Computation of Total Income and

Computation of Total Income and Tax Liability of various Entities

Lesson
LESSON 11

Tax Liability of various Entities 11

KEY CONCEPTS
n Hindu Undivided Families ‘HUF’ n Firm n Partner n Partnership n Alternate Minimum Tax ‘AMT’ n Book Profit n Association
of Person ‘AOP’ n Body of Individual ‘BOI’ n Political Parties n Electoral Trusts

Learning Objectives
To understand:
 The Computation of Taxation of Individuals
 Concept of Hindu Undivided Family ‘HUF’ and how HUF comes into existence?
 When and How HUF can be partitioned?
 What are the Tax implications before and after partition of HUF?
 What is Partnership Firm?
 What are the Tax implications in the hands of Partners and Firm?
 What are Admissible Expenses/ Inadmissible Expenses while calculating the Book Profit of the Firm?
 What is Book Profit?
 What are the provisions of Alternate Minimum Tax ‘AMT’?
 What is Association of Persons and how it is formed?
 What is the method of computation of share of a member of AOP?
 What are Co-operative Societies and how the tax liability of Cooperative societies is determined?
 Provisions related to Political Parties
 Provisions related to Electoral Trusts
 Registration of trust u/s 12A/ 12AA / 12AB

Lesson Outline
 Introduction  Taxation of Association of Persons / Body of
 Tax Rates Individual
 Special Tax Regime for Individual & HUF  Taxation of Co-Operative Societies
 Special Tax Regime Applicable to a  Tax Exemptions to Political Parties [Section
Cooperative Societies 13A]
 Taxation of Individuals  Electoral Trusts
 Taxation of Hindu Undivided Families ‘HUF’  Registration of trust u/s 12A/ 12AA / 12AB
 Computation of Income of Hindu Undivided  Lesson Round-Up
Families (‘HUF’)  Test Yourself
 Taxation of Firms  List of Further Readings
 Alternate Minimum Tax ‘AMT’ [Section 115JC]  Other References

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INTRODUCTION
Income Tax is a charge on the Assessee’s Income. Income Tax law lays down the provisions for computing
the taxable income on which tax is to be charged. Taxable income of an assessee shall be calculated in the
following manner:
1. Determine the residential status of the person as per section 6 of the Income Tax Act, 1961 (‘the Act’).
2. Calculate the Income as per the provisions of respective Heads of Income. Section 14 classifies the
income under five heads.
(i) Income from Salaries
(ii) Income from House Property
(iii) Profits and Gains from Business or Profession
(iv) Capital Gains
(v) Income from Other Sources.
3. Consider all the Deductions and Allowances given under the respective heads before arriving at the net
under each head.
4. Exclude the Incomes exempt under section 10 of the Act.
5. Aggregate of Incomes computed under the 5 heads of income after applying Clubbing provisions and
making adjustments of set off and carry forward of losses is known as Gross Total Income.
6. Deduct therefrom the deductions admissible under Sections 80C to 80U. The balance is called Total
Income.
7. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A)
8. Add Agriculture Income (if any) in the total income calculated in (6) above. Then calculate tax on the
aggregate as if such aggregate income is the Total Income.
9. Calculate income tax on the net agricultural income as increased by Rs. 2,50,000 / 3,00,000 / 5,00,000
as the case may be, as if such increased net agricultural income were the total income.
10. The amount of income tax determined under (9) above will be deducted from the amount of income tax
determined under (8) above.
11. Calculate income tax on capital gains under Section 112, 112A, 111A and on other income at specified
rates.
12. The balance of amount of income tax left as per (10) above plus the amount of income tax at (11) above
will be the income tax in respect of the total income.
13. Deduct the following from the amount of tax calculated under (12) above.
(i) Rebate under section 87A (if applicable).
(ii) Tax deducted and collected at source.
(iii) Advance tax paid.
(iv) Double taxation relief (Section 90 or 91).
14. The balance of amount left after deduction of items given in (13) above, shall be the net tax payable
or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest
multiple of Ten rupees (Section 288B).

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15. Along with the amount of net tax payable, the assessee shall have to pay late fee, penalties or fines, if
any, imposed on him under the Income-tax Act.
For calculation of income, amount received is classified under 5 heads of income; it is then to be adjusted with
reference to the provisions of the Income Tax laws in the following manner.

Computation of Tax Liability Sections Amount

1. Income from Salary 15 to 17 XXX

Less: Deductions u/s 16
i. Standard Deduction of Rs. 50,000 or Gross Salary, whichever is
lower in Old Tax regime. From FY 2024-25, Standard Deduction of
Rs. 75,000 or Gross Salary, whichever is lower in New Tax regime.
ii. Entertainment Allowance
iii. Professional Tax Paid

2. Income from House Property 22 to 27 XXX

Less: Deduction u/s 24
Standard Deduction
Interest on House Property Loan

3. Income from Profits and Gains from Business and Profession 28 to 44 XXX
Turnover / Receipts / Fees / Sales
Less: Deductions u/s 30 to 37(1)

4. Income from Capital Gains 45 to 55A XXX

Full value of consideration
Less: Cost of acquisition/Cost of Improvement/Transfer expenses
Less: Exemption u/s 54/54B/54EE etc.

5. Income from Other Sources 56 to 59 XXX

Income u/s 56
Less: Deductions u/s 57

Add: Clubbing of Income XXX

Less: Set Off & Carry Forward Provisions under respective heads (XXX)

Gross Total Income [GTI] XXX

Less: Deductions under Chapter VIA 80C to 80U ( XXX )

Total Income (Rounded off to nearest Rs.10 u/s 288A) XXX

Tax on Total Income XXX

Add: Surcharge on Total Tax (if applicable) XXX

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Computation of Tax Liability Sections Amount

Less: Rebate u/s 87A (XXX)

Add: 4% Health & Education Cess on [Total tax + Surcharge – Rebate] XXX

Net Tax Liability XXX

Less: (i). TDS (ii). Advance Tax (iii). Relief u/s 89 (XXX)

Balance Tax Payable on Self-Assessment [Section 140A] XXX

Less: Self-Assessment Tax paid XXX

Balance Tax NIL

Provision for Computation of Taxable Income

Tax Rates l It is given by Finance Act (Passed by Parliament every year along with Union
Budget.
l It is not given by Income tax Act.

Computation of l Provision for computation of taxable income is given as per Income Tax Act.
Taxable Income

Structure of l Chapter: I Preliminary

Finance Bill
l Chapter: II Rates of Income Tax.
l Chapter: III Direct taxes [Income Tax]
l Chapter: IV Indirect Taxes [Custom/Excise/CGST/IGST/UTGST]
l Chapter: V Misc.

Schedule-I of Part- I l Income-tax rates for different assessee

Finance Act
Part-II l TDS Rates applicable

Part-III l Advance Tax Rates

Note l Part-III of First schedule of Finance Act would become the Part-I
of the First Schedule of next Finance Act.

TAX RATES FOR FY 2024-25 I.E. AY 2025-26

Calculation of Tax on Income
 Tax rate depends upon the category of person
 Amount of income
 Residential status of person
 Age of individual
 Type of Income

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Components of Tax are

Tax Rates for Different types of persons depending upon various parameters:
1. For:
 Resident Individual of the age below 60 years
 Non-Resident Individual
 Hindu undivided family
 Association of Persons
 Body of Individuals (other than Co-operative society)
 Artificial Juridical Person

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 2,50,000 Nil Nil

2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)

5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500

Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500

2. Applicable for:
Resident individual of the age of 60 years or more but less than eighty years at any time during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 3,00,000 Nil Nil

3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)

5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000

Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000

3. Applicable for:
Resident Individual of the age of 80 years or more at any time during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 5,00,000 Nil Nil

5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)

Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000

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CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be considered to
have attained a particular age on 31st March, the day preceding the anniversary of his birthday.
Therefore a resident individual, whose 60th / 80th birthday falls on 1st April, 2025 would be treated as having
attained the age of 60 years/80 years in the P. Yr. 2024-25.
4. For Firm and Local Authorities:

Types of persons Tax Rates

Firms (including LLP) 30% of total Income

Local Authorities 30% of total Income

Good to Know: Entity or individual other than a company whose adjusted total income exceeds Rs. 20
lakhs is liable to pay Alternate Minimum tax @ 18.5%.

5. For Co-operative Society:

Income Slabs Tax Rates

i. Where the taxable income does not exceed Rs. 10,000 10% of the income

ii. Where the taxable income exceeds Rs. 10,000 but does Rs. 1,000 + 20% of income in excess of
not exceed Rs. 20,000 Rs. 10,000

iii Where the taxable income exceeds Rs. 20,000 Rs. 3.000 + 30% of the amount by which
the taxable income exceeds Rs. 20,000

Surcharge
Surcharge is an additional tax imposed on certain cases. It is imposed over the basic tax rate calculated on the
income.
For example: Suppose total taxable income of an individual of 45 years is Rs. 1,30,00,000, then Base tax will be:
Rs. 1,12,500 + 30% of (1,20,00,000) = Rs. 37,12,500.
Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rates of surcharge prescribed in the
following manner:

S. Types of persons Income Surcharge Rates

No.

i. Individuals, HUF, AOP, BOI If Income exceeds Rs. 50 lakhs but does not 10% of income tax
exceed Rs. 1 crores

If income exceeds Rs. 1 crore but does not 15% of income tax
exceed Rs. 2 crores

If income exceeds Rs. 2 crores but does not 25% of income tax
exceed Rs. 5 crores

If total income exceeds Rs. 5 crores 37% of income tax

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S. Types of persons Income Surcharge Rates

No.

ii Firm/Local Authority If income exceeds Rs. 1 crore 12% of income tax

iii Co-operative Society If income exceeds one crore rupees but not 7%
exceeding ten crore rupees

If total income exceeds ten crore rupees 12%

In case of income referred in section 115AD then surcharge shall be computed as under:

S. Types of persons Income Surcharge Rates

No.

i. Individuals, HUF, If Income exceeds Rs. 50 lakhs but does not exceed Rs. 10% of income tax
AOP, BOI 1 crores

If income exceeds Rs. 1 crore but does not exceed Rs. 2 15% of income tax
crores

If income (excluding interest or dividend income u/s 115AD) 25% of income tax
exceeds Rs. 2 crores but does not exceed Rs. 5 crores

If total income (excluding interest or dividend income u/s 37% of income tax
115AD) exceeds Rs. 5 crores

Interest or dividend income referred u/s 115AD exceeding 15% of income tax
Rs. 2 crores

Marginal Relief in Surcharge: When an assessee’s taxable income exceeds applicable slab mentioned above,
for example, exceeds Rs. 1 crore, he is liable to pay Surcharge at prescribed rates mentioned above on Income
Tax payable by him. However, the amount of Income Tax and surcharge on total income shall not exceed the
amount of income that exceeds the respective slabs, for example, Rs. 1 crore.
Example: Suppose Mr. Ram an individual assessee of 42 years is having taxable income of Rs. 1,00,01,000/-
assuming Mr. Ram adopted new tax regime

Particulars Amount (Rs.)

1. Income Tax Rs. 26,90,300

2. Surcharge @15% of Income Tax Rs. 4,03,545

3. Income Tax on income of Rs. 1 crore Rs. 26,90,300

4. Maximum Surcharge payable (Income over Rs. 1 crore i.e. Rs. 1,000) Rs. 1,000

5. (Income Tax + Surcharge) payable Rs. 26,91,300

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Thus, in the above case, though the surcharge @15% is Rs. 4,03,545. However, since the income of Mr. Ram
exceeds Rs. 1 crore by just Rs. 1,000, Ram will be eligible for marginal relief and maximum surcharge will be
restricted to Rs. 1,000 only.
Cess
 Governments resort to imposition of cess for meeting specific expenditure
 Education Cess and Senior and Higher Education Cess are additional levy on the basic tax liability +
surcharge, if applicable.
 Rate of Education Cess is 2%
 Rate of SHEC is 1%.
 Rate of Health Cess is 1%.

SPECIAL TAX REGIME FOR INDIVIDUAL, HUFS, AOP, BOI, ARTIFICIAL JURIDICAL PERSON
[SECTION 115BAC]
The Finance Act, 2023, has amended tax regime under section 115BAC for Individuals, HUF, AOP, BOI or an
artificial juridical person for payment of taxes at the given rates. This regime of section 115BAC is the default tax
regime from Assessment Year 2024-25. Below rates are applicable from Assessment Year 2025-26:

Total Income (Rs) Rate

Up to 3,00,000 Nil
From 3,00,001 to 7,00,000 5%
From 7,00,001 to 10,00,000 10%
From 10,00,001 to 12,00,000 15%
From 12,00,001 to 15,00,000 20%
Above 15,00,000 30%

Surcharge: Surcharge is levied on the amount of income-tax at following rates if total income of an assessee
exceeds specified limits:

Rs. 50 Lakhs to Rs. 1 Rs. 1 Crore to Rs.2 Exceeding Rs. 2 Crores excluding
Crore Crores dividend & income u/s 111A, 112, 112A

10% 15% 25%

Note 1: The enhanced surcharge of 25% or 37% is not levied, on income by way of dividend or from income
chargeable to tax under sections 111A, 112, 112A and 115AD(1)(b). Hence, the maximum rate of surcharge on
tax payable on such incomes shall be 15%. Also, the surcharge rate for AOP with all members as a company,
shall be capped at 15%.
Note 2: Marginal relief is available from surcharge.
Health and Education Cess: Health and Education Cess is levied at the rate of 4% on the amount of income-tax
plus surcharge.
Alternate Minimum Tax: The assessees who are paying tax as per section 115BAC have been kept out of the
purview of Alternate Minimum Tax (AMT) of section 115JC. Further the provision relating to the computation,
carry forward and set off of AMT credit shall not apply to these assessees.

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Few Incentives Not Available:

1. Total Income of the assessee is calculated under the tax regime of section 115BAC without claiming the
following deductions/exemptions (which are otherwise available under regular tax regime):

a) Leave Travel concession [Section 10(5)]

b) House Rent Allowance [Section 10(13A)]

c) Official and personal allowances (other than those as may be prescribed) [Section 10(14)]

d) Allowances to MPs/MLAs [Section 10(17)]

e) Allowances for income of minor [Section 10(32)]

f) Deduction for units established in Special Economic Zones (SEZ) [Section 10AA]

g) Exemption of perquisite in respect of free food and non-alcoholic beverage (i.e. Rs.50 per meal)
provided through paid voucher {Section 17(2) read with Rule 3 (7)(iii)}

h) Entertainment Allowance [Section 16((ii)]

i) Professional Tax [Section 16(iii)]

j) Interest on housing loan in the case of one or two self-occupied properties [Section 24(b)]

k) Additional depreciation in respect of new plant and machinery [Section 32(1) (iia)]

l) Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]

m) Deduction in respect of tea, coffee or rubber business [Section 33AB]

n) Deduction in respect of business consisting of prospecting or extraction or production of petroleum

or natural gas in India [Section 33ABA]

o) Deduction for donation made to approved scientific research association, university college or
other institutes for doing scientific research which may or may not be related to business [Section
35(1) (ii)]

p) Deduction for payment made to an Indian company for doing scientific research which may or
may not be related to business [Section 35(1) (iia)]

q) Deduction for donation made to university, college, or other institution for doing research in social
science or statistical research [Section 35(1) (iii)]

r) Deduction for donation made for or expenditure on scientific research [Section 35(2AA)]

s) Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e.,
cold chain facility, warehousing facility, etc. [Section 35AD]

t) Deduction for expenditure on agriculture extension project [Section 35CCC]

u) Deduction under section 80C – 80U {Except employer’s contribution towards NPS under section
80CCD(2), deduction under section 80JJAA, Deduction u/s 80CCH and deduction under section
80LA(1A)}. Finance Act 2024 has increased tax deduction limit for employer contribution from 10%
to 14% of basic salary.

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2. Total income of the assessee is calculated after claiming depreciation under section 32, other than
additional depreciation, and without adjusting brought forward losses and depreciation from any earlier
year (if such loss or depreciation pertains to any deduction under the aforesaid sections). Further, loss
under the head house property can’t be set off against other heads of Income. Moreover, such loss and
depreciation will not be carried forward.

3. If the assessee has any unabsorbed depreciation, relating to additional depreciation, which has not
been given full effect, the corresponding adjustment shall be made to WDV of the block of assets in the
prescribed manner.

4. In case the assessee has business or professional income, and no option is exercised, he will be
governed by the alternative tax regime. The assessee can avail benefit of regular tax regime by
exercising the option under section 115BAC (6). Such option can be exercised on or before the due date
of submission of return of income under section 139(1) and such option once exercised shall apply to
subsequent assessment year as well.

5. However, the option once exercised for any previous year can be withdrawn only once for a previous
year (other than year in which it was exercised) and thereafter the person shall never be eligible to
exercise the option of availing the benefit of regular tax regime {except where such person ceases to
have any income from business or profession.}

6. If assessee does not have business or professional income, the option under section 115BAC(6) i.e. to
opt for regular tax regime must be exercised along with return of income under section 139(1) for every
previous year.

SPECIAL TAX REGIME APPLICABLE TO A CO-OPERATIVE SOCIETIES [SECTION 115BAD]

The Finance Act, 2020 has inserted a new section 115BAD in Income-tax Act to provide an option to the resident
co-operative societies (Other than those mentioned in Section 115BAE) to get taxed at the rate of 22% plus 10%
surcharge and 4% cess. The resident co- operative societies have an option to opt for taxation under newly
introduced section 115BAD of the Act w.e.f. Assessment Year 2021-22. The option once exercised under this
section cannot be subsequently withdrawn for the same or any other previous year.

If the new regime of Section 115BAD is opted by a co-operative society, its income shall be computed without
providing for specified exemption, deduction or incentive available under the Act. The societies opting for this
section have been kept out of the purview of Alternate Minimum Tax (AMT). Further, the provision relating to
computation, carry forward and set-off of AMT credit shall not apply to these assessees.

The option to pay tax at lower rates shall be available only if the total income of cooperative society is computed
without claiming following exemptions or deductions:

a) Deduction for units established in Special Economic Zones (SEZ) [Section 10AA];

b) Additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];

c) Deduction for investment in new plant and machinery in notified backward areas [Section 32AD];

d) Deduction in respect of tea, coffee or rubber business [Section 33AB];

e) Deduction in respect of business consisting of prospecting or extraction or production of petroleum or

natural gas in India [Section 33ABA];

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f) Deduction for donation made to approved scientific research association, university college or other
institutes for doing scientific research which may or may not be related to business [Section 35(1) (ii)];

g) Deduction for payment made to an Indian company for doing scientific research which may or may not
be related to business [Section 35(1)(iia)];

h) Deduction for donation made to university, college, or other institution for doing research in social
science or statistical research [Section 35(1) (iii)];

i) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may
or may not be related to business [Section 35(2AA)];

j) Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold
chain facility, warehousing facility, etc. [Section 35AD];

k) Deduction for expenditure on agriculture extension project [Section 35CCC];

l) Deduction in respect of certain incomes other than specified under Section 80JJAA [Part C of Chapter
VI-A].

