s Sec. 40A (3).
[Link] the term deemed profits.
i. Deemed profits (u/s 41):
ii. Balancing charge [Sec. 41(2)]:
iii. Profit on sale of assets used for scientific research [Sec. 41(3)]:
iv. Bad debts allowed earlier but recovered [Sec. 41(3)]:
v. Amount withdrawn from special reserve [Sec. 41(4A)]:
vi. Setting off loss from deemed profit [Sec. 41(5)]:
[Link] which losses are treated as Business losses.
Following losses are treated as business losses.
 Loss by theft and embezzlement by employee.
 Loss of cash due to robbery while being carried by cashier for disbursement;
 Loss of cash by dacoit in case of a banking company;
 Brokerage, commission and stamp duty incurred on rent deed for hiring office
premises.
 Loss due to accident fire in stock – in – trade.
 Loss caused by white ants.
 Loss caused due to theft of pledged goods.
 Loss on sale of securities held by assessee as a trading asset.
 Loss due to fire of hired machinery.
 Loss of stock – in – trade due to entry action.
 Loss of stock due to natural calamities.
 Loss due to fluctuations in the rate of foreign currency.
 Loss due to failure or insolvency of assessee bank.
 Loss due to forfeiture of security deposit.
 Loss due to non – acceptance of delivery of goods.
 13. EXPLAIN THE PROCEDURE FOR COMPUTATION OF BUSINESS INCOME
Computation ofBusiness Income
Particulars Amount Amount
Net profit as per P & L account ***
Add
1. Inadmissible expenses but included in P&L account ***
2. Incomes relating to business but not included in P&L ***
account . ***
3. Under valuation of closing stock *** ***
4. Over valuation of opening stock.

Less ***
1. Income not relating to business but included in P&L ***
account. ***

III [Link] Page 55

21UCM14 Income tax law and practice-I
2. Admissible expenses but not included in P&L account *** ***
3. Over valuation of closing stock.
4. Under valuation of opening stock
Income from business ***
Computation of Professional income:
Profession Income:
 Fees (For all professionals) ****
 Operation fees, visiting fees (Doctor) ****
 Institute fees (for accountants) ****
 Gift from clients (for all professionals) ****
 Legal fees, practicing fees (for lawyer) ****
 Examiner Fees (For all professionals) ****
 All other professional receipts **** ****
Less : Professional expenses
 Office and Administrative expense’s ****
 Clinic &expense’s and dispensary expense’s ****
 Cost of books ****
 Subscription of journals ****
 Depreciation ****
 Any membership fees ****
 Cost of medicine ****
(Op. stock + Purchases – closing stock) ****
 All other professional payments **** ****
Income from profession ****

DEPRECIATION
[Link] do you mean by depreciation?
Depreciation is the process of allocating the cost of long term asset to the time periods in
which it is used in a systematic and relational manner. As time passes the value of a capital
asset goes on decreasing and depreciation measures this decrease in monetary value which in
turn treated as business expenditure and debited to profit and loss account of the assessee.
[Link] the different methods of depreciation.
The depreciation is charged on a “Block of assets “system. The rates of depreciation have
been provided on block of asset basis. This scheme was introduced with effect from 1-4-1987.
1. Block of assets
Block of assets means group of assets falling within a class of assets comprising tangible
and intangible assets in respect of which the same percentage of depreciation is described.
Depreciation is charged on
Tangible assets( Building, Machinery, Plant, Furniture)
Intangible assets.
 Know how.
 Patents.

One Mark Questions

1. Business has been defined under section….
a) 2(14)

b) 2(13)

c) 2(10)

d) None of the above

2. Expenditure on scientific research – Under section…..?

a) sec 35

b) sec 34

c) sec 33

d) None of the above

3. Payment made in cash exceeding amounting to Rs. ……is Fully disallowed

a) 30000

b) 20000

c) 10000

d) None of the above

4. As per section 30, which expenditure incurred for buildiig shall not be allowed as deduction
under business and profession ?
a) Repairs of building

b) Revenue Expenditure

c) Capital expenditure

d) None of this

5. Payments to residents on which tax has not been deducted will be disallowed up to the extent
of
a) 30%

III [Link] Page 57

21UCM14 Income tax law and practice-I
b) 40%

c) 50%

d) None of the above

6. Which is the charging section of income under the head profits and gains from business &
profession?
a) Section 27

b) Section 28

c) Section 25

d) All of the above

7. The Export Incentives taxable under this head includes……?

a) Cash Compensatory Support

b) Profit on transfer of DEPB

c) Duty Drawback

d) All of the above

8. Circulars and Notifications are binding on the…..?

a) Income Tax Authorities

b) Central Board of Direct Taxes (CBDT)

c) International Revenue Authorities

d) None of the Above

9. Income from illegal business are ……?

a) Exempted

b) Fully Taxable

c) Partly Taxable

d) All of the above

10. Any payments made to outside India but TDS is not paid, then it will…..?
a) Disallowed

b) Allowed

c) Partly allowed

d) None of the Above

11. Interest on delayed payment of Value Added Tax is…… ?

III [Link] Page 58
21UCM14 Income tax law and practice-I
a) Partly allowed

b) Allowed

c) Disallowed

d) None of the above

12. Group of assets falling within a class of assets inrespect to tangible and intangible assets is
called as …..?
a) Set of assets

b) Group of assets

c) Block of assets

d) None of the above

13. while computing the business income, In Which of the following taxes are allowed as
deduction
a) Sales tax