Where a co-operative society exercises option for availing benefit of lower tax rate under section 115BAD, it
shall not be allowed to claim set-off of any brought forward losses or depreciation attributable to any restricted
exemption or deduction in the Assessment Year for which the option has been exercised and for any subsequent
Assessment Year.

TAX ON INCOME OF CERTAIN NEW MANUFACTURING CO-OPERATIVE SOCIETIES [SECTION

115BAE]
Conditions:

l The co-operative society is set up and registered on or after 01-04-2023;

l It is engaged in manufacture or production of any article or thing;

l It commences manufacturing on or before 31-03-2024 ; and

l It does not claim specified exemption, incentive or deduction.

Tax rate: 15% (Income from manufacturing activities)

Surcharge: The surcharge is levied at a rate of 10% on the amount of income-tax irrespective of the total income
of such co-operative society.

Health & Education Cess: 4% of such income-tax and surcharge.

REBATE [SECTION 87A]

1. In case of tax payable as per normal provisions,an assessee, being an individual resident in India,
whose total income does not exceed Rs. 5,00,000 shall be entitled to a deduction, from the amount of
income-tax (as computed before allowing the deductions under this Chapter) on his total income with
which he is chargeable for any assessment year, of an amount equal to 100% of such income-tax or an
amount of Rs. 12,500, whichever is less.

2. The rebate under section 87A for the assessee paying tax under default scheme of section 115BAC shall
be as follows:

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Conditions:

a. Assessee should be resident individual.

b. The assessee wants to pay tax under default regime of section 115BAC and;

c. Whose Total Income does not exceed Rs.7,00,000.

Quantum of Rebate:

If the aforesaid conditions are satisfied, the amount of rebate under section 87A shall be 100% of
Income Tax or; Rs.25,000, whichever is less.

Marginal Relief in Rebate for assessee paying tax u/s 115BAC:

If Net income exceeds Rs.7,00,000, income tax on such income cannot exceed the amount by which the
net income exceeds Rs.7,00,000.

Illustrations:

Compute Income Tax liability in following situations for Assessment Year 2025-26 given that in none of the
cases assessee wants to opt for the regular tax regime i.e. computation is to be done under section 115BAC and
the assessees are resident individuals. Given are the Total Incomes.

1. Mr. Ishank (30 years): Rs.7,00,000.

2. Ms. Shirin (29 years): Rs.7,27,000.

3. Mr. Aroha (21 years): Rs.7,80,000.

4. Mr. Nirvan (23 years): Rs.8,00,000.

Solution:

Computation of Tax liability for the Assessment Year 2025-26:

PARTICULARS Mr. Ms. Shirin Mr. Aroha Mr. Nirvan

Ishank

Total Income (1) 7,00,000 7,27,000 7,80,000 8,00,000

Tax on Total Income as per section 115BAC (2) 20,000 22,700 28,000 30,000

Less: Rebate u/s 87A (3) (20,000) (Nil) (Nil)

Less: Amount deductible as per proviso (b) to section - (Nil) (Nil)

87A {i.e. Marginal Relief Adjustment} (4) Excess of tax
in step 2 over Total Income (-) Rs.7 lakhs in case of Mr.
Ishank {There is no such excess tax in situation of Mr.
Aroha & Mr. Nirvan}

Therefore, Income Tax after Rebate u/s 87A Nil 22700 28,000 30,000

Add: Health and Education Cess @ 4% Nil 908 1,120 1,200

Therefore, Total Tax Liability Nil 22,908 29,120 31,200

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TAXATION OF INDIVIDUALS

Income of Individual and its tax treatment

Taxable Income Taxability/Exemption
Income of
Income earned by Individual Based on Individual capacity
Individual
Remuneration in terms of Salary, Bonus, Commission Taxable as Business Income
etc. received by partner (As Individual)
Interest on capital/Loans to Firm/LLP received by Taxable as Business Income
partner (As Individual)
Income received as Member of AOP or BOI Share of Income from AOP/BOI is
taxable
Income from impartible estate of HUF Income is taxable in hands of Karta

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Exempted Share of Profit of Firm/LLP Exempt in the hands of Partner

in hands of [Section 10(2A)]
Individuals
Income of AOP/BOI is chargeable at Maximum Share of income of member will
Marginal Rate (MMR) not be included in taxable income
Share of Income from HUF Exempt in the hands of Individual
[Section 10(2)]

List of deductions available to Individuals under Chapter VI-A

(Except who pay tax under section 115BAC)

Section Particulars

80C Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund,
subscription to certain equity shares or debentures, etc.

80CCC Deduction in respect of contribution to certain pension funds

80CCD Deduction in respect of contribution to pension scheme of Central Government

80CCE Limit on deductions under sections 80C, 80CCC and 80CCD

80D Deduction in respect of health insurance premia

80DD Deduction in respect of maintenance including medical treatment of a dependent who is a person
with disability

80DDB Deduction in respect of medical treatment, etc.

80E Deduction in respect of interest on loan taken for higher education

80EE Deduction in respect of interest on loan taken for residential house property

80EEA Deduction in respect of interest on loan taken for certain house property

80EEB Deduction in respect of purchase of electric vehicle

80G Deduction in respect of donations to certain funds, charitable institutions, etc.

80GG Deductions in respect of rents paid

80GGA Deduction in respect of certain donations for scientific research or rural development

80GGC Deduction in respect of contributions given by any person to political parties

80-I Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.

80-IB Deduction in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings

80-IBA Deductions in respect of profits and gains from housing projects

80-IE Special provisions in respect of certain undertakings in North-Eastern States

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80JJA Deduction in respect of profits and gains from business of collecting and processing of bio-
degradable waste

80JJAA Deduction in respect of employment of new employees

80QQB Deduction in respect of royalty income, etc., of authors of certain books other than text-books

80RRB Deduction in respect of royalty on patents

80TTA Deduction in respect of interest on deposits in savings account

80TTB Deduction in respect of interest on deposits in case of senior citizens

80U Deduction in case of a person with disability

CASE 1

Mr. DP, has earned gross salary of Rs. 655000 including HRA of Rs. 45000. He has paid Rs. 15000 p.m. as
rent for his residential accommodation. Besides that, he earned Rs. 12000 from saving bank deposit during
the year 2024-25 and at the same time he has deposited to Rs. 65000 to PPF. You are required to compute
total income and tax payable by DP if
l He opts to pay tax as per regular scheme.
 He pays tax under Section 115BAC
Solution: Statement showing computation of Total income and tax liability

Particulars Opts to pay tax as per He pays tax under

regular scheme section 115BAC

Amount (`) Amount (`) Amount (`) Amount (`)

Salary received 655000 655000

Less: HRA Exempted u/s 10(13A) (45000) Nil

610000 655000

Less: Standard Deduction (50000) (75000)

Income under the head salary 560000 580000

Income from saving bank deposit 12000 12000

Gross Total Income 572000 592000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Less:
Deduction u/s 80C 65000
Deduction u/s 80TTA 10000 (75000) Nil
(a) Actual 12000
(b) Limit 10000
Whichever is less

Total Income 497000 592000

Tax on total Income 12350 14600

Less: Rebate u/s 87A

(a) 100% of Tax
(b) Limit 12500 or Rs. 25000 (as applicable) (12350) (14600)
Whichever is less

Balance Nil Nil

Add: HEC @4% Nil Nil

Total Tax Payable (R/O) Nil Nil

Illustration 1:
Gross total income of Mr. X, a tax consultant based at Mumbai, is Rs. 18,00,000 (income from profession Rs.
17,00,000 and interest on bank fixed deposit Rs. 1,00,000). He pays Rs. 3,00,000 as house rent. He deposits
Rs. 50,000 in public provident fund. Compute his taxable income for the assessment year 2025-26.
Option 1: Assessee has opted to pay tax under regular scheme
Option 2: Assessee is paying tax as per Section 115BAC
Solution:
Option 1: Assessee has opted to pay tax under regular scheme
Computation of Taxable Income of Mr. X for the A.Y. 2025-26

Particular Amount (Rs.) Amount (Rs.)

Professional Income – PGBP 17,00,000

Interest on Bank Deposit – Other sources 1,00,000

Gross Total Income 18,00,000

Less: Deductions under Chapter VI-A

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Computation of Total Income and Tax Liability of various Entities LESSON 11

u/s 80C (PPF) (50,000)

u/s 80 GG (Note-1) (60,000) (1,10,000)

Total Income 16,90,000

Note 1: Deduction u/s 80GG is least of the following:

a) Rs. 60,000 (i.e., Rs. 5000 x 12 months)
b) Rs. 4,37,500 [25% of total income (Rs. 18,00,000- 50,000)]
c) Rs. 1,25,000 [Excess of rent paid over 10% of total income (Rs. 3,00,000- 1,75,000)]
Option 2: Assessee pays tax as per section 115BAC
Computation of Taxable Income of Mr. X for the A.Y. 2025-26

Particular Amount (Rs.)

Professional Income – PGBP 17,00,000

Interest on Bank Deposit – Other sources 1,00,000

Gross Total Income 18,00,000

Less: Deductions under Chapter VI-A Nil

Total Income 18,00,000

Note 1: Deduction u/s 80C & 80GG not allowed.

Illustration 2:
From the following profit and loss account of Vinay for the year ended 31st March 2025, compute his total
income and tax liability for the assessment year 2025-26:

Particulars Amount Particulars Amount

Rs. Rs.

Interest on capital 12,000 Gross profit 5,10,000

Insurance 2,000 Brokerage 30,000

Bad debts 30,000 Bad debts recovered 15,000

(earlier allowed as deduction)

Depreciation 34,000 Sundry receipts 18,000

Advance tax 25,000 Interest on debentures (gross) [TDS 40,000

Rs. 4,000]

General expenses 12,000

Advertisement 5,000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Salary (including salary to Vinay 85,000

Rs.20,000)

Interest on loan 8,000

Net profit 4,00,000

Total 6,13,000 Total 6,13,000

Additional information:
(i) The amount of depreciation allowable as per income-tax rules is Rs. 42,000.
(ii) General expenses include Rs.5,000 given as Health insurance Premium.
(iii) Vinay pays Rs. 5,200 as premium on his own life insurance policy of Rs. 50,000 issued in 2016-17.
(iv) Loan was obtained for payment of income-tax.
Option 1: Assessee has opted to pay tax as per regular scheme
Option 2: Assessee is paying tax as per Section 115BAC
Solution:
Option 1: Assessee has opted to pay tax as per regular scheme

Particulars Amount (Rs.) Amount (Rs.)

(I) Income from business

Net profit for the year 4,00,000

Add: Expenses not allowed under Income tax Act but debited to P
& L A/c

Interest on capital (Note 2) 12,000

Depreciation as per books of a/c 34,000

Advance tax 25,000

General Expenses 5,000

Salary to Vinay 20,000

Interest on loan (Note 2) 8,000 1,04,000

Less: Income not related to business and profession but Credited to

P& L a/c

Interest on debentures 40,000

Deductible expenses not debited to P&L Account

Depreciation as per Income tax Act 42,000 (82,000)

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Profits and Gains of Business & Profession 4,22,000

(II) Income from other sources Interest on debenture 40,000

Gross Total Income (I + II) 4,62,000

Less: Deduction U/S 80C – 80U

(i) Premium on life insurance policy (u/s 80C) (Note 1) (5,000)

(ii) Health insurance Premium (u/s 80 D) (5,000)

Total Taxable Income 4,52,000

Note
1. Under section 80C deduction of life insurance premium cannot exceed 10% of the sum assured.
2. Under Section 36(1)(iii) Interest paid on borrowed capital is allowed as a deduction. Interest on own
capital is not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as
a deduction.
Option 2: Assessee is paying tax as per Section 115BAC

Particulars Amount (Rs.) Amount (Rs.)

(I) Income from Business

Net profit for the year 4,00,000

Add: Expenses not allowed under Income tax act but debited to P & L A/c

Interest on capital (Note 2) 12,000

Depreciation as per books of A/c 34,000

Advance tax 25,000

General Expenses 5,000

Salary to Vinay 20,000

Interest on loan (Note 2) 8,000 1,04,000

Less: Income not related to business and profession but Credited to

P& L A/c

Interest on debentures 40,000

Deductible expenses not debited to P&L Account

Depreciation as per Income tax Act (Working Note) 42,000 (82,000)

Profits and Gains of Business & Profession 4,22,000

(II) Income from other sources Interest on debenture 40,000

433
EP-TL&P Computation of Total Income and Tax Liability of various Entities

Gross total income (I + II) 4,62,000

Less: Deduction U/S 80C – 80U NIL

Total Taxable Income 4,62,000

Note:
1. Deduction u/s 80C is not allowed under section 115BAC.
2. Under Section 36(1)(iii) Interest paid on borrowed capital is allowed as a deduction. Interest on own capital
is not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as a deduction.
3. Depreciation u/s 115BAC is allowed except Additional depreciation as per prescribed manner.

Illustration 3:
For the Assessment Year 2025-26, Mr. Ram, who is 58 years old, resident in India, furnishes the following
information:

Basic salary Rs. 15000 pm

Dearness Allowance (20% forming part for retirement benefits) 40% of basic salary

City Compensatory Allowance Rs. 300 pm

Children education allowance Rs. 200 pm per child

for 2 children

Transport allowance Rs. 2000 pm

House Rent Allowance Rs. 6000 pm

Actual rent paid for a house in Delhi Rs. 7000 pm

He travels via Delhi metro from his residence to office and back in which he Rs. 1500 pm
spends

Medical allowance Rs. 1000 pm

Lunch allowance Rs. 200 pm

He owns a house property in Mumbai whose construction is completed in 2005 and which is let out for Rs.
40,000 pm. The standard rent as per Rent Control Act is Rs. 3,10,000. He pays Rs. 32,000 for municipal
taxes and interest on capital borrowed for construction of house Rs. 75,000. Further, he incurs Rs. 10,000
on repairs of the house.
Long-term capital gains Rs. 225,000
Short term capital gains for the year Rs.1,01,000 (STT not applicable).
Dividend received from Indian Company X Ltd. Rs. 12,000.
Interest received @10% on listed debentures of face value 14,00,000
Diwali Gift of gold coins received from a friend. Market value Rs. 60,000

434
Computation of Total Income and Tax Liability of various Entities LESSON 11

Share of profit from:

Firm 40,000

HUF 34,000

Income from Lotteries (gross) 50,000

Mr. Ram invested in PPF Rs.1,50,000 and also paid a life insurance premium of Rs. 21,000. Donation to
National Defence Fund Rs.10,000.
Compute the total income and Tax liability of Mr. Ram for the Assessment year 2025-26.
Option 1 : Assessee has opted to pay tax as per the regular scheme
Option 2 : Assessee is paying tax as per section 115BAC
Solution:
Option 1: Assessee has opted to pay tax as per the regular scheme
(A) Computation of Total Income

Particulars Amount Rs. Amount Rs.

Income from Salary

Basic salary (15000 *12) 180,000

Dearness Allowance (180,000*0.40) 72,000

CCA (fully taxable) (300*12) 3600

Children Education Allowance 4800
Less: Exempt (2400) 2400
Transport allowance 24000
Less: Exempt (Exemption withdrawn by Finance Act, 2018) NIL 24000
House Rent Allowance (Note) 7440
Lunch Allowance 2400
Medical Allowance 12000
Less: Deduction under section 16 (ia) Standard Deduction (50,000)
Taxable Salary 2,53,840
Income from house property
Gross annual Value (Rent Received 40,000*12) 4,80,000
Less: Municipal Taxes (32,000)
Net annual Value 4,48,000

435
EP-TL&P Computation of Total Income and Tax Liability of various Entities

Less: Standard Deduction @ 30% of 4,48, 000 (1,34,400)

Less: Interest on capital borrowed (75,000)
Income from House property 2,38,600
Income from Business/Profession
Firm (Exempt) NIL
HUF (Exempt) NIL
Income under the head Capital Gains
Long-term capital gains u/s 112 2,25,000
Short term Capital Gain u/s 111A 1,01,000
Income from other sources
Dividend received from Indian Company X Ltd. 12,000
Interest received on listed debentures 1,40,000
Winning from Lotteries 50,000
Gift in kind 60,000 2,62,000
Gross Total Income 10,80,440
Less: Deduction under section 80C to 80U
(i) Under section 80C (maximum) (150,000)
(ii) Under section 80G (10,000)
Total Income 9,20,440

(B) Computation of Tax on Total Income

Tax on winning from lotteries (30% of Rs. 50,000) 15,000

Tax on long-term capital gains (20% of Rs. 2,25,000) assuming sale made before July 45000
24. If a candidate assumed that sale is made after July 2024 and indexation benefit is
availed by the assesse, the rate of tax will be 20% otherwise 12.5% without indexation.

Balance of Total Income Rs. 6,45,440 41,588

Total tax 1,01,588

Add: Health and Education cess at 4% 4,064

Total liability 1,05,652

Total liability (round off) 1,05,650

Notes:
1. House Rent Allowance: Least of three is exempt
i. 50% of the salary* because the house is in Delhi = 0.50 * 194400 = Rs. 97,200

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Computation of Total Income and Tax Liability of various Entities LESSON 11

ii. HRA received = Rs. 72,000

iii. Rent paid – 10% of the salary = (7000 * 12) – 0.10 * 194400 = 84000 - 19440= Rs. 64,560
Exempted HRA = Rs. 64,560
Taxable HRA = 72,000 – 25,680 = Rs. 7,440
*Salary here = Basic salary + Dearness allowance (forming part only) = 180,000 + 180000 *0.40* 0.20
= Rs. 1,94,400
2. The tax liability is subject to set-off of TDS for winning from lotteries and interest from listed debentures.
Option 2: Assessee is paying tax as per section 115BAC
(A) Computation of Total Income

Income from salary Rs. Rs.

Basic salary (15000 *12) 180,000

Dearness Allowance (180,000*0.40) 72,000

CCA (fully taxable) (300*12) 3600

Children Education Allowance 4800

Less: Exempt NA 4800

Transport allowance 24000

Less: Exempt NA 24000

House Rent Allowance (Note) 72,000

Lunch Allowance 2400

Medical Allowance 12000

Less: Deduction under section 16 (75000)

Taxable Salary 2,95,800

Income from house property

Gross annual Value (Rent Received 40,000*12) 4,80,000

Less: Municipal Taxes (32,000)

Net annual Value 4,48,000

Less: Standard Deduction @ 30% of 4,48,000 (1,34,400)

Less: Interest on capital borrowed (75,000)

437
EP-TL&P Computation of Total Income and Tax Liability of various Entities

Income from House property 2,38,600

Income from Business/Profession

Firm (Exempt) NIL

HUF (Exempt) NIL NIL

Income under the head Capital Gains

Long-term capital gains u/s 112 2,25,000

Short term Capital Gain u/s 111A 1,01,000

Income from other sources

Dividend received from Indian Company X Ltd. 12,000

Interest received on listed debentures 1,40,000

Winning from Lotteries 50,000

Gift in kind 60,000 262,000

Gross Total Income 11,22,400

Less: Deduction under section 80C to 80U NA

Total Income 11,22,400

(B) Computation of Tax on Total Income

Tax on winning from lotteries (30% of Rs. 50,000) 15,000

Tax on long-term capital gains (20% of Rs. 2,25,000) 45000

Balance of Total Income Rs. 8,47,400 34,740

Total tax 94,740

Add: Health and Education cess at 4% 3,780

Total liability 98,530

Notes:
1. Exemption from House Rent Allowance / Children Education allowance, Deduction under section
80C & 80G is not allowed
2. The tax liability is subject to set-off of TDS for winning from lotteries and interest from listed
debentures.

438
Computation of Total Income and Tax Liability of various Entities LESSON 11

Illustration 4:
Mr. X aged 62 years; resident individual furnishes the following particulars relevant for the assessment
year 2025-26:

Profit and Loss Account

Particulars Amount (Rs.) Particulars Amount (Rs.)

Salaries 30000 Gross profit 436000

General Expenses 45000 Commission 120000

Bad Debts 15000 Sundry Receipts 40000

Reserve for losses 3000 Short term capital gain 30000

Insurance 5200 Discount 2000

Advertisement 10000 Profit on sale of import license 100000

Add: outstanding 2000 12000

Interest on capital 4500

Interest on bank loan 12500

Expenditure on acquisition of 16000

patent and put to use on 30.06.21

Depreciation on Plant 24000

Depreciation on building 10000

Depreciation on Furniture 4000

Provision for outstanding GST 12000

liability

Taxation reserve 12000

Loss by fire of a part of building 8000

(Uninsured)

Net profit 514800

Total 728000 Total 728000

Other information
1. Bank loan is used for business purposes.
2. The amount of depreciation as per tax rates, in respect of plant, building, furniture, amounts to Rs.
20000, 12000, 7400 respectively.

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

3. Salary includes payment to a relative which is unreasonable to the extent of Rs. 5000.
4. Out of GST liability Rs. 2000 is paid on 04.07.25 and Rs. 6000 is paid on 03.10.25. The balance is still
outstanding. Due date of filling the return of income is 31.7.25.
5. Income of X from other sources is Rs. 24000.
6. X paid medical insurance premium Rs. 16000 for himself and Rs. 16000 for his mother (dependent)
7. X repaid housing loan to the extent of Rs. 45000.
Determine the taxable income and tax liability of Mr. X for the assessment year 2025-26 assuming STT is
not applicable on STCG.
Assume Assessee has not opted for section 115BAC.
Solution:
Computation of total income of Mr. X for the AY 2025-26

Particulars Rs.

Profit and gain from business profession (Note) 537900

Income under the head capital gain [STCG] 30000

Income from other sources 24000

Gross Total Income 591900

Less: Deduction

80C Repayment of Housing Loan (45000)

80D Medical Insurance Premium (32000)

Total Income 514900

Computation of Tax on Total Income

Tax on Rs. 300000 Nil

Tax on Rs. 200000 @ 5% 10000

Balance of Total Income 14900 @ 20% 2980

Total tax 12980

Add: Health and Education cess at 4% 519.2

Total liability 13499.2

Total liability (round off) 13,500

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Working Note:
Calculation of Business Income

Particulars Rs.

Profit as per P&L A/C 514800

Add: Inadmissible Expenses

Reserve for losses 3000

Interest on capital 4500

Patent right [16000- 25% of 16000] 12000

Excess salary paid to relative 5000

Outstanding GST liability [12000-2000] 10000

Taxation reserve 12000

Loss by fire of part of building 8000

Less: Admissible Expenses Depreciation [39400-38000] (1400)

Less: Income taxable under head capital gain (STCG) (30000)

Business Income 537900

TAXATION OF HINDU UNDIVIDED FAMILIES (HUF)

441
EP-TL&P Computation of Total Income and Tax Liability of various Entities

The term ‘Hindu undivided family’ has not been defined in the Income-tax Act but it is treated as a separate
entity or person under section 2(31) of the Income-tax Act, 1961 for the purpose of assessment under the Act.
Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor
and includes their wives and unmarried daughters. Jain and Sikh families even though are not governed by
the Hindu Law, but they are treated as HUF under the Act. An HUF cannot be created under a contract and is
created automatically in a Hindu Family. Creation of a HUF is a God-gifted phenomenon since birth of a child
to a married Hindu, automatically creates a new HUF. It is not at all necessary that every HUF must have joint
property or family income. [R. Subramania Iyer v. CIT (1955) 28, ITR, 352]. However, to become an assessee
under the Income-tax Act, there must be ‘income-yielding’ joint property of the family.
A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence and may be assessable
as a unit distinct from the apex joint family even when the bigger HUF is in place [CIT v. Khanna (1963) 49 ITR
232].
The Supreme Court’s decision in the case of Surjit Lal Chhabra v. CIT (1975 101 ITR 776) has come to stay as one
of the leading case laws. The ratio laid down by the Supreme Court had been applied by the Andhra Pradesh,
Orissa and Madras High Courts, followed by Bombay, Patna, Madhya Pradesh and Delhi High Courts and relied
upon by the Punjab High Court. In the latest case, the Delhi High Court held in Commissioner of Income-tax
v. S.P. Chopra (1991, 191 ITR 455) that the income from the half share of the property had to be treated as the
individual income of the assessee under the personal law and not as income of the family. The character of the
property had to be determined in accordance with the personal law of the assessee and not on the basis of how
the property had been treated by the revenue in respect of earlier assessments.
A son conceived or in his mother’s womb is equal in many respects to a son actually in existence, viz., inheritance,
partition, survivorship etc. But this doctrine does not apply to the Income-tax Act. Hence, a son conceived is not
treated a member of the H.U.F. for Income-tax purposes. [IS. Srinivasan v. C.I.T., (1966) 60, ITR, p.36 (S.C.)].
Jain and Sikh undivided families are also treated as Hindu undivided families unless, under special circumstances,
the assessee claims not to be treated as such. If such claim is made, the assessee shall have to prove that there
is some such custom in his family on account of which it cannot be treated as a Hindu undivided family.
A Hindu does not cease to be a Hindu merely because he declared for the purpose of the Special Marriage
Act, 1872, that he does not profess Hindu Religion. Such a Hindu does form an H.U.F. with his children from such
marriage. [CIT v. Partap Chand (1959), 36 ITR, 262]. Similarly, a Muslim family governed by the Marumakkathayam
law constitutes ‘Tarwad’ or ‘Thavazhi’ and falls within the definition of a H.U.F. [V.K.P. Abdul Kadar Haji v. Ag. ITO
(1967) 66, ITR, 173].

442
Computation of Total Income and Tax Liability of various Entities LESSON 11

If a Hindu gets converted as a Christian, the family of such a person will not be a HUF. However, a Hindu, along
with his son (by a Christian wife) who has been brought up as a Hindu will be a HUF. [CWT v. R. Sridharan (1976)
104, ITR, 436 (S.C.)].
A Hindu Joint Family consists of two types of members:
1. Coparceners: The lineal male descendants of a person up to the third generation of such person are
known as coparceners. The coparceners acquire, on birth, ownership in the ancestral properties of such
ascendant and have a right to claim partition of such property at any time. However, w.e.f. 9.9.2005
due to amendment of Hindu Succession Act, the daughter of a coparcener shall by birth become a
coparcener in her own right in the same manner as the son. Hence, the daughter can also ask for
partition.
2. Other members: Such members include wives of male members of the family and other male members.
Widow or widows of deceased male member or members. [Gowli Buddanna v. C.I.T. (1966) 60, ITR, p.
293 (S.C.)]
However, an unmarried coparcener who receives share on the partition of joint family properties, cannot form a
Hindu undivided family unless he marries. After his marriage, he can hold the property received from family as
joint family property consisting of himself and his wife. [C. Krishna Prasadv. C.I.T. (1974) 97, p. 493 (S.C.)].
The joint property of the HUF is managed through Karta: Property of the family is ordinarily managed by the
father or other senior member for the time being of the family. He is called Karta. However, the senior member
may give up his right of management and a junior member may be appointed as Karta with the consent of all
other members. [Narendra Kumar J. Modi v. CIT (1976) 105, ITR, 109 (S.C.)]. In the absence of a male member in
the family or when all male members are minors, a woman member can be treated as manager of the family
for income- tax purposes. [Smt. Champa Kumari Singhi v. Addl. Member of the Board of Revenue (1962) 46, ITR,
p. 81].

Views of different schools of Hindu law under taxation of HUF

School of Hindu Law l Dayabhaga School of law

l Mitakshara School of law

Dayabhaga School of law l It prevails in West Bengal and Assam.

(Summarized Provision) l Son does not acquire any interest by birth in an ancestral property
but acquires such interest only after the death of his father. (i.e. No
enjoyment of right to demand partition during the lifetime of his father)
l On the other hand, the father enjoys an absolute right to dispose of
No coparcener till the death the property of the family according to his desire.
of father
l Father is assessed as an individual (Not as HUF)

Mitakshara School of law l Applicable to the whole of India except West Bengal and Assam

l Both son and daughter acquire by birth an equal right in the ancestral
property along with their father.
l The Co-parcenary is a fluctuating body which is enlarged at the time
of each birth and reduced at the time of each death of a Co-parcenary
child.

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Note: l As per Hindu Succession Act, 2005 (Amendment), Daughter and Her
Children (In case of pre-deceased daughter) are eligible for share in
the family assets on partition.
l Ancestral property refers to property which a man inherits from any of
his 3 immediate male ancestors (i.e. His father, grandfather and great
grandfather)
l Jain and Sikh families will not be governed as per Hindu Law but
treated as HUF for the purpose of Income Tax Act.

Position under Hindu Succession Act, 1956

This Act came into force on and from 17th June, 1956. It lays down a uniform and comprehensive system of
inheritance and applies to persons governed by the Mitakshara as well as the Dayabhaga Schools, superseding
and abrogating all previous law or customs or usage having the force of law.
Under this Act, the heirs of a male Hindu dying intestate on or after 17th June, 1956 are divided into three
classes. Class I heirs get the right to the deceased’s property simultaneously to the exclusion of all other
Classes of heirs. Class II relations succeed only if there is no class I relation and, the heirs in the first entry of
class II being preferred to heirs in the second entry, and so on, but heirs in any one entry taking in equal shares
amongst themselves.
The students should note that Section 4 of the Hindu Succession Act, 1956 clearly lays down that “save as
otherwise expressly provided in the Act, any text, rule or interpretation of Hindu Law or any custom or usage
as part of that law in force immediately before the commencement of the Act shall cease to have effect with
respect to any matter for which provision is made in the Act.” And, Section 8 of the Hindu Succession Act, 1956,
lays down the scheme of succession to the property of a Hindu dying intestate. The schedule classifies the heirs
on which such property shall devolve.
The preferential heirs of class I are as under:
(1) Son (2) Daughter (3) Widow (4) Mother (5) Son/daughter/widow of a predeceased son (6) son/daughter of a
predeceased daughter (7) Son/daughter/ widow of a predeceased son of a predeceased son.
A son’s son is not mentioned as an heir under Class I of the schedule and, therefore, he cannot get any right in
the property of his grandfather under the provision. The right of a son’s son in his grandfather’s property during
the lifetime of his father which existed under the Hindu Law as in force before the Act, is not saved expressly
by the Act and, therefore the earlier interpretation of Hindu Law giving a right by birth in such property ‘ceased
to have effect’.
Therefore, the property which devolves on a Hindu on the death of his father intestate after coming into force of
the Hindu Succession Act, 1956, does not constitute H.U.F. property consisting of his own branch including his
sons. [Shri Vallabhdas Modani v. C.I.T. (1982) 138, ITR, p. 673].
The Allahabad High Court’s decision supra in the case of Shri Vallabhdas Modani v. Commissioner of Income-
tax was followed by the Andhra Pradesh High Court (1983, 144 ITR 18) and later approved by the Supreme Court
in the case of Commissioner of Wealth-Tax v. Chander Sen (1986, 161 ITR 370) holding that it is not possible to
say that when a son inherits the property in the situation contemplated by the Hindu Succession Act, 1956, he
takes as Karta of his own undivided family.

444
Computation of Total Income and Tax Liability of various Entities LESSON 11

COMPUTATION OF INCOME OF HINDU UNDIVIDED FAMILY ‘HUF’

Income of the HUF is assessed as joint family income of HUF if there exists a co-parcenership and joint property
of the family till partition is claimed by any of its coparceners.
Joint Property of the family consists of:
(i) ancestral property which a man inherits from any of his three immediate male ancestors, namely, father,
grandfather, great grandfather;
(ii) accretion thereto;
(iii) acquisition with joint funds; and
(iv) self-acquired property of any member thrown by him into the common stock to be treated as family
property. In the case of Pushpa Devi v. C.I.T. the Supreme Court has held that a Hindu female, not being
a coparcener, cannot blend her separate property with Joint family property. However, she can make a
gift of her property or sell the property to the family. [(1977) 109, ITR p. 730].
The gross total income of the family for the relevant previous year shall be computed under the relevant heads
(as per the provisions of the Income-tax Act) as it is computed for other assessee’s. Incomes exempt under
section 10 to 13A are exempt and deductions allowable under chapter VIA are to be provided. However, in this
connection the following points are worth noting:
(i) The holder, who is the senior most male member of the family, of an impartible estate is liable to tax on
income from that estate in his individual capacity though the estate belongs to HUF.
(ii) Conversion of self-acquired property into joint family property- Section 64(2) provides that where an
individual being a member of Hindu undivided family transfers his separate property after 31st December,
1969 to the family for the common benefit of the family, otherwise than for adequate consideration,
such property is known as converted property. The income derived from the converted property or any
part thereof shall be included in the total income of the transferor individual and not in the income of
the family.
(iii) If the funds of a Hindu Undivided family are invested in a company or a firm, fees or remuneration
received by the member as a director, or a partner in the company or firm may be treated as income of
the family in case the fees or remuneration is earned essentially as a result of investment of funds. But,
if the fees or remuneration is earned essentially for services rendered by the member in his personal
capacity, the income shall constitute the personal income of the member.
(iv) Where a member of a HUF is a partner in a firm on behalf of the family and on partition of the property of the
family, the share in the firm is allotted to such a member, subsequent to such allotment when the firm settles
its accounts the whole income for that year would be the income of the individual member and no part of the
income would be added to the income of the family. [CIT v. Ashok Bhai Chiman Bhai (1965) 56, ITR, 42 (SC)].
(v) The personal earning, including income from self-acquired property of a member of the HUF, even
though he has sons, would not be included in the income of the family. Such income shall be assessed
as income of that individual. [Kalyanji Vithal Das v. CIT (1937) 5 ITR 90 (PC)].
(vi) Any sum paid by an HUF to a member of the family out of its income is not deductible in computing
the income of the family. However, such amount will not be included in the income of such individual
whether the family had paid tax on its income or not [Section 10(2)].
(vii) If any remuneration is paid by the Hindu Undivided family to the Karta or any other member for services
rendered by him in conducting family’s business, the remuneration is deductible if remuneration is (a)

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paid under a valid and bona fide agreement; (b) in the interest of, and expedient for, the business of
family; and (c) genuine and not excessive. Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC).
(viii) If salary is paid by the Hindu undivided family to its Karta for looking after its interest in firms in which
it is partner through said Karta, such salary is allowable as deduction - CIT v. Prakash Chand Agarwal
[1982] 11 Taxman 55 (MP).
(ix) Income from ‘stridhan’ is not includible in the income of the family. Property derived by a woman from
her father or brother or husband or any other relative either before or after her marriage is known as
‘stridhan’.
(x) Under the Dayabhaga School of law, as stated in a preceding page, no son has any right in the
ancestral property during the lifetime of his father. If, therefore, the father does not have any brother as
a coparcener, income arising from ancestral property is taxable as his individual income.

Partition of a Hindu Undivided Family [Section 171]

‘Partition’ signifies division of property. In the cases of property capable of physical division, share of each
member is determined by making physical division thereof. It must be noted that a division of income without
physical division of property does not amount to partition. Where, however, the property is not capable of
physical division, partition implies such division as the property may admit.
Who is entitled to share on partition
Though only coparceners can demand partition, once the partition takes effect, the following persons are
entitled to a share:
(a) all coparceners;
(b) a son in the womb of his mother at the time of partition;
(c) mother, who gets an equal share if the partition takes place among her sons after the death of her
husband; and
(d) wife, who gets a share equal to that of a son at the time of a partition between father and sons.
Assessment after partition (Section 171)
Section 171 applies to an HUF which is assessed as such. Therefore, if in case a family is not assessed as a
Hindu Undivided Family this section does not apply. A joint family, once assessed as a HUF, continues to be
assessed as such till one or more coparceners claim partition. Such claim must be made by the coparceners
before the assessment of the income of the HUF for the relevant assessment year is completed. On the receipt
of such a claim, the Assessing Officer must make an inquiry after giving due notice to the members and record
a finding whether there has been a partition and, if so, the date of the partition. The income of the family from
the first day of the previous year to the date of partition is assessed as income of the HUF and from the next
date of the partition to the date of close of the previous year, as the individual income of the recipient-members.
If the recipient member forms another HUF along with his wife and son(s), the income of the property which was
subject to partition is chargeable to tax in the hands of the new H.U.F.
A partition of the HUF can be both total and partial
Where the entire joint family property is divided among all coparceners and the family ceases to exist as an
undivided family, the partition is total. A partial partition may be as regards: (a) the persons constituting the
joint family, or (b) the properties belonging to the joint family, or (c) both. In case of partial partition, some
coparceners continue as a joint family or some properties continue as a joint estate as against some coparceners
or properties which separate from HUF. The device of partial partition has been used as a medium for reduction

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of proper tax liability. To curb such a practice, the Finance (No. 2) Act, 1980 inserted Sub-section 9 in Section
171 which lays down that partial partitions of HUFs assessed as such (Union of India vs. MV Valliappan 1999 AIR
SCW 2689), effected after 31st December, 1978 will not be recognised for tax purposes.
The provisions made by Sub-section (9) in Section 171 are as follows:
(i) In a case where a partial partition of a HUF has taken place after 31.12.1978, no claim of such partition
will be enquired into and the Assessing Officer will not record a finding as to whether there has been a
partition of the family property. Further, any finding regarding partial partition recorded under Section
171(3) will be null and void and of no legal effect.
(ii) Such family will continue to be assessed as if no such partial partition has taken place, i.e., the property
or source of income will be deemed to continue to belong to the Hindu undivided family and no member
will be deemed to have separated from the family.
(iii) Each member or group of members of such family will be jointly and severally liable for any tax, interest,
penalty, fine or other sum payable under the Act by the family, whether before or after such partition.
The several liability of any member or group of members of such family will be computed according
to the portion of the joint family property allotted to him on such partial partition. This amendment has
come into force with effect from April 1, 1980 and has, accordingly, been applicable with effect from
assessment year 1980-81 and onwards.