b) Income-tax

c) Direct Tax

d) All of the above

14. In the business, Assessee is having stock existing .Then Valuation of stock will be at…..?
a) Cost price

b) Cost or market price, whichever is less

c) Market Price

d) None of the Above

15. Business included which of the following as per section 2(13) :

a) Commerce

b) Manufacture

c) Trade

d) All of the above

16. Dividend paid by an Indian company is …..in Income tax

a) Exempted

b) taxable

c) partly taxable

III [Link] Page 59

21UCM14 Income tax law and practice-I
d) None of the above

17. Singer is a……

a) Profession

b) Vocation

c) Business

d) None of the above

18. Example of Profession……

a) Dancer

b) Singer

c) Lawyer

d) All of the above

[Link] & maintenance of machinery , plant & furniture

a) Sec 34

b) Sec 33

c) Sec 31

d) All of the above

[Link] rates and taxes, repair & insurance for building come under section……
a) Sec 40

b) Sec 30

c) Sec 20

d) None of the Above

21. Depreciation under Income-tax Act is charged at the prescribed rate on the written down
value of
the …………….
a) Block of asset
b) Individual asset
c)Fixed asset
d) None of the above

22. If any asset is used for less than days in the year of purchase, the depreciation rate will be
only 50% of the normal rate.
a) 180
b) 150

III [Link] Page 60

21UCM14 Income tax law and practice-I
c) None of the above
d)195

23. Advertisement in souvenir of a is disallowed while computing business income.

a) political party
b) Trust
c) NGO
d) None of the above

24. Expenses exceeding paid in cash are disallowed.

a) Rs 10,000
b) Rs 20,000
c) Rs 50,000
d) None of the above
25. Deduction for bonus or commission to an employee is allowed only on the basis.
a) Payment
b) Receipt
c)All the above
d) None of the above

26. Profit on sale of an import license is taxed under the head ………………
a) Profit & Gains of Business
b) Income from other sources
c)Income from salary
d) None of the above

27. Any expenditure incurred on scientific research except on shall be allowed as business
expenditure u/s. 35.
a) Land
b) Machinery
c)Building
d) None of the above

28. Tax is allowed as deduction while computing the business income.

a) Sales
b) Income
c) wealth
d) None of the above

29. If some expenses are partly disallowed, then only disallowed portion should be % to the
profit.
a) Added
b) Deducted

III [Link] Page 61

21UCM14 Income tax law and practice-I
c) None of the above
d)Either a(or)b

[Link] assesses can claim additional deprecation on Plant and Machinery at the rate of 20% of a
few conditions are satisfied.
a) Actual cost
b)Sunk cost
c)Historical cost
d)None of the above

III [Link] Page 62

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Income Tax Law and Practice Overview

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Income Tax Law and Practice Overview

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21UCM14 Income tax law and practice-I

PAAVENDHAR COLLEGE OF ARTS & SCIENCE

[Link] is mean by tax?

III [Link] Page 2

[Link] of Canons of Taxation:

ii. Canon of Certainty:

iii. Canon of Economy:

iv. Canon of Convenience:

We now present other canons of taxation:

According to a well-known classical economist in the field of public finance, Charles F.

III [Link] Page 3

iii. Canon of Simplicity:

iv. Canon of Diversity:

[Link] the Importance of Taxation. ( 5/10 Marks)

III [Link] Page 4

III [Link] Page 5

Gross Total Income:

III [Link] Page 6

III [Link] Page 7

III [Link] Page 8

III [Link] Page 9

Resident [Sec.6(1)] Non – Resident

Ordinary Resident Not ordinary Resident

Basic Conditions[SEC 6(1)]

III [Link] Page 10

I. Resident (ordinary resident) [SEC 6(1)]

II. Not ordinarily resident [SEC 6(6)]

III. Non resident

III [Link] Page 11

Residential status of individual

[Link] Status Basic Conditions Additional

[Link] short note on residential status of HUF ( 5 Marks)

Residential status of HUF [ Section 6(2)]

Resident Non – resident [Sec 2 (3)]

Ordinary Resident Not – Ordinarily Resident

Not Ordinary Resident:[Section 6(6)(b)]

Non Resident: [Section 2(30)]

III [Link] Page 12

[Link] the concept of residential status of a company [ SEC 6(3)]. ( 5 Marks)

8. Write short note on residential status of every other person. ( 5 Marks)

9. Explain the scope of total income OR

Scope of total income of ‘a resident’ [SECTION 5(1)]

Scope of income = Indian income + Foreign income

Scope of total income of ‘not ordinarily resident’ [section 5(1)]

Scope of income = Indian income + One particular type of foreign

Scope of total income of ‘non-resident’ [section 5(2)]

Scope of income = Indian income

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10. Explain the different types of income ( 5 Marks)

[Link]. Section Exempted incomes

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ONE MARK QUESTIONS

1. Income deemed to accrue or arise in India is taxable is case of:

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b) Where is the Source of income

12. Under Residence based taxation, taxation of an individual is based on : -

b) Whether the source of income is in or outside the country of residence

13. Under Residence based taxation, taxation of an companies is based on : -

14. Assessee includes : -

d) All of the above

b) a person who is a "resident",

d) ordinarily resident within the meaning of clause (6) of section 6.

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18. Resident taxpayers are liable to pay tax on their : -

b) Only India sourced income

c) Only Foreign income.

19. Non - Resident taxpayers are liable to pay tax on their : -

b) Only India sourced income

c) Only Foreign income.

c) Resident and ordinarily resident

d) Either of the above

c) Both the Basic conditions and at least one additional condition

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b) Non Resident in India

25. A person is said to be of indian origin if : -