Illustration 5:
Ram Manhar & Sons HUF, running Raghuveer Departmental Stores consists of Karta, his wife, two sons and
daughter. Both the sons who are having professional/technical qualifications as a Chartered Accountant
and as an Automobile Engineer started in partnership, a garage for the repairing of motor cars, with a
clear understanding that the technical side of the business be looked after by the Engineer while the
general administration and finance part be taken care by the Chartered Accountant. They had taken an
interest-free loan of Rs. 5,00,000 from the HUF for starting the venture. The business of garage resulted in
a net profit of Rs. 15,00,000 for the year ended 31.03.2024. The Assessing Officer proposes to assess the
income from the business of motor garage in the hands of HUF. Examine the validity of the proposition of
the Assessing Officer in the light of a decided case law.
Solution:
The facts of the case are similar to that of the case of CIT v. Charan Dass Khanna & Sons (1980) 123 ITR 194,
where the Delhi High Court observed that if the investment made by the HUF in the business started by
the coparceners plays a minor role and it is primarily the personal efforts, specialized skill and enterprise
of the individual coparceners which resulted in setting up of a new business and earning of goods profits,
then it may not essentially be said that the income belongs to the HUF.
The Supreme Court has also supported this view in the case of K.S. Subbiah Pillai v. CIT (1999) 237 ITR
11 and held that where the remuneration and commission earned by the Karta were on account of the
personal qualifications and exertions and not on account of the investment of the family funds, such
income cannot be treated as income of the HUF.
Thus, in the given case, profits were earned primarily because of the specialized skills acquired by both
the partners in their respective fields and used in the business of motor garage. The initial capital taken
from the HUF as interest free loan, of course, has its role but it is nevertheless a minor one. Therefore, the
income from the business set up by the brothers is assessable in their individual hands and not as the
income of the family.
Further, the proposition of the Assessing Officer to tax the profits of the business of motor garage earned
by the two sons in the hands of the HUF is not valid.

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Illustration 6:
Ram (59 years) and his two brothers (Ramesh (57 years) and Somesh (50 years) are engaged in family
business of cultivation of wheat. Last year they had losses to the extent of Rs. 12,000 but this year, due to
good season the Business earned a Profit of Rs. 2,20,000.
The family owns a house property, the municipal valuation of which is Rs. 280000 and the market rent of
similar property is Rs. 2,85,000. The standard rent as per Rent Control Act is Rs. 3,50,000. The family pays
Rs. 48,000 for municipal taxes during the previous year out of which Rs. 20,000 pertains to earlier year
which could not be paid due to business loss. Interest on capital borrowed for repaying original loan for
construction of house Rs. 75,000. Further, the rental income of the property is Rs. 3,10,000.
Dividend received from Indian Company X Ltd. Rs. 12,000.
Interest received on listed debentures Rs.8,10,000 (net).
Compute the total income and Tax liability of the family X (HUF) for the Assessment year 2025-26.
Option 1: Assessee has opted to pay tax as per the regular scheme.
Option 2: Assessee is paying tax as per Section 115BAC.
Solution:
Option 1: Assessee has opted to pay tax as per the regular scheme:
Computation of Total Income of X (HUF) for the Assessment Year 2025-26

Income from House Property (Rs.)

Gross annual Value 3,10,000

Less: Municipal Taxes (48,000)

Net annual Value 2,62,000

Less: Standard Deduction @ 30% of 2,62, 000 (78,600)

Less: Interest on capital borrowed (75,000)

Income from House property 1,08,400

Income from Business/Profession

Agricultural income (Exempt) NIL

Income from other sources

Dividend received from Indian Company X Ltd. 12,000

Interest on listed debentures 9,00,000

Gross Total Income 10,20,400

Less: Deduction under section 80C to 80U NIL

Total Income 10,20,400

Note: The share of Karta and other coparceners in the profits of HUF will be exempt under section 10(2)

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Computation of tax on Total Income of X (HUF) for the Assessment Year 2025-26

Particulars Amount (Rs.)

(a) Agricultural income (2,20,000-12,000) 2,08,000

(b) Non-agricultural income 10,20,400

(c) Total of (a) and (b) 12,28,400

(d) Tax payable on (c) 1,81,020

Tax on first 2,50,000 NIL

Tax on next 250,000 @ 5% = Rs. 12,500

Tax on next 500,000 @ 20% = Rs. 100,000

Tax on remaining income Rs. 2,28,400@ 30% = 68,520

(e) Total of agricultural income and basic exemption limit 4,58,000

(f) Tax payable on (e) (As per slab rates) 10,400

(g) Net tax payable = (d)-(f) 1,70,620

(h) Add: Health and Education cess of 4% on Rs.170620 6,824

(i) Total tax (round off) 1,77,440

Option 2: Assessee is paying tax as per section 115BAC

Computation of Total Income of X (HUF) for the Assessment Year 2025-26

Income from House Property (Rs.)

Gross annual Value 3,10,000
Less: Municipal Taxes (48,000)
Net annual Value 2,62,000
Less: Standard Deduction @ 30% of 2,62,000 (78,600)
Less: Interest on capital borrowed (75,000)
Income from House property 1,08,400
Income from Business/Profession (Rs.)
Agricultural income (Exempt) NIL
Income from other sources
Dividend received from Indian Company X Ltd. 12,000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Interest on listed debentures 9,00,000

Gross Total Income 10,20,400
Less: Deduction under section 80C to 80U NIL
Total Income 10,20,400

Note: The share of Karta and other coparceners in the profits of HUF will be exempt under section 10(2).
Computation of Tax on Total Income of X (HUF) for the Assessment Year 2025-26

Particulars Amount (Rs.)

(a) Agricultural income (2,20,000-12,000) 2,08,000

(b) Non-agricultural income 10,20,400

(c) Total of (a) and (b) 12,28,400

(d) Tax payable on (c) 85,680

Tax on first 3,00,000 NIL

Tax on next 4,00,000 @ 5% = Rs. 20,000

Tax on next 3,00,000 @ 10% = Rs. 30,000

Tax on next 2,00,000 @ 15 % = Rs.30,000

Tax on next 28,400 @ 20 % = Rs.5,680

(e) Total of agricultural income and basic exemption limit 5,08,000

(f) Tax payable on (e) (As per slab) 10,400

(g) Net tax payable = (d)-(f) 75,280

(h) Add: Health and Education cess of 4% on Rs. 75,280 3,011

(i) Total tax (round off) 78,291

Illustration 7:
Ram, 66 years is the Karta of a HUF with his two sons Ramesh (39 years) and Somesh (25 years). The family
owns a house property, the rental income of the same is Rs. 3,10,000. Family business profits Rs. 2,80,000.
Long- term capital gains Rs. 25,000 and short-term capital gains for the year Rs.11,000 (STT applicable).
Dividend received from Indian Company X Ltd. Rs. 12,000. Interest received on listed debentures Rs.8,000
(gross) Ram invested in PPF Rs. 1,50,000 out of family funds and received share of profits from a firm in
which he represented HUF being Karta. Ram gifts Rs. 1,00,000 to family. Salary income of Ramesh Rs.
6,00,000 Interest on Government Securities Rs. 10,000(gross) out of own funds of Ram.
Compute the total income and Tax liability of the family X (HUF) and Ram, Ramesh and Somesh for the
Assessment year 2025-26. Assume that assessees are opting to pay tax as per regular scheme .

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Solution:
Computation of Total Income of X (HUF) for the Assessment Year 2025-26

Income from house property Amount (Rs.)

Rent 3,10,000
Less: Standard Deduction @ 30% 93,000
Income from House property 2,17,000
Income from Business/Profession
Business Profits 2,80,000
A Firm (Exempt) NIL
Income under the head Capital Gains
Long-term Capital Gain 25,000
Short term Capital Gain 11,000
Income from other sources
Dividend received from Indian Company X Ltd. 12,000
Interest received on listed debentures 8,000
Gift (Exempt) NIL
Gross Total Income 5,53,000
Less: Deduction under section 80C to 80U
Under section 80C (maximum) 1,50,000
Total Income 4,03,000
Note: The share of Karta and other coparceners in the profits of HUF will be exempt under section 10(2)
Computation of tax on Total Income of HUF for the Assessment Year 2025-26

Tax on long-term capital gains (20% of Rs. 25,000) assuming indexation benefit is 5,000
availed and sale took place before July, 2024
Tax on short-term capital gains (15% of Rs. 11,000) 1,650
Balance of Total Income Rs. 3,67,000 5,850
Total tax 12,500
Add: Health and Education cess at 4% 500
Total liability (round off) 13,000

Note: The share of Karta and other coparceners in the profits of HUF will be exempt under section 10(2)
Computation of taxable income of Ram, Ramesh and Somesh for the Assessment Year 2025-26

Particulars Ram Ramesh Somesh

Salary Income 6,00,000
Business Income:
Profit share in HUF Exempt Exempt Exempt

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Income from other sources

Interest on Government Securities 10,000
Gross Total Income 10,000 6,00,000
Deductions u/s 80C to 80U
Taxable Income 10,000 6,00,000
Tax liability NIL 33,800 NIL

TAXATION OF FIRMS
Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and “partnership” have the meanings
respectively assigned to them in the Indian Partnership Act, 1932 and Limited Liability Partnership Act, 2008.
The expression “partner” also includes a minor who has been admitted to the benefits of partnership and a
partner of a Limited Liability Partnership Act, 2008. However, a minor cannot validly enter into any partnership
as a ‘full partner’ with other persons but he can be admitted to the benefits of partnership only.
A joint Hindu family as such cannot be a partner in a firm. However, through its Karta it may enter into a valid
partnership with a third person or with a member of the undivided family in his individual capacity. In such
a case, the Karta occupies a dual position. On the partnership he functions in his individual capacity; on the
relations to other members of the Hindu undivided family, in his representative capacity.
An incorporated company being a legal person may form a partnership with an individual or with another
company. In considering the maximum number of partners comprising a firm, the company will be considered
as one person only.
A partnership firm as such is not entitled to enter into a partnership with another firm, H.U.F., individual, or a
company. However, its partners in their individual capacity can enter into another partnership.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Assessment as a Firm [Section 184]

As per the scheme, a partnership firm in the first assessment year shall be assessed as a firm if the following
conditions are satisfied:
1. The partnership is evidenced by an instrument, i.e., partnership deed which is to be in writing containing
necessary clauses.
2. The individual shares of the partners as specified in that instrument (including how the loss will be
borne by major partners in case of a minor admitted for benefits only).
3. A copy of the partnership deed certified by all the partners or their duly authorized agents, in writing
(other than the minors) is submitted along with the return of income in respect of which assessment as
a firm is first sought.
Where the return is made after the dissolution of the firm, the copy of the partnership deed should be certified
in writing by all persons (excluding minors) who were partners of the firm immediately before its dissolution and
by the legal representative of any deceased partner.
When a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every
subsequent year if there is no change in the constitution of the firm or in the shares of partners as evidenced by
the partnership deed on the basis of which assessment as a firm was first sought.
Where any such change has taken place in the previous year, the firm shall furnish a certified copy of the revised
instrument of partnership along with the return of income for the assessment year relevant to such previous
year. In doing so all the provisions of Section 184 will apply to the firm. Further, any change in remuneration or
interest to partners is to be notified in the same manner to comply with section 40(b).
Circumstances where the firm will be assessed as a firm but shall not be eligible for deduction on account of
interest, salary, bonus, etc.
Where the firm -
(a) fails to make the return required under Section 139(1) and has not made a return or revised return under
Section 139(4) or 139(5), or
(b) fails to comply with all the terms of a notice issued under Section 142(1) or fails to comply with a
direction issued under Section 142(2A), or
(c) having made a return, fails to comply with all the terms of a notice issued under Section143(2),
(d) does not comply with three conditions mentioned above u/s 184.
then the firm shall not be eligible for any deduction on account of interest to a partner and remuneration to a
working partner although the same is mentioned in the partnership deed.

Computation of Income and Tax thereon of Firm

The income of the firm shall be computed as per the normal provisions of the Act under various heads of income
excluding incomes exempt from tax and deductions under section 80 as applicable.
Rate of Tax: In the case of a firm which is assessable as such (i.e., as a firm), tax is chargeable on its total income
at the rate of 30%.
Surcharge @12% shall be applicable where the total income exceeds Rs. 1 crore.
Health and Education Cess shall be added as 4% of tax plus surcharge. However, firm and LLP is subject to
Alternate Minimum Tax ‘AMT’ under section 115JC (discussed in detail later in this chapter).
Partnership is not a separate entity distinct from the partners, but for tax purposes a partnership is taxed as
a separate entity and therefore total income will be computed under various heads of income. A partnership
firm is also entitled for deductions under section 30 to 38 for expenditures incurred. However, for payment of

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

remuneration to partners and interest on capital are allowed subject to conditions laid down under section 40(b).
Section 40(b), contains the following conditions which need to be complied with while making payment of
remuneration and interest on borrowed capital to the partners:
(i) Payment of salary, bonus, commission or remuneration by whatever name called to a non-working
partner shall not be allowed as deduction. Such payments are allowed only to working partners if it is
authorised by the partnership deed and are in accordance with partnership deed. Also, such payments
should pertain to the period after the partnership deed.
(ii) Interest payable to a partner, authorised by the partnership deed for period after the partnership deed
shall be allowable as deduction subject to a maximum of 12% p.a. If the partnership deed provides for
interest at less than 12% p.a, the deduction of interest shall be allowed to the extent provided by the
partnership deed.
(iii) the payment of remuneration to working partner, although authorised by partnership deed however it
is subject to maximum of the following limits.

Uniform limits for both Professional Firms and Non-Professional Firms:

On the first Rs. 3,00,000 of the book-profit or in case Rs. 1,50,000 or 90% of the book-profit, whichever is
of a loss. more.
On the balance of the book-profit 60% of the book profits.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Meaning of Book Profit [Explanation 3 to section 40(b)]

Book-profit” means the net profit, as shown in the profit and loss account and make the additions and deductions
as per section 28 to 44DB explained under the head income from Business and Profession increased by the
aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has
been deducted while computing the net profit. Interest paid/payable to partners in excess of 12% shall also be
disallowed as per section 40(b).

Net profit as per P&L account **

Add/less: Adjustments as provided by sections 28 to 44DB

Add: Remuneration to partners if debited to the P&L

Book profit **

Note:
a) Income chargeable to tax under the heads “Income from house property”,” Capital gains” and “Income
from other sources” is not part of “book profit”
b) Brought forward business losses are not to be deducted from “book profit” (Adjust b/f unabsorbed
depreciation from earlier years); and for allowing unabsorbed depreciation, b/f business loss shall have
to be notionally allowed first from current business income.
c) Permissible deductions from gross total income under sections 80C to 80U shall be ignored for
computing “book profit”.
d) Interest on FD is a considered to be business income and hence it will be included in book profit. CIT v
J.J. Industries [2013] 216 Taxman 162(Guj.)

CASE 1

D Patel & Associates, a firm carrying on business provides details for the FY 2024-25 stated a book profit before
adjusting unabsorbed depreciation and b/f business loss of Rs 185000. However, the unabsorbed depreciation
of earlier years and b/f business loss would be Rs 85000 and Rs. 115000 respectively. Kindly advise towards
treatment of Brought forward business losses and allowable remuneration under section 40(b).
Solution:
Provision for Brought forward business losses
Brought forward business losses are not to be deducted from “book profit” (Adjust b/f unabsorbed depreciation
from earlier years); and for allowing unabsorbed depreciation, b/f business loss shall have to be notionally
allowed first from current business income.
Computation of allowable remuneration under section 40(b)

Particulars Amount
Rs

Book profit before adjusting unabsorbed depreciation and b/f business loss 185000

Less: B/F business loss (Notional Deduction) (115000)

Balance 70000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Less: Set off unabsorbed depreciation (To the extent of Rs70000) (70000)

Balance 0

Add: B/F business loss (Notional Deduction) but not allowed to be set off as carried 115000
under section 72

Book Profit 115000

Allowable Remuneration under section 40(b) 150000

a) 150000
b) 90% of Book profit (i.e. 90% of 115000) = 103500
Whichever is higher

Summarized provisions of carry forward and set off of loss in the case of Firm
Points to be noted l No separate provision of carry forward and set off of loss of firms.

l Same as applicable in case of other assesses

l Losses and unabsorbed depreciation of firm can be carried forward by firm only.
Set off and carry l Section 78 provides that where there is a change in the constitution of the firm on
forward Change in account of death/ retirement, the firm shall not be entitled to carry forward of so
the constitution of much of the loss as is attributable to such partner.
firm.
l This provision covers when a partner goes out of the firm (i.e., the case of retirement
or death).
l It does not cover the case of change in profit-sharing ratio or the case of admission
of a partner.
l Section 78 is not applicable in the case of unabsorbed depreciation and
unabsorbed capital expenditure on scientific research.
Tax Treatment in Step 1: Compute Share of outgoing partner in the profit **
case of change of the firm in the year of change in the constitution of firm
in constitution of Step 2: Compute the share of loss of outgoing partner in **
firm the brought forward loss.
Step 3: Set off share in b/f loss of outgoing partner for his **
share of profit of current year.

CASE 2

XL and Associates (A firm) having 3 partners sharing profit in the ratio of 2:2:1 provides you the following
details for the PY 2024-25.
Profit (Before) setting of b/f loss and depreciation 360000
B/F depreciation for AY 2024-25 (i.e. P.Y 2023-24) 150000
B/F loss of AY 2024-25 200000

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Computation of Total Income and Tax Liability of various Entities LESSON 11

You are requested to advice on Tax Treatment in case of change in constitution of firm when one of the
partners retired on 31.8.2024 from the firm.
Solution:

Particulars Amount

Step 1: Share of outgoing partner in the profit of the firm in the year of change in the 60000
constitution of firm (360000*2/5*5/12) [Period from 1.4.2024-31.8.2024]

Step 2: Share of loss of outgoing partner in the brought forward loss. (200000*2/5) 80000

Step 3: Set off loss to the extent of profit

Loss 80000
Less: Set off of profit (60000)

Balance of Loss (Can’t be carried forward and set off by firm) 20000

Firm is allowed to set off b/f loss (200000-20000) to the extent of 180000

Assessment of Partners
As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his share in the
total income of the firm will not be included in computing his total income. Partner includes a minor admitted to
the benefits of partnership as per Section 2(23) of the Act.
Further, the explanation to Sub-clause (2A) provides that the share of a partner in the total income of the firm
assessed as a firm shall be an amount which bears to the total income of the firm the same proportion as the
amount of his share in the profits of the firm (in accordance with the partnership deed) bears to such profits.
In terms of a formula, the amount exempt would be: Partners share in the profit of the firm =as shown in the
partnership deed Total Profits of the Firm x Total income of the firm.
Any interest, salary, bonus, commission or remuneration by whatever name called which is due to or received
by a partner of a firm from the firm will be chargeable to tax in the hands of the partner (to the extent allowed
as deduction to the firm) under the head “profits and gains of business or profession”. However, if such salary,
interest, bonus, commission or remuneration (or any part thereof) has not been allowed as deduction as per
Section 40(b) in the hands of the firm, the amount not allowed as deduction shall not be charged to tax in the
hands of partners.
Further, deductions under Sections 32 to 37 can be claimed by a partner from any income where any expenditure
was incurred to earn such income.

Succession of one firm by another firm [Section 188]

When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is known
as succession of one firm by another firm. If a firm is dissolved and some of the partners take over the firm’s
business or carry on a similar business with or without new partners, it would be a case of succession by a new
firm (62 I.T.R. 75).
In CIT v. K.H. Chambers (1965) 55 ITR 674, the Supreme Court laid down the following requisites of succession:
(i) There is a change of ownership.

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

(ii) The whole business is transferred.

(iii) Substantially the identity and the continuity of the business are preserved.
Where the partnership deed does not provide specifically for continuance of the firm on the death of a
partner, there would be no change in constitution of the firm but it would be a case of succession. [Addl. CIT v.
Thyagasundara Mudaliar (1981) 127 ITR 520].
Where a firm is succeeded by another firm, separate assessments are made on the predecessor and successor
firms respectively in accordance with the provisions of Section 170. Section 170 provides that the predecessor
shall be assessed in respect of the income of the previous year in which the succession took place up to
the date of succession and the successor shall be assessed in respect of the income of the previous year
after the date of succession. If the predecessor cannot be found, or the tax assessed on the predecessor
cannot be recovered from him for the previous year (in which the succession took place) and the previous year
immediately preceding such previous year, the unrealised tax payable by the predecessor shall be recovered
from the successor.
However, the successor firm is entitled to recover from the predecessor firm any tax paid by it on behalf of the
former. If any tax is due against any partner of the predecessor firm, it cannot be recovered from the successor
firm.

Joint and Several Liabilities of Partners for Tax Payable by Firm [Section 188A]
Section 188A provides that every person who was, during the previous year, a partner of a firm, and the legal
representative of any such person who is deceased, shall be jointly and severally liable along with the firm for
the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous
year is relevant, and all the provisions of Income-tax Act, so far as may be, shall apply to the assessment of
such tax or imposition or levy of such penalty or other sum.

Firm Dissolved or Business Discontinued [Section 189]

Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the
assessment of the total income of the firm shall be made as if no such discontinuance or dissolution had taken
place and all the provisions of the Act, including the provisions relating to penalty or any other sum (interest,
fine) chargeable under the Act, shall apply. Consequently, every person who was a partner of the firm at the
time of discontinuance of business or dissolution of the firm and legal representative of the deceased partner
shall be jointly and severally liable to the amount of tax penalty and any other sum. Where the dissolution
or discontinuance of business takes place after any proceedings in respect of an assessment year have
commenced, the proceedings may be continued against the partners or legal representative of a deceased
partner from the stage at which the proceedings stood at the time of such dissolution or discontinuance.
Thus, every partner of the firm and the legal representative of the deceased partner is liable to pay the tax
which is already due or may have become due after the dissolution, irrespective of his interest in the firm.
However, if there was any irrecoverable amount at the time of dissolution or discontinuance of business and
later on it was recovered by the partners, the partners shall personally pay the tax on their share so recovered.

ALTERNATE MINIMUM TAX (AMT) [SECTION 115JC]

Summarized provisions of Alternate Minimum Tax [AMT]

Chapter XIIBA (Special provisions relating to certain persons other than a company)
Section 115JC to 115JF

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Applicability Non corporate Assessee Condition

Individual/HUF/AOP/BOI/AJP If Adjusted Total Income (ATI) >Rs 20Lakh
LLP/Any other firm/Any person If claimed deduction
other than co.
l u/s/ 10AA/80H to 80RRB (Except
80P) for AY 13-14 or 14-15 or
Non-Corporate
Assessee l u/s 10AA/35AD/80H to 80RRB
(Except 80P) for AY 15-16 onwards

Non Applicability l Non-Corporate Assessee whose adjusted total income (ATI) is Rs 20,00,000
or less.
l Person who has opted to pay tax under section 115BAC/115BAD/115BAE.

Tax Rate (AMT) Normal Tax Rate 18.5% of ATI

Co-Operative Society 15% of ATI
Units located in IFSC and derived 9% of ATI
income solely in convertible forex

Tax liability A. Tax on total income as per normal provision of Income Tax Act
B. 18.5% (+SC+HEC) of Adjusted Total Income
Amount of tax payable = (A) or (B) whichever is higher

A>B l Non-Corporate has to pay normal income tax

l Non-Corporate can utilize amount of AMT credit in that year if available.

Maximum Amount of Credit Utilized = A-B

A<B l Non-Corporate has to pay AMT u/s 115JC

l Non-Corporate can only avail AMT credit.

AMT Credit Available = B-A

How to compute ATI Net Income or Total Income **

Add:
l Deduction under section 10AA **
l Deduction under section 80H to 80RRB (Except 80P) **
l Deduction claimed, if any, under section 35AD (as reduced **
by the amount of depreciation allowable in accordance
with the provisions of section 32 as if no deduction under
section 35AD was allowed in respect of the assets on
which the deduction under that section is claimed).

Adjusted Total Income **

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Set off and Carry l Not beyond 10th assessment year (up to the assessment year 2017-18) and
forward AMT credit
l Not beyond 15th assessment year (from the assessment year 2018-19)]

l From AY 2018-19, AMT Credit shall not be carried forward to subsequent

year to the extent such credit relates to difference between Foreign Tax
Credit (FTC) allowed against AMT.
l No interest is payable on AMT credit.

l AMT can’t be adjusted in case of person who has opted for the Alternative
Tax regime under section 115BAC/115BAD/115BAE.

Report form CA The assessee will have to obtain a report in Form No. 29C electronically from
a chartered accountant 1 month prior to the due date of submission of return
certifying that the ATI and AMT have been computed in accordance with the
provisions of this Chapter.

Other Provisions Advance tax, interest u/s 234A/B/C shall apply to assessee

The provisions of section 115JC are applicable to all assessees except companies where the regular income
tax payable for a previous year is less than the alternate minimum tax payable for such previous year then
the adjusted total income shall be deemed to be the total income of that person for such previous year and
it shall be liable to pay income tax on such adjusted total income @ 18.5% plus Health and Education Cess
@ 4%.
12% surcharge if Adjusted Total income of the firm or LLP exceeds INR 1 crore plus 4% Health & Education cess
in all cases. In case of individual surcharge will be 10% if Adjusted Total income exceeds INR 50 Lacs and 15% if
it exceeds INR 1 crore and 25% if it exceeds INR 2 crores and 37% if it exceeds INR 5 crores.
It is further provided that the provisions of AMT under Chapter XII-BA shall only apply to an individual or a
Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not) or an
artificial juridical person if the adjusted total income of such person exceeds twenty lakh rupees.
However, AMT is levied @ 9% in case of a non-corporate assessee being a unit located in International Financial
Services Centre and deriving its income solely in convertible foreign exchange. For Co-operative Society rate
of AMT will be 15% from AY2024-25 onwards. Surcharge and cess as applicable will also be levied. (Applicable
from Assessment Year 2020-21)
The regular income tax payable shall be the income-tax payable for a previous year by a person other than a
company on his total income in accordance with the provisions of the Act other than the provisions of Chapter
XII- BA, i.e., section 115JC to 115JF.
Adjusted total income shall be the total income before giving effect to the provisions of Chapter XII-BA as
increased by the deductions claimed under any section 80H to Section 80RRB (other than section 80P)
included in Chapter VI-A under the heading “C - Deductions in respect of certain incomes” and deduction
claimed under section 10AA. Further, total income shall be increased by the deduction claimed under section
35AD for purpose of computation of adjusted total income. The amount of depreciation allowable under section
32, as if no deduction u/s 35 AD in respect of such assets was allowed, shall however, be reduced in computing
the adjusted total income.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Particulars (Rs.)

Taxable income of the taxpayer XXXX

Add: Amount of deduction claimed under section 80H to 80RRB (except 80P) XXXX

Add: Amount of deduction claimed under section 35AD (as reduced by the amount of XXXX
depreciation allowable in accordance with the provisions of section 32)

Add: Amount of deduction claimed under section 10AA XXXX

Adjusted total income XXXX

The provisions can be summarized as:

1. If regular income tax payable is more than or equal to the alternate minimum tax (18.5% plus Health and
Education cess @ 4% of adjusted total income), the regular income tax payable is the tax liability of the
assessee.
2. If regular income tax payable is less than the alternate minimum tax (18.5% plus Health and Education
cess @ 4% of adjusted total income), the adjusted total income is the deemed income of the assessee
for that year and alternate minimum tax is the tax liability.
However, it is also provided that the credit for tax (tax credit) paid by a person on account of AMT under
Chapter XII- BA shall be allowed to the extent of the excess of the AMT paid over the regular income-tax. This
tax credit shall be allowed to be carried forward up to the fifteen assessment years immediately succeeding
the assessment year for which such credit becomes allowable and set off against regular tax liability. In other
words, it shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the AMT,
to the extent of the excess of the regular income-tax over the AMT.
The amount of AMT credit shall not be allowed to be carried forward to the subsequent year to the extent such
credit relates to the difference between the amounts of foreign tax credit (FTC) allowed against AMT and FTC
allowable against the tax computed under regular provisions of the Act.
Every person to which this section applies shall obtain a report, before the specified date referred to in section
44AB, in such form as may be prescribed, from an accountant referred to in the Explanation below sub-section
(2) of section 288, certifying that the adjusted total income and the alternate minimum tax have been computed
in accordance with the provisions of this Chapter and furnish such report by that date.
All other provisions of the Act, like advance tax, interest u/s 234A/B/C shall apply to assessee who is liable to
pay AMT.
The provisions of AMT shall not apply to a person who has exercised the option referred to in section 115BAC or
section 115BAD or section 115BAE.

Illustration 8:
A, B and C are the partners for 3:2:1 share respectively, in a firm engaged in medical profession. Compute
the total income of the firm for the year ended 31st March, 2025:

Particular Rs. Particular Rs.

Office Expenses 15,400 Gross Profit 40,000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Income Tax 1,000 Net Loss A 8,700

Salary to A 5,000 Net Loss B 5,800

Salary to B 4,000 Net Loss C 2,900

Salary to C 10,000

Bonus to A 10,000

Bonus to B 12,000

Total 57,400 Total 57,400

Solution:

Computation of Book Profit of the Firm Rs. Rs. Rs.

Net Loss as per P & L A/c (17,400)

Add: Inadmissible Expenses:

Income-tax 1,000

Salary to partners:

A 5,000

B 4,000

C 10,000 19,000

Bonus to partners

A 10,000

C 12,000 22,000 42,000

Book Profit 24,600

Permissible Remuneration to Partners

90% of first Rs. 3,00,000 of Book-profit or Rs. 1,50,000 whichever is more, is allowed as deduction. Here
the permissible remuneration comes to Rs. 1,50,000, but as the partners have claimed Rs. 41,000 only,
hence the entire amount will be allowed.
Computation of total income of the firm

Book Profit 24,600

Less: Salary to Partners 19,000

Bonus to Partners 22,000 (41,000)

Loss of the Firm (16,400)

Note: Loss of the firm will be carried forward by the firm to the next year(s).

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Illustration 9:
M, N and O are partners sharing profits and losses in the ratio of 2:1:1 respectively. Their summarized Profit
and Loss A/c for the year ending 31st March, 2025 is appended below:

Particulars Amount (Rs.) Particulars Amount (Rs.)

Office salaries 5,680 Gross Profit 60,570
Telephone and Telegram 2,000 Rent received 6,000
Interest on loan from M 2,000 Interest on securities 4,000
Local taxes (let out property) 1,000
Salary to N 3,000
Commission to partners
M 4,000
N 5,000
O 6,000
Collection charges of interest on 50
securities
Bad debts reserve 1,000
Net Profit to partners:
M 20,420
N 10,210
O 10,210
Total 70,570 Total 70,570

Compute total income of the firm for the Assessment Year 2025-26 and tax liability thereon. Interest paid
to M has been calculated at the rate of 20% p.a.
Solution:
Computation of Book-Profit

Particulars Rs. Rs.

Net Income as per P & L A/c 40,840
Add: Inadmissible items -
Local taxes (on let out property) 1000
Salary to N (Partner) 3000
Commission to partners 15,000
Collection charges 50
Bad debts reserve 1,000 20,050

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

60,890
Less: Other Incomes -
Rent received (6,000)
Interest on securities (4,000) (10,000)
Book Profit 50,890

Maximum remuneration payable to partners

Here Rs. 1,50,000 will be allowed as maximum remuneration. But as the partners have drawn only Rs.
18,000 by way of salary and commission, the entire amount will be allowed as deduction.
Computation of Total Income of the Firm [Assessment Year 2025-26]

Particulars Rs. Rs.

Book Profit: 50,890
Less: Salary and commission to partners (18,000)
– Taxable Business Profit 32,890
– Income from house property
Rent received 6,000
Less: Municipal taxes (1,000)
Net adjusted annual value (NAAV) 5,000
Less: Repairs (30% of NAAV) u/s 24 (1,500)
Income from House Property 3500
– Income from other sources:
Interest on Securities 4,000
Less: Collection charges (50) 3,950
Gross Total Income (32,890 + 3,500 + 3,950) 40,340

The firm will have to pay tax on Rs. 40,340 @ 30%, which comes to Rs. 12,102 plus health and education
cess @ 4% on 12,102 making the total liability as Rs. 12,586.

Illustration 10:
Compute tax liability of the firm X & Co. for the assessment year 2025-26 considering the provisions of
Section 115JC. The business income of the firm is Rs. 21,00,500 before deduction under section 32 and
before deduction under section 35AD Rs. 11,00,000, because of which depreciation of Rs. 40,000 cannot
be claimed. Deduction under section 80IB Rs. 1,00,000. Donation paid to a political party Rs. 85,000.
Solution:

Particulars (Rs.)

GTI - Business Income (Rs. 21,00,500 less 11,00,000) 10,00,500

Less: Deductions

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Under section 80IB 1,00,000

Under section 80GGC 85,000
Net Income 8,15,500
Tax on Rs. 8,15,500 @ 30% 2,44,650
Add: Health and Education Cess @ 4% 9786
Tax liability 2,54,436
Adjusted total income and alternate minimum tax for the purpose of section 115JC
Net Income 8,15,500
Add: Under section 80IB 1,00,000
Add: under section 35AD (Rs. 11,00,000 less 40,000) 10,60,000
Adjusted total income 19,75,500
AMT on Rs. 19,75,500 @ 18.5% 3,65,467
Add: Health and Education Cess @ 4% 14,618
AMT liability 3,80,085
AMT liability (round off) 3,80,090
Tax payable is Rs. 3,80,090 being higher of tax liability Rs. 2,54,436 and AMT Rs. 3,80,090.

Illustration 11:
Income & Expenditure A/c of Lawyers & Co. for the year ending March 31, 2025

Particulars Amount (Rs.) Particulars Amount (Rs.)

To Expenses 1,50,000 By Professional Receipts 3,80,000

To Depreciation 20,000 By Other fees 90,000

To Remuneration to partners 1,50,000

Interest on Capital to partners @ 20 20,000

per cent

To Net Profit 1,30,000

Total 4,70,000 Total 4,70,000

Other Information:
1. Expenses include Rs. 18,000 and Rs. 12,000 paid in cash as brokerage to a single party on a single day.
2. Depreciation calculated as per section 32 is Rs. 40,000.
Compute the Total Income of the Firm.

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Solution:
Computation of Total Income of Lawyers & Co. for A. Y. 2025-26

Particulars Amount (Rs.)

Net profit as per profit and loss account 1,30,000

Add: Expenses not allowable

Section 40A(3)- Cash payments to a broker exceeding Rs. 10,000 (Note 1) 30,000

Section 40(b)-Excess interest on capital to partners 20%-12%,i.e., 8,000 38,000

(20000*8/20) (Note 2)

Add: Remuneration to partners debited to profit and loss account 1,50,000

Less: Depreciation u/s 32 (Rs. 40,000 - Rs. 20,000 debited in profit and (20,000)
loss account)

Book profit (Note 3) 2,98,000

Maximum permissible remuneration (higher of the two: (i.e., 90 per cent of 2,68,200
Rs. 2,98,000 or Rs. 1,50,000) OR

Actual (Subject to actual) 1,50,000 (1,50,000)

Business Income of the Firm 1,48,000

Tax Liability (30% of 1,48,000) 44,400

Add: Health and Education Cess @ 4% 1,776

Total Tax Liability 46,176

Notes:
1. As per section 40A(3) of the Act, if the aggregate payment made (otherwise than by an account
payee cheque/draft) to the same person during a day exceeds Rs. 10,000/- the entire amount of such
payment is disallowed.
2. As per section 40 (b) of the Act, if the interest payable to the partners exceeds simple interest of 12%
per annum, the excess amount is not deductible.
3. The remuneration paid to the working partners cannot exceed the permissible limits specified under
section 40 (b) of the Act.

Illustration 12:
Mr. X, carrying on the business of operating a warehousing facility for storage of sugar, has a total income
of Rs. 80 lakhs. In computing the total income, he had claimed deduction under section 35AD to the tune
of Rs. 70 lakhs on investment in building (on 1.4.2024) for operating the warehousing facility for storage
of sugar. Compute his tax liability for A.Y. 2025-26. Show the calculations of Alternate Minimum Tax also.

466
Computation of Total Income and Tax Liability of various Entities LESSON 11

Option 1: Assessee paying tax under normal tax regime

Option 2: Assessee paying tax under Section 115BAC
Solution:
Option1: Assessee paying tax under normal tax regime
Computation of Tax payable by Mr. X for AY 2025-26

Computation of Normal Tax

Particulars Amount (Rs. in lakh)

Tax liability under the normal provisions of the Income-tax Act, 1961 22.125

Add: Surcharge @ 10% of Total income > 50 lacs 2.2125

Add: Health and Education Cess @ 4% of 24.3375 0.9735

Total Tax Liability 25.311

Computation of Alternate Minimum Tax

Particulars Amount (Rs. in lakh)

Adjusted Total Income 80.00
Add: Deduction under section 35AD 70.00
Less: Depreciation under section 32 (7.00)
Adjusted Total Income 143.00
AMT @18.5% 26.46
Surcharge @ 15% (since adjusted total income> Rs. 100 lakh) 3.97
Tax 30.43
Add: Health and Education Cess @ 4% 1.217
Total tax Liability 31.647
Since the regular income tax payable is less than the AMT payable, the adjusted total income of Rs. 143
lakhs shall be deemed to be the total income of Mr. X and tax is payable @18.5% thereof plus surcharge
@ 15% and cess @4%. Therefore, tax liability is 31.647 lakhs.
However, Mr. X would be eligible for credit in 15 subsequent years to the extent of difference between the
AMT and Normal Tax, i.e. Rs., 6.336 lakhs.
Option 2: : Assessee paying tax under Section 115BAC
Computation of Tax payable by Mr. X for AY 2025-26
Computation of Normal Tax

Particulars Amount (Rs. in lakh)

Tax liability under the normal provisions of the Income-tax Act, 1961 20.90
Add: Surcharge @ 10% of Total income > 50 lacs 2.09

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Add: Health and Education Cess @ 4% of 23.10 0.91960

Total Tax Liability 23.90960

Note: Alternate Minimum Tax is not applicable if assessee covered u/s 115BAC

Illustration 13:
Mr. A, 42 years, and Mr. B, 50 years, are equal partners in a partnership firm AB and Co. engaged in
furniture business. From the profit and loss account of the firm compute net income and tax liability of the
firm as well as the partner’s for the assessment year 2025-26.
Profit and Loss Account
For the year ending March 31, 2025

Particulars Amount (Rs.) Particulars Amount (Rs.)

Cost of goods sold 5,10,000 Sales 1,90,0000

Salary to staff 6,00,000 Long term capital gain 1,00,000

Depreciation 1,20,000 Lottery prize 35,000

Fees for technical service 40,000 Other business 1,47,000

receipts

Remuneration to partners 2,00,000

A 140000
B 60000

Other Expenses 2,10,000

Interest on capital@20%

A 43000

B 60000 10,3000

Provision for bad debts 10,000

Net profit 3,89,000

Total 2,18,2000 Total 2,18,2000

Other Information
1) Remuneration and interest to partners is paid as per partnership deed
2) Depreciation as per income tax rules Rs. 100000
3) Firm paid bonus to employees Rs. 20,400 relating to last year on 15-12-2024.
4) Other expenses include donation to approved charitable institution for the purpose of family planning
Rs. 45,000.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

5) Fees for technical services are paid out of India wherein TDS rules apply. Tax has been deducted at
source on time on 31 July, 2024 but it is deposited to Government 21 days late on 28 August, 2024.
6) The firm complies with conditions of section 184 and 40(b)
7) Income and investments of Mr. A and Mr. B are as follows:

Particulars Mr. A (Rs.) Mr. B (Rs.)

Interest on Government Securities 60,000 56,000

Interest on Bank Deposit (gross) 4,500 5,000

Dividend from Indian Company 20,000 22,000

Contribution to PPF 1,00,000 1,10,000

Interest on listed Debentures (net) 6,300 6,300

8) Mr. A received gift of Rs. 80,000 from a friend.

9) Assessee paying tax under normal tax regime
Solution:
Computation of Total Income of AB and Co. for the Assessment Year 2025-26
Calculation of Business Income

Particulars Amount (Rs.)

Net Profit as per P&L A/C 3,89,000
Add: Inadmissible Expenses
Excess depreciation [120000-100000] 20,000
Remuneration to partners 2,00,000
Interest on capital in excess of 12% p.a.
A: 43000*8/20 = 17200
B: 60000*8/20 = 24000 41,200
Provision for bad debts 10,000
Donations 45,000
Less: Admissible Expenses
Bonus to employees (20,400)
Less: Income taxable under head capital gain and other sources

LTCG (1,00,000)

Lottery prize (35,000)

Book profit 5,49,800

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Less: Remuneration to partners

On First 3,00,000 of book profit @90% =2,70,000
Balance 2,49,800 @60% =1,49,880
4,19,880 or Rs. 2,00,000 whichever is less (2,00,000)
Business Income 3,49,800
Income under the head capital gain [LTCG] 1,00,000
Income from other sources
Lottery prize 35,000*100/70 50,000
Gross total income 4,99,800
Less: Deduction u/s 80
80G [100% of 45,000 or 10% of {4,99,800 – 1,00,000}] (39,980)
Taxable Income 4,59,820

Share of A and B in the income of the firm Rs. 2,29,910 (4,59,820/2)

Computation of Tax on Total Income of AB and Co. for the Assessment Year 2025-26

Particulars Amount (Rs.)

Tax on winning from lotteries (30% of Rs. 50,000) 15,000

Tax on long-term capital gains (20% of Rs. 1,00,000) (assuming assets transfer 20,000
took place before July 2024)

Balance of Total Income 3,09,820 @ 30% 92,946

Total tax 1,27,946

Add: Health and Education Cess @ 4% 5,118

Total liability 1,33,064

Rs. 1,33,060 (round off, subject to setoff of TDS for winning from lotteries)
Computation of Taxable Income of partners for the Assessment Year 2025-26

Particulars A (Rs.) B (Rs.)

Business Salary

Remuneration 1,40,000 60,000

Interest on capital 25,800 36,000

Profit share in firm Exempt Exempt

Income from other sources

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Interest on Government securities 60,000 56,000

Interest on Bank deposits 4,500 5,000

Dividend from Indian companies 20,000 22,000

Interest on listed debentures (6,300*100)/90 7,000 7,000

Gift from a friend 80,000 -

Gross Total Income 3,37,800 1,86,000

Deductions u/s 80-80C PPF 1,00,000 1,10,000

Taxable Income 2,37,800 76,000

Tax liability NIL NIL

TDS amounting to Rs. 700 to be claimed for refund

Illustration 14:
Mr. A (40 years) and Mr. B (49 years) are equal partners in a firm of Chartered Accountants, AB Co. On April
1, 2024 they amended their partnership deed and provided for salary and interest to partners as follows:

Particulars Amount (Rs.)

Salary to A 2,50,000 p.a.

Salary to B 3,00,000 p.a.

Interest to A and B 24 % p.a.

From the income and expenditure account of the firm compute net income and tax liability of the firm as
well as the partner’s for the assessment year 2025-26. Assessee has not opted for section 115BAC and
paying tax under normal tax regime.
Income and Expenditure Account For the year ending March 31, 2025

Particulars Amount (Rs.) Particulars Amount (Rs.)

Office expenses 2,51,000 Receipts from clients 8,40,000
Salary to staff 82,000 Interest on drawings 3,500
Income Tax 39,000
Salary to A 2,50,000
Salary to B 3,00,000
Interest on loan to minor son of X @15% 6,000
Interest on capital@24%
A 17000
B 19000 36,000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Net profit 1,14,500

Total 843500 Total 8,43,500

Other Information
1) The firm does not comply with conditions of section 184 and 40(b)
2) The firm has received funds from minor son of X as loan.
3) Income and investments of Mr. A and Mr. B are as follows:

Particulars Mr. A (Rs.) Mr. B (Rs.)

Investment in 5% Government Loan 12,00,000 11,20,000
Interest from Post office savings bank 4,500 5,000
Medical Insurance Premium 12,000 15,000
Dividend from Foreign Companies 40,000 30,000

Solution:
Computation of Total Income of AB and Co. for the Assessment Year 2025-26
Calculation of Business Income

Particulars Rs.

Net Profit as per P&L A/C 1,14,500

Add: Inadmissible Expenses

Income Tax 39,000

Salary to A 2,50,000
Salary to B 3,00,000
Interest on capital in excess of 12% p.a.
A: 17000*12/24 8,500
B: 19000*12/24 9,500 18,000
Book profit 7,21,500
Less: Remuneration to partners (not allowed as conditions of section 184 &40(b) NIL
are not met )
Business Income 7,21,500
Taxable Income 7,21,500

Share of A and B in the income of the firm Rs. 7,21,500/2= 3,60,750

Computation of tax on Total Income for the Assessment Year 2025-26

Particulars Amount (Rs.)

Tax on Rs. 7,21,500@30% 2,16,450

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Add: Health and Education Cess @ 4% 8,658

Total liability 2,25,108
Total (round off) 2,25,110

Computation of taxable income of partners for the Assessment Year 2025-26

Particulars A B
Business Salary
Remuneration – –
Interest on capital 8500 9500
Profit share in firm Exempt Exempt
Income from other sources
Interest on Government Loan (5% of 12,00,000; 5% of 11,20,000) 60,000 56,000
Interest on Post office savings bank (exempt upto Rs. 3500 u/s 1,000 1,500
10(15)(i)
Dividend from Foreign companies 40,000 30,000
Gross Total Income 1,09,500 97000
Deductions u/s 80
80D Mediclaim Insurance (12,000) (15,000)
Taxable Income 97500 82,000
Tax liability NIL NIL

CASE 1

Tax on total income as per normal provision of Income Tax Act is Rs. 205000 and AMT is Rs. 305000.
Compute the tax liability and implications assuming Foreign Tax Credit (FTC) will be Rs. 45000 and Rs.
60000 attributable to Normal provision and AMT respectively.
Solution:
Computation of tax liability and adjustment of FTC

Particulars Amount Amount

(Rs.) (Rs.)
Tax on total income as per normal provision of Income Tax Act 205000

Less: FTC attributable to Normal Tax (45000)

A. Tax on total income as per normal provision of Income Tax Act 160000
Alternate Minimum Tax 305000

Less: FTC attributable to AMT (60000)

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

B. Tax as per AMT 245000

Amount of tax payable = (A) or (B) whichever is higher 245000
Tax Implications:
A<B
 Non-Corporate has to pay AMT u/s 115JC
 Non-Corporate can only avail AMT credit.
AMT Credit Available = B-A = 245000-160000 = Rs. 85000

CASE 2

The taxable income for the year 2024-25 of Mr. Shah (resident and age 40 years) computed as per the
provisions of Income-tax Act is Rs. 28,40,000. The taxable income has been computed after deduction of Rs.
2,00,000 under section 80QQB in respect of royalty on books. Compute the tax liability and tax implications
with reference to AMT assuming Mr. Shah does not opt to be taxed under section 115BAC/BAD and paying
tax under normal tax regime.

Solution:

Check the eligibility

Applicable to Non-Corporate Assessee (i.e. Mr Shah) Yes
If claimed deduction Yes

l u/s/ 10AA/80H to 80RRB (Except 80P) for AY 13-14 or 14-15 or

l u/s 10AA/35AD/80H to 80RRB (Except 80P) for AY 15-16 onwards

ATI > Rs 2000000 (i.e. 30,40,000 Refer Note:2) Yes
Provision of AMT apply Yes

Computation of Adjusted Total Income (ATI)

Net Income or Total Income 28,40,000
Add:

l Deduction under section 10AA Nil

l Deduction under section 80H to 80RRB (Except 80P) (i.e. 80QQB) 2,00,000

l Deduction claimed, if any, under section 35AD (as reduced by the amount of Nil
depreciation allowable in accordance with the provisions of section 32 as if no
deduction under section 35AD was allowed in respect of the assets on which the
deduction under that section is claimed).
Adjusted Total Income (ATI) 30,40,000

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Computation of Total Income and Tax Liability of various Entities LESSON 11

A Tax on total income as per normal provision of Income Tax Act 6,91,080

Tax on 28,40,000 6,64,500

Less: Rebate u/s 87A N.A

Balance 6,64,500

Add: Surcharge N.A.

Tax and Surcharge 6,64,500

Add: HEC@4% 26,580

Total Tax Payable 6,91,080

B 18.5% (+SC+HEC) of Adjusted Total Income 5,84,896

18.5% on 30,40,000 5,62,400

Add: Surcharge N.A.

Tax and Surcharge 5,62,400

Add: HEC@4% 22,496

Total Tax Payable 5,84,896

Amount of tax payable = (A) or (B) whichever is higher 6,91,080

Tax Implications

A>B  Non-Corporate (i.e. Mr. Shah) has to pay normal income tax
 Non-Corporate can utilize amount of AMT credit in that year if available.
Maximum Amount of Credit Utilized = A-B
= 6,91,080 - 5,84,896 = 1,06,184

CASE 3

The taxable income for the financial year 2024-25 of Mr. Jay (resident and age 35 years) computed as per
the provisions of Income-tax Act is Rs. 20,84,000. The taxable income has been computed after deduction
of Rs. 5,00,000 under section 80JJA. Will he be liable to AMT? What will be his tax liability for the year?
Assuming Mr. Jay does not opt to be taxed Under section 115BAC/BAD and paying tax under normal tax
regime.

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Solution:

Check the eligibility

Applicable to Non-Corporate Assessee (i.e. Mr. Jay) Yes

If claimed deduction Yes

l u/s/ 10AA/80H to 80RRB (Except 80P) for AY 13-14 or 14-15 or

l u/s 10AA/35AD/80H to 80RRB (Except 80P) for AY 15-16 onwards

ATI >Rs2000000 (i.e. 25,84,000 Refer Note:2) Yes

Provision of AMT apply Yes

Computation of Adjusted Total Income (ATI)

Net Income or Total Income 20,84,000

Add:
l Deduction under section 10AA Nil
l Deduction under section 80H to 80RRB (Except 80P) (i.e. 80JJA) 5,00,000
l Deduction claimed, if any, under section 35AD (as reduced by the amount of Nil
depreciation allowable in accordance with the provisions of section 32 as if no
deduction under section 35AD was allowed in respect of the assets on which the
deduction is claimed).

Adjusted Total Income (ATI) 25,84,000

A Tax on total income as per normal provision of Income Tax Act 4,55,208

Tax on 20,84,000 4,37,700

Less: Rebate u/s 87A N.A

Balance 4,37,700

Add: Surcharge N.A.

Tax and Surcharge 4,37,700

Add: HEC@4% 17,508

Total Tax Payable 4,55,208

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Computation of Total Income and Tax Liability of various Entities LESSON 11

B 18.5% (+SC+HEC) of Adjusted Total Income 4,97,162

18.5% on 25,84,000 4,78,040

Add: Surcharge N.A.
Tax and Surcharge 4,78,040
Add: HEC@4% 19,122
Total Tax Payable 4,97,162

Amount of tax payable = (A) or (B) whichever is higher 4,97,162

Tax Implications
A<B
 Non-Corporate (i.e. Mr Jay) has to pay AMT u/s 115JC
 Non-Corporate (i.e. Mr Jay) can only avail AMT credit.
AMT Credit Available = B-A = 497162-455208 =Rs 41,954

CASE 4

The tax liability of SP Enterprises (a partnership firm) for the financial year 2024-25 under the normal provisions
of the Income-tax Act is Rs. 8,40,000 and the liability as per the provisions of AMT is Rs. 10,00,000. Will it be
entitled to claim any AMT credit in the subsequent year(s)?
Solution:

A Tax on total income as per normal provision of Income Tax Act 840000

B 18.5% (+SC+HEC) of Adjusted Total Income 1000000

Amount of tax payable = (A) or (B) whichever is higher 1000000

Note: Tax Implications

A<B
 Non-Corporate has to pay AMT u/s 115JC
 Non-Corporate can only avail AMT credit.
AMT Credit Available = B-A = 1000000-840000 = Rs. 160000

CASE 5

The taxable income for the financial year 2024-25 of Mr. Dixy (resident and age 35 years) who established
unit located in IFSC and derived income solely in convertible forex computed as per the provisions of
Income-tax Act is Rs. 20,84,000. The taxable income has been computed after deduction of Rs. 5,00,000
under section 80JJA. Will he be liable to AMT? What will be his tax liability for the year? Assuming Mr. Jay
does not opt to be taxed under section 115BAC/BAD.

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Check the eligibility

Applicable to Non-Corporate Assessee (i.e. Mr Jay) Yes

If claimed deduction Yes
l u/s/ 10AA/80H to 80RRB (Except 80P) for AY 13-14 or 14-15 or

l u/s 10AA/35AD/80H to 80RRB (Except 80P) for AY 15-16 onwards

ATI >Rs. 2000000 (i.e. 25,84,000 Refer Note:2) Yes

Provision of AMT apply Yes

Computation of Adjusted Total Income (ATI)

Net Income or Total Income 20,84,000
Add:
l Deduction under section 10AA Nil
l Deduction under section 80H to 80RRB (Except 80P) (i.e. 80JJA) 5,00,000
l Deduction claimed, if any, under section 35AD (as reduced by the amount of Nil
depreciation allowable in accordance with the provisions of section 32 as if no
deduction under section 35AD was allowed in respect of the assets on which the
deduction is claimed).
Adjusted Total Income (ATI) 25,84,000

A Tax on total income as per normal provision of Income Tax Act 4,55,208

Tax on 20,84,000 4,37,700

Less: Rebate u/s 87A N.A
Balance 4,37,700
Add: Surcharge N.A.
Tax and Surcharge 4,37,700
Add: HEC@4% 17,508
Total Tax Payable 4,55,208

B 9% (+SC+HEC) of Adjusted Total Income 2,41,862

9% on 25,84,000 2,32,560
Add: Surcharge N.A.
Tax and Surcharge 2,32,560
Add: HEC@4% 9,302
Total Tax Payable 2,41,862

Amount of tax payable = (A) or (B) whichever is higher 4,55,208

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Tax Implication

A>B  Non-Corporate (i.e. Mr. Dixy) has to pay normal income tax
 Non-Corporate can utilize amount of AMT credit in that year if available.
Maximum Amount of Credit Utilized = A-B
= 455208 - 241862 = 213346

TAXATION OF ASSOCIATION OF PERSONS / BODY OF INDIVIDUALS

‘Association of Persons’ has not been defined in the Income-tax Act. However, in the case of CIT v. Indira
Balkrishna [(1960) 39 ITR 546] the Supreme Court has defined it as:
“Association of Persons” means an association in which two or more persons join in for a common purpose or
common action to produce income, profits or gains.
An association of persons may consist of non-individuals (Companies, Firms, Joint Families) [Ipoth v. CIT (1968)
67 ITR 106 (S.C.)]. A minor can join an AOP if his lawful guardian gives his consent. [Murugesan & Bros. v. CIT
(1973) 88 ITR 432 (SC)].
Applying the ratio laid down by the Supreme Court in the case of G Murugesan and Bros. v. Commissioner of
Income- tax (1973, 88 ITR 432), the Kerala High Court held in the case of Commissioner of Income-tax v. Goel
Dalal and Perin C. Dalal (1990, 184 ITR 248) that in order to acquire the status of an association of persons, the
persons must join in a common purpose or action and the object of the association must be to produce income.
It is not enough that the persons receive the income jointly.
For the formation of an AOP, the association need not necessarily be on the basis of a contract, consent and
understanding may be presumed [Shanmugham & Co. v. CIT(1971) 81 ITR 310 (S.C.)].
Applying the ratio laid down by the Supreme Court in the case of N.V. Shanmugham & Co. v. Commissioner of
Income- tax (1971, 81 ITR 310) the Calcutta High Court held in the case of Gopal Chand Sen v. Income-tax Officer
and others (1977, 109 ITR 820) that an assessment of business income has to be done in the hands of receivers
and in such an assessment, the receivers are never assessed as independent earners of income. The income
in the hands of the receiver is assessable in the like manner and to the same extent as it would have been
assessed on the real owners.
However, co-owners, co-heirs or co-legatees do not constitute an AOP in respect of the income of the joint
or common asset by reason only of their jural relationship. But if they write themselves with the objective of
earning income they constitute an AOP for assessment purposes. [Estate of Mohamed Rowther v. CIT (1963, 49
ITR 39)]. Section 26 of the Income-tax Act provides that where property consisting of building or buildings and
lands appurtenant thereto is owned by two or more persons in definite and ascertainable shares, such persons
shall not, in respect of such property be assessed as an AOP, but on their respective share of income therefrom.
In order to constitute an association of persons, there must be joining together in a common purpose or in a
common action, the object of which is to produce income, profits and gains. Though a body of individuals is not
identical with an association of persons, they have some similarities. An association of persons may consist
of non-individuals also but a body of individuals has to consist only of human beings. The word ‘body’ would
require an association for some common purpose or for a common cause or there must be unity under some
common tie or occupation. A mere collection of individuals without a common tie or common aid cannot be
taken to be a body of individuals failing under Section 2(31) of the Income-tax Act, 1961. [See CIT v. Deghamwala
Estates (1980, 121 ITR 684)].

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Tax Liability of Association of Persons / Body of Individuals

With effect from assessment year 1989-90, the following provisions are applicable to assessees other than
companies, co-operative societies and societies registered under the Societies Registration Act, 1860 or any
law corresponding to that Act in force in any part of India.
(1) Interest paid by the AOP to a member will not be allowed as deduction from the income of the AOP
[(Section 40(ba)]. In cases where interest is paid by the AOP to any member, who has also paid interest
to the AOP, the amount of interest, that will be disallowed, is the amount of interest paid by the AOP
to the member less the amount of interest paid to the AOP by the member [(Explanation 1 to section
40(ba)].
(2) In cases where an individual is a member of an AOP in a representative capacity, any interest paid by
the AOP to such individual or by such individual to the AOP, otherwise than in a representative capacity
will not be subject to disallowance under explanation 2(i) to Section 40(ba).
(3) In the cases of interest paid by AOP to such individual or by such individual to the AOP in a representative
capacity any interest paid by the AOP to the person represented by such person or vice versa, will not
be allowed under Section 40(ba) [Explanation 2(ii) to Section 40(ba)].
(4) Explanation 3 to Section 40(ba) further provides that where an individual is a member of the AOP
otherwise than as member in a representative capacity, any interest paid by the AOP to such individual
will not be disallowed if the interest is received by him on behalf of any other person.
(5) Any salary, bonus, commission or remuneration (by whatever name called) paid by the AOP to a
member will not be allowed as a deduction.
Section 167B makes the following provisions as regards the incidence of charge of tax on the association of
persons.
A. Where Shares of Members are Determinate
In this case, tax is chargeable on the income of the association of persons at the same rate as applicable
to an individual. However, where the total income of any member of the association of persons for the
previous year (excluding his share of income from the association of persons) exceeds the maximum
amount not chargeable to tax in the case of an individual, tax will be charged on the total income of the
AOP at the maximum marginal rate of 30%, i.e., the highest slab applicable to an individual.
More so, where the total income of any member of the AOP, irrespective of whether or not it exceeds
the maximum amount not chargeable to tax in the case of an individual, is chargeable to tax at a rate
higher than the maximum marginal rate (e.g. foreign company), tax will be charged on the total income
of the AOP at such higher rate for that portion of the income of AOP which relates to the share of such
member and the balance of income at a maximum marginal rate of tax.
Note:
1. Some incomes are taxable at special rates.
2. Provisions of alternate minimum tax under section 115JC to 115JF shall apply.

Illustration 15:
Mr. A, Mr. B and a foreign company X Ltd. are members of a AOP sharing profits and losses in the ratio of
2:2:1. The total income of the AOP is Rs. 2,50,000 including long term capital gains Rs. 40,000. Calculate
tax liability of the AOP for AY 2025-26.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Solution: Foreign Company X Ltd. is taxable at a rate higher than maximum marginal rate (i.e., 40%)

Tax on LTCG (assuming assets transfer before July 2024) 40,000 at 20% 8,000

Tax on share of X Ltd. (2,10,000 *40%*1/5) 16,800

Balance (2,10,000 *40%*4/5) 50,400

Total Tax 75,200

Add Cess (4%) 3,008

Tax liability 78,208

Total 78,210 (round off)

B. Where the Shares of the Members are Indeterminate

In this case, tax will be charged on the total income of the AOP at the maximum marginal rate, that is,
the rate of tax as well as surcharge, if any, applicable to the highest slab of income in the case of an
individual as specified in the Finance Act of the relevant year. However, if income of any member of
AOP is chargeable to tax at a rate higher than maximum marginal rate, then the rate of tax for the entire
income of AOP shall be such higher rate.
The individual shares of the members in the whole or any part of the income of the AOP will be deemed
to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation
of the AOP, or at any time thereafter.

Method of Computing Share of a Member of Association of Persons / Body of Individuals [Section

67A]
Section 67A seeks to provide for the method of computing a member’s share in the income of an association of
persons or a body of individuals, wherein the shares of the members are determinate, in the same manner as
provided for in Sub-sections (1) to (3) of Section 67 for computing a partner’s share in a firm.
This section lays down the following methods of computing the member’s share:
(a) Any interest, salary, bonus, commission or remuneration, by whatever name called, paid to any member
in respect of the previous year shall be deducted from the total income of the association or body and
the balance ascertained and apportioned among the members in the proportion in which they are
entitled to share the income of the association or body.
(b) Where the amount apportioned to a member under (a) hereinabove is a profit, any interest, salary,
bonus, commission or remuneration paid to the member by the AOP in respect of the previous year
shall be added to that amount - the result shall constitute the member’s share in the income of the
association or body.
(c) Where the amount apportioned to a member under (a) is a loss, any interest, salary, bonus, commission
or remuneration aforesaid paid to the member by the association or body in respect of the previous
year shall be adjusted against that amount, the result shall be adjusted against that amount, and the
result shall be treated as the member’s share in the income of the association or body.
Notes:
(1) The share of each member of AOP/BOI shall be apportioned under the various heads of income as is
determined while computing the income of the AOP/BOI.

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(2) Deductions under section 80 to the extent allowed to AOP/BOI shall not be allowed to the
members.

Taxation of share of income of a member of AOP/BOI

Section 86 relates to shares of members of an association of persons or a body of individuals in the income of
the association or body. This section provides that if the assessee is a member of an association of persons or a
body of individuals (other than a company or a Co-operative society or a Society registered under the Societies
Registration Act, 1860, or any law corresponding to that Act in force in any part of India), his share in the income
of the association or body, computed in the manner provided in Section 67A shall not be liable to tax.
Further, The taxability of share of income of a member of AOP/BOI depends on the rate at which income of such
AOP/ BOI is taxable:
1. Where AOP/BOI is chargeable to tax on its total income at the maximum marginal rate or any higher
rate, the share of the member shall not be included in his total income.
2. Where AOP/BOI is chargeable to tax on its total income at the rate applicable to individuals (normal
rate) and tax is paid, share of income of a member shall be chargeable to tax as part of his total income
and rebate under section 86 shall be claimed.
3. Where AOP/BOI is chargeable to tax on its total income at the rate applicable to individuals (normal
rate) and no tax is chargeable, share of income of a member shall be chargeable to tax as part of his
total income and no rebate under section 86 shall be claimed.

Assessment in case of Dissolution of an Association of Persons [Section 177]

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

CASE 1

DD, D and P are the three partners of AOP having profit sharing ratio of 2:2:1. Details of income provided are
as follows:
Rs.
DD 100000
D 90000
P 110000
Total income of AOP 540000 (Including LTCG Rs. 120000 and STCG under 111A Rs. 80000)
You are required to compute tax liability of AOP for AY 2025-26.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Solution:
Here, in this case, AOP will be assessed and taxed like an individual assuming indexation benefit is availed
and sale took place after July 24 with regard to capital gain

Total Tax [A+B+C] 40500

Add: HEC @4% 1620

Tax Payable 42120

TAXATION OF CO-OPERATIVE SOCIETIES

Meaning [Section 2(10)]

‘Co-operative Society’ means a co-operative society registered under the Co-operative Societies Act, 1912, or
under any other law for the time being in force in any state for the registration of co-operative societies. The
Income of the co-operative society is computed in the same manner as provided for other assesses. A co-
operative society is entitled to the deductions from its gross total income u/s 80G, 80GGA, 80GGC, 80IA, 80-IB,
80JJA and 80P.
A regional rural bank (to which provisions of the Regional Rural Bank Act, 1976, apply) is deemed to be a co-
operative society [Circular No. 319 dated 11.1.1982].

Computation of Income of Co-operative Societies

The income of a co-operative society is computed in the same manner as provided for other assessees under
the Act. The provisions under various heads of income, clubbing of incomes, set off and brought forward losses,
deductions under section 80 shall apply.
Further, the subsidy given by the government to a co-operative society for meeting managerial expenses and
admission fee collected by the society is treated as revenue receipt and liable to tax. [Ludhiana Central Co-
operative Consumers’ Stores Ltd. v. C.I.T (1980) 122, I.T.R. 942]. There is, however difference of opinion with regard
to tax treatment of ‘subsidy’ received from the Government. Distinguishing the ratio laid down by the Punjab
& Haryana High Court in the case of Ludhiana Central Co-operative Consumers’ Stores Ltd. Commissioner of
Income-tax (1980, 122 ITR 942), the Punjab & Haryana High Court held in the case of Commissioner of Income-
tax v. Jindal Brothers Rice Mills (1989, 179 ITR 470) that depreciation is allowable on the cost of the machinery
or plant reduced by the amount of the subsidy as actual cost stands reduced by the percentage allowed by the
subsidy. Though this case was followed by it in the case of Commissioner of Income-tax v. Janak Steel Tubes

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(Pvt.) Ltd. (1989, 179 ITR 536) (the capital subsidy should be deducted from the value of plant and machinery) but
had been dissented from by the Bombay, Madras and Rajasthan High Courts in the following cases:
(i) Srinivas Industries v. Commissioner of Income-tax (1991, 188 ITR 22): The Madras High Court held that
the subsidy really partook the character of cash grant expendable for any purpose-consequently, the
amount of subsidy granted could not be deducted from the capital cost of the machinery.
(ii) In Commissioner of Income-tax v. Elys Plastics Pvt. Ltd. (1991, 188 ITR 11) the Bombay High Court held
that the subsidies were not deductible in computing the cost of plant and machinery for purposes of
allowing depreciation.
(iii) In Commissioner of Income-tax v. Ambica Electrolytic Capacitors (P) Ltd. and others (1991, 191 ITR 494)
the Rajasthan High Court held that the subsidy or investment subsidy given by the Government cannot
be deducted from the actual cost for purposes of investment or depreciation allowance.

Rates of Income-tax on Co-operative Society

The rates of income-tax applicable to a co-operative society for the assessment year 2025-26 are as follows:

1. Where the total income does not exceed Rs. 10,000 10% of total income

2. Where the total income exceeds Rs. 10,000 Rs. 1,000 plus 20% of the amount by which income
but total income does not exceed Rs. 20,000. exceeds Rs. 10,000

3. Where the total income exceeds Rs. 20,000 Rs. 3,000 plus 30% of the amount by which income
exceeds Rs. 20,000

Health and Education Cess @ 4%.

Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where
total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax,
where total income exceeds ten crore rupees.
Note:
1. Some incomes are taxable at special rates.
2. Provisions of alternate minimum tax under section 115JC to 115JF shall apply.

Deduction in respect of Income of Co-operative Societies [Section 80P]

Section 80P provides for certain deductions from the gross total income of a Co-operative Society. These
deductions are:
(a) In the case of Co-operative Society engaged in:
(i) the business of Banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of the agricultural produce grown by its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, i.e., catching, curing, processing, preserving, storing or marketing of fish

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Computation of Total Income and Tax Liability of various Entities LESSON 11

or the purchase of materials and equipment in connection therewith for the purpose of supplying
them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such
activities shall be deducted from the gross total income provided that in the case of a co-operative
society falling under Sub-clause (vi) or (vii), the rules and bye-laws of the society restrict the voting
rights to the following classes of its members:

(i) the individuals who contribute their labour or carry on the fishing or allied activities;

(ii) the co-operative credit societies which provide financial assistance to the society;

(iii) the State Government.

(b) In the case of primary co-operative society engaged in supplying milk, oilseeds, fruits, vegetables
raised or grown by its members to

(i) a federal co-operative society engaged in supplying the above-mentioned products; or

(ii) a Government or a local authority; or

(iii) a Government Company or a Corporation established by or under a Central, State or a Provincial

Act (being a company or corporation engaged in supplying the above-mentioned products to the
public).

the whole of the amount of profits and gains of such business shall be deducted from the gross total
income.

In the case of a co-operative society engaged in activities other than those specified in clauses (a) or
(b) either independently of, or in addition to, profits and gains attributable to the activities mentioned at
clauses (a) and (b) deduction from the gross total income will be allowed to the extent of Rs. 50,000.

(c) Where such co-operative society is a Consumers’ Co-operative Society, the deduction shall be Rs.
1,00,000.

(d) In the case of every co-operative society, the whole of the income by way of interest or dividends
derived from its investments with any other co-operative society shall be deducted from the gross total
income.

(e) In the case of every co-operative society, the whole of the income derived by the society from the
letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities
shall be deducted from its gross total income.

(f) In the case of every co-operative society, not being a housing society or an urban consumers’ society, or
a society carrying on transport business or a society engaged in the performance of any manufacturing
operations with the aid of power, where the gross total income does not exceed Rs. 20,000 the amount
of any income by way of interest on securities or any income from house property shall be deducted
from the gross total income.

Urban Consumers’ Co-operative Society

An urban consumers’ co-operative society means a society for the benefit of consumers, within the limits of a
municipal corporation, municipality, notified areas committee, town area, or cantonment [Explanation to Section
80P(2)].

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The provisions of this Section shall not apply in relation to any cooperative bank other than a primary agricultural
credit society or a primary cooperative agricultural and rural development bank.

Other points
l Amount received for letting of godowns, incidental services of taking delivery of stock at rail-head and
transporting it to godowns were also rendered and amount received was described as ‘commission’
was wholly exempt. I.T. v. South Arcot District Co-operative Marketing Society Ltd. (1989) 43 Taxman
328/176 ITR 117 (SC).
l Income from ginning and pressing of cotton is exempt. Broach Distt. Co-operative Cotton Sales, Ginning
& Pressing Society Ltd. v. CIT (1989) 177 ITR 418/44 Taxman 439 (SC).
l Where assessee, an apex co-operative society, derived (i) interest on cash security furnished by it for
carrying on sugar agency business, and (ii) interest on temporary loans given by it for financing sugar
business, while former interest was not exempt, latter was exempt under Section 14(3)(iii) of the 1922 Act,
CIT v. U.P. Co-operative Federation Ltd. (1989) 176 ITR 435/43 Taxman 20 (SC).
l Amount of subsidy received by assessee from National Co-operative Development Corpn. towards
loss incurred on account of price fluctuation qualifies for deduction under Section 81 (1)(c) - CIT v. Punjab
State Co-operative Supply & Marketing Federation Ltd. (1989) 46 Taxman 156 (Punj. & Har.).
l Proportionate expenditure relating to such business activities of assessee co-operative society as are
contemplated by Section 80P(2) is not to be disallowed. Baghapurana Co-operative Marketing Society
Ltd. v. CIT (1989) 178 ITR, 653/44 Taxman 92 (Punj. & Har.).
l In the cases of agricultural produce, the agricultural produce marketed by assessee co-operative
society need not have been produced by assessee’s members - CIT v. Punjab State Co-operative Supply
& Marketing Federation Ltd. (1989) 46 Taxman 156 (Punj. & Har.).
l The expression ‘the marketing of the agricultural produce of its members means that agricultural produce
should be owned by its members, whether supplied by them (that is, the members) or purchased from
the market or acquired from any other producer. C.I.T. v. Haryana State Co-operative Supply & Marketing
Federation Ltd. (1989) 79 CTR (Punj. & Har.) 94.
l Short-term call deposits are investment within the meaning of Section 80P(2)(d). CIT v. Haryana Co-
operative Sugar Mills Ltd. (1989) 46 Taxman 28 (Punj. & Har.).

Assessment of Co-operative Societies

The following are the provisions which are specifically applicable to the assessment of Co-operative Societies.
(I) Co-operative Housing Society: Under Section 27(iii), a member of co-operative society, company or
other association of persons to whom a building or part thereof is allotted or leased under a house
building scheme of the society, company or association, as the case may be, shall be deemed to be
owner of that building or part thereof.
Clause (iiia) further provides that a person who is allowed to take or retain possession of any building
or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer
of Property Act, 1882 shall be deemed to be the owner of that building or part thereof; and
As per Clause (iiib), a person who acquires any rights (excluding any rights by way of a lease from
month to month or for a period not exceeding one year) in or with respect to any building or part thereof,
by virtue of any such transaction as is referred to in Clause (f) of Section 269UA, shall be deemed to be
the owner of that building or part thereof.

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Clause (f) of Section 269UA, it may be noted, defines “transfer” for the purposes of Chapter XX-C of
the Income- tax Act, dealing with purchase by Central Government of immovable properties in certain
cases of transfer.
(II) Profits and Gains of Co-operative Society from Insurance Business [Section 44]: The profits and gains
of any business of insurance carried on by a Co-operative Society shall be computed in accordance
with the rules contained in the First Schedule.
In this connection, the First Schedule and Rule 6E of the Income-tax Rules, 1962 provides as under:
The profits of non-life insurance business, e.g., Fire insurance business, marine insurance business,
general insurance business etc. shall be the profits disclosed by the annual accounts required to be
prepared under the Insurance Act, 1938 subject to the following adjustments:
(i) If such profits are arrived at after deducting any expenditure or allowance which is not admissible
under Sections 30 to 43B of the Income-tax Act, such expenditure or allowance shall be added
back to the profits.
(ii) The reserve for unexpired risks shall be allowed as a deduction to the following extent:
(a) where the insurance business relates to fire insurance or miscellaneous insurance - 50% of
the net premium income of such business of the previous year;
(b) where the insurance business relates to marine insurance, 100% of the net premium income
of such business of the previous year.
‘Net premium income’ means the amount of premium received, as reduced by the amount of re-insurance
premiums paid during the relevant previous year.
In the context of computing the total income of co-operative society, the following cases are worth noting.
(1) Where the credit facility is extended to members of the society by virtue of sale of goods to them by
consumers’ co-operative society, the exemption is not available. When the society sells goods on credit
to its members, such transaction cannot be construed as a credit society to which the benefit of Section
80P(2)(a)(i) can be extended. [Rodier Mill Employees’ Co-operative Stores Ltd. v. CIT (1982) 135 ITR 355].
Following the ratio laid down by the Madras High Court in the case of Rodier Mill Employees’ Co-
operative Stores Ltd. v. Commissioner of Income-tax (1982, 135 ITR 355), the Kerala High Court held in
the case of Kerala Co-operative Consumers Federation Ltd. v. Commissioner of Income-tax (1988, 170
ITR 455) that the words ‘providing credit facilities’, occurring in Section 80P(2)(a)(i) of the Income-tax Act,
1961 should be construed as similar to, or akin to the ‘carrying on the business of banking’, preceding
the words “or providing credit facilities” in the same sub-section. The words ‘providing credit facilities to
its members’ means providing credit by way of loans and not selling goods on credit.
(2) Where society purchases auto-rickshaws and sells them to members on hire-purchase, it is not providing
credit facility to members and not entitled to exemption [C.I.T. v. Madras Auto Rickshaw Drivers’ Co-
operative Society (1983) 143 ITR 981]. In this case it was held that the tax relief under Section 80P(2)(a)
(i) of the Income- tax Act, is a grant not to a category of income but to a category of assessees namely,
a co-operative society answering the description of a society engaged in carrying on the business of
providing credit facilities to its members. If the society in question does not answer to this description, it
is not entitled to the relief.
(3) In Bihar State Co-operative Bank Ltd. v. C.I.T. [(1960) 39 I.T.R. 114] the Supreme Court has held that if a
co- operative society carrying on banking business invests its circulating capital in such a manner that it
is readily available, the interest on such investment shall constitute income from banking business and
therefore shall be exempt in the hands of the co-operative society.

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(4) Interest received on Government Securities held by co-operative society as its stock-in-trade qualifies for
deduction from gross total income. But the deduction is inapplicable to interest received from Government
Securities held as investments. [CIT v. Bombay State Co-operative Bank Ltd. (1968) 70 ITR 86 (SC)].
The Madhya Pradesh High Court held in the case of M.P. State Co-operative Bank Ltd. v. Addl.
Commissioner of Income-tax (1979, 119 ITR 327) that income from investment of reserve capital in
securities was not a part of the income from banking business and did not qualify for exemption.
Similarly, the interest income from investment of provident fund income did not form part of the income
from the banking business and did not qualify for exemption under Section 80(i)(a) (now Section 80P).
Distinguishing the ratio laid down in this case, the Madhya Pradesh High Court held in the case of
Commissioner of Income-tax v. Bhopal Co-operative Central Bank Ltd. (1987, 164 ITR 713) that the security
deposits made are in accordance with the Banking Regulation Act, 1949 and interest income received
on deposits formed part of income from business of banking and exempt under Section 80P(2)(i) of the
Income-tax Act, 1961.
The Allahabad High Court held in the case of Addl. Commissioner of Income-tax v. U.P. Co-operative
Cane Union (1978, 114 ITR 70) that selling goods on credit was only a mode of carrying on business. It
did not become a business of providing credit facility. Following this case, the Allahabad High Court
held in the case of Commissioner of Income-tax v. U.P. Co-operative Cane Union Federation Ltd. (1980,
122 ITR 913) that the expression ‘providing credit facilities’ in Section 80P(2)(a)(i) would comprehend
the business of lending money on interest. It would also comprehend the business of lending services
on profit for guaranteeing payments because guaranteeing payment is as much a part of banking
business for affording credit facility as advancing loans.
However, where a co-operative society holds securities as per requirements of Banking Regulation Act
and directions of the RBI, the deduction is available on such interest income. Similarly, subsidy from
Government for opening new branches and giving loans to poorer sections at lower rate of interest, is
income attributable to banking business [CIT v. Madurai District Central Co-operative Bank Ltd. (1984)
148 ITR 196].
(5) The Income earned by a co-operative society carrying on the business of banking and providing credit
facilities to its members from commission and brokerage by dealing in bills of exchange, subsidy from
Government, admission fee from members, incidental charges and financial penalties is attributable to
the business of banking of providing credit facilities to its members and hence deductible under Section
80P(2)(a)
(i) [CIT v. Dhar Central Co-operative Bank (1984) 149 ITR 438 (MP)].
Following its decision in the case of Commissioner of Income-tax v. Dhar Central Co-operative
Bank (1984, 149 ITR 438), the Madhya Pradesh High Court held in the case of Commissioner
of Income-tax v. Bhopal Co- operative Central Bank Ltd. (1988, 172 ITR 423) that a co-operative
society carrying on the business of banking is entitled to exemption in respect of interest on
securities, commission, subsidy, donation and locker rent. Again, the said decision was followed
by it in the case of Madhya Pradesh Rajya Sahakari Bank v. Commissioner of Income-tax (1988,
174 ITR 150) holding that the income from commission, exchange and other miscellaneous income
was attributable to the business of banking and that the assessee was entitled to exemption
under Section 81 (now 80P) of the Income-tax Act, 1961 in respect thereof.
(6) A society which buys and sells products of other societies or individuals is not entitled to exemption.
Where a society manufactures and sells its own products or the products of its members, such
society is entitled to exemption. Hence, the Central Cottage Industries Emporium, New Delhi, is not
entitled to exemption under Section 80P [Addl. C.I.T. v. Indian Co-operative Union Ltd. (1982) 134 ITR
108 (Delhi)].

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If the godown or warehouse is let for a purpose other than storage, processing of facilitating the
marketing of commodities, the income derived therefrom by a co-operative society would not be
deductible under Section 80P. In C.I.T. v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses
Society Ltd. [(1986) 162 ITR 142 (Guj.)] it was also held that shops in which wholesale or retail business
in cloth is carried on cannot come within the meaning of ‘godowns’ or ‘warehouses’.
The Gujarat High Court’s decision in the case of Commissioner of Income-tax v. Ahmedabad Maskati
Cloth Dealers Co-operative Warehouses Society Ltd. (1986, 162 ITR 142) had since been approved by
the Supreme Court in the case of South Arcot District Co-operative Marketing Society Ltd. (infra). The
Gujarat High Court had, inter alia, held that the words facilitating the marketing of commodities’ would
not lend colour to the words ‘godowns or warehouses’ so as to enlarge their meaning.

CASE 1

P Co-operative Society engaged in procession of agriculture produce and running its activities without aid of
power furnishes following details of income, compute taxable income and tax liability for the purpose of A.Y.
2025-26 if it does not opt to be taxed under section 115BAD and if opts to be taxed under section 115BAD.
l Income from processing of agricultural produce of its member 38500
l Income from marketing of the agricultural produce 12000
l Dividend from another co-operative society 41400
l Income from letting of godown 24000
l Commission income 91000
Solution:
Statement showing computation of Total income and tax liability

Particulars Remarks Not opt to Opts to be

be taxed taxed under
under section section
115BAD 115BAD
Income from letting of godown [a] 24000 24000

Income from processing of agricultural produce of 38500 38500

its member

Income from marketing of the agricultural produce 12000 12000

Commission income 91000 91000

Income from PGBP [b] 141500 141500

Dividend from another co-operative society 41400 41400

Income from other Source [c] 41400 41400

Gross Total Income [a+b+c] 206900 206900

Deduction under section 80C to 80U

Deduction under section 80P

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Income of agricultural produce 38500*100% 38500 Nil

Income from marketing of the agricultural produce 12000*100% 12000 Nil
Commission income Exempt up to 50000 Nil
50000
Letting out of godowns 24000*100% 24000 Nil
Dividend income 41400*100% 41400 Nil
Total Income 41000 206900
Tax on total income At Slab rate At 22%
Up to 10000 = 10% (10%*10000)=1000 9300 45518
10000-20000=20%(20%*10000) =2000
20000-41000=30% (30%*21000)=6300
Add: Surcharge NA NA
Tax and Surcharge 9300 45518
Add: HEC@4% 372 1821
Tax Payable (Rounded off) 9670 47340

Illustration 16:
Delhi Co-operative Society derived the following incomes during the previous year 01.4.2024 to 31.3.2025

(1) Marketing of agricultural produce of its members 10,000

(2) Interest from members on delayed payment of the price of goods purchased 1,000
(3) Processing (without aid of power) of agricultural produce of its members 8,000
(4) Supplying milk to the Government (raised by its members) 15,000
(5) Agency business 25,000
(6) Dividends from other Co-operative Societies 15,000
(7) Income from letting of godowns 20,000
(8) Income from House Property 30,000

Solution:
Option 1: Assessee has not opted for Section 115BAD
Computation of total income of Delhi Co-operative Society

Particulars Amount (Rs.) Amount (Rs.)

Income from House Property 30,000
Letting of godowns 20,000 50,000

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Computation of Total Income and Tax Liability of various Entities LESSON 11

Income from Business

Marketing of agricultural product 10,000
Processing of goods 8,000
Supplying milk 15,000
Agency business 25,000 58,000
Income from other sources
Interest from members 1,000
Dividends 15,000 16,000
Gross Income 1,24,000
Deductions under Section 80P
Letting of godowns 20,000
Marketing of agricultural produce 10,000
Processing of goods 8,000
Supplying milk 15,000
Agency business 25,000
Dividends 15,000 (93,000)
Total income 31,000

Notes:
(1) Interest from members Rs. 1,000 is not deductible as it is not from the credit facilities provided to the
member and for this purpose society cannot be said to be a credit society [Rodier Mill Employees’
Co- operative Stores Ltd. v. CIT (1982) 135 ITR 355].
(2) The gross total income of the society exceeds Rs. 20,000 hence deduction regarding income from
house property is not available.
Option 2: Assessee has opted for Section 115BAD
Computation of total income of Delhi Co-operative Society

Particulars Amount (Rs.) Amount (Rs.)

Income from House Property 30,000

Letting of godowns 20,000 50,000

Income from Business

Marketing of agricultural product 10,000

Processing of goods 8,000

Supplying milk 15,000

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

Agency business 25,000 58,000

Income from other sources

Interest from members 1,000

Dividends 15,000 16,000

Gross Income 1,24,000

Deductions under Section 80P NA

Total income 1,24,000

Notes:
(1) Interest from members Rs. 1,000 is not deductible as it is not from the credit facilities provided to the
member and for this purpose society cannot be said to be a credit society [Rodier Mill Employees’
Co- operative Stores Ltd. v. CIT (1982) 135 ITR 355].
(2) The gross total income of the society exceeds Rs. 20,000 hence deduction regarding income from
house property is not available.
(3) Deduction under section 80P is not allowed u/s 115BAD

TAX EXEMPTIONS TO POLITICAL PARTIES [SECTION 13A]

‘Political Party’ means an association or body of individual citizens of India registered with the Election
Commission of India as a political party and includes a political party deemed to be registered with that
Election Commission of India.

Political parties are liable to pay tax on their income and they are assessed as ‘An association of persons’.
However, the income derived by these parties as income by way of voluntary contributions, Income from House
Property; and Income from Other Sources or Capital Gains are exempt subject to the following conditions:
(i) the party keeps and maintains such books of account and other documents as would enable the
Assessing Officer to properly deduce the income;
(ii) in respect of each such voluntary contribution in excess of’ Rs. 20,000, the party keeps and maintains a
record of the contributions and names and addresses of the persons who have made such contribution;
and the accounts of the party are audited by a Chartered Accountant or other qualified accountant.
(iii) No donation of Rs. 2000 or more can be received by a Political Party otherwise than by an account
payee cheque/draft/ECS through a bank account or through electoral bonds.
Return of income under section 139(4B) should be filed by the Political Party on or before due date of filing of
return u/s 139(1), otherwise exemption under section 13A will not be given.
The Chief Executive Officer of the political party is required to file a return of income if the total income (computed
under this Act without giving effect to the provisions of Section 13A) exceeds the maximum amount which is not
chargeable to income-tax. In this connection, the provisions of Section 139(1) shall apply.

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Computation of Total Income and Tax Liability of various Entities LESSON 11

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

ELECTORAL TRUST

‘Electoral Trust’ means a trust so approved by the Board in accordance with the scheme made in this regard
by the Central Government.

Voluntary contributions received by an Electoral Trust [Section 13B]

Any voluntary contributions received by an electoral trust shall not be included in the total income of the
previous year of such electoral trust, if -
(a) such electoral trust distributes to any political party, registered under section 29A of the Representation
of the People Act, 1951, during the said previous year, ninety-five per cent of the aggregate donations
received by it during the said previous year along with the surplus, if any brought forward from any
earlier previous year; and
(b) such electoral trust functions in accordance with the rules made by the Central Government.

Tax Exemptions for Charitable Trusts and Institutions

Trust: Section 3 of the Indian Trusts Act defines a trust to mean “an obligation annexed to the ownership of
property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by
him for the benefit of another and the owner”.

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Institution: An organisation with a constitution composed of a President, Vice-President, Secretary, Committee

Members and ordinary members, is known as an Institution. The activities of the institution and its offices are
regulated by rules and bye-laws of the institution. A university or a Chamber of Commerce is an Institution.
Charitable purpose: The term ‘charitable purpose’ has been defined in this Act in a wider sense than what
is commonly understood. According to Section 2(15) of the Act, it includes relief of the poor, education, yoga
medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest and advancement of any other object of general
public utility not involving the carrying on of any activity for profit.
In order to qualify for tax exemptions the charity must be of a public character, and the trust or institution
should not be created or established for the benefit of any particular religious community or caste, if the trust
or institution is established for the benefit of the member of a club or employees of a factory, it would not be a
public charitable trust. Vide Circular No. 395 dated Sept. 24, 1984 promotion of sports and games is considered
to be a charitable purpose within the meaning of Section 2(15). Accordingly an association or institution,
engaged in the promotion of sports or games can claim exemption under Section 11, even if it is not approved
under Section 10(23).
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it
involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering
any service in relation to any trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income from such activity, unless -
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object
of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty
per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that
previous year;
However, Union Budget 2024-25 has merged tax exemption frameworks under section 10(23C) and 12(A).
This move is designed to streamline procedures, reduce redundancies, and provide greater tax certainty
for taxpayers. This change involves transitioning existing organisations approved under Section 10(23C) to
the Section 12A regime.
Summary of amendments:
l No new applications seeking approval or provisional approval under sub-clauses (iv), (v), (vi), or (via) of
Section 10(23C) can be made or considered on or after 01-10-2024. It is important to note that these four
clauses are the only ones requiring approval from the Principal Commissioner of Income Tax (PCIT) or
Commissioner of Income Tax (CIT).
l Applications filed under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) before 01-10-2024, and
still pending will be processed and considered under Section 10(23C) regime. In other words, new
registrations under Section 10(23C) with a validity of five years can be issued until 31-03-2025. Therefore,
the sunset timeline for all organisations approved under these sub-clauses will be the assessment year
2029-30. The government should have shifted to the assessment under the Section 12A regime from an
earlier assessment year.
l Approved trusts, funds, or institutions will continue to avail exemption benefits under sub-clauses (iv),
(v), (vi), or (via) of Section 10(23C) until their current approval expires.
l The Supreme Court of India, in its landmark judgment in New Noble Educational Society v. CCIT [2022]
143 [Link] 276, established important guidelines for educational institutions claiming exemption

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EP-TL&P Computation of Total Income and Tax Liability of various Entities

under Section 10(23C)(vi). The Court ruled that a “solely” educational institution must focus exclusively
on educational activities and cannot engage in any other charitable or profit-making activities. In
other words, all objects of the society, trust etc., must relate to imparting education or be in relation
to educational activities. Currently, there is no formal mechanism for such educational institutions to
transition to exemptions under Section 11. Therefore, the proposed amendment offers these institutions
a much-needed opportunity to shift to the second regime.

Income not to be included in the Total Income [Section 11(1)]

According to Section 11(1), the following items of income are not to be included in the total income of the previous
year of the assessee who is in receipt of the same:
(i) Income derived from property held under trust wholly for charitable or religious purposes: Income
derived from property held under trust wholly for charitable or religious purposes shall be exempt to
the extent to which such income is applied for such purposes in India and where any such income is
accumulated or set apart for application to such purposes in India, to the extent to which the income so
accumulated or set apart is not in excess of 15% of the income from such property.
(ii) Income derived from property held under trust in part only for charitable or religious purposes:
Income derived from property held under trust in part only for charitable or religious purposes shall
be exempt. This exemption would, however, be available only for trusts created before 1.4.1962.
Further, where any such income is finally set apart for application to such purposes in India, shall
be exempt to the extent to which the income so set apart is not in excess of 15% of the income from
such property.
(iii) Income from property held under trust created on or after 1.4.1952: for a charitable purpose which
tends to promote international welfare in which India is interested shall be exempt to the extent to
which such income is applied for such charitable purposes outside India.
(iv) Income from property held under trust created before 1.4.1952 for charitable or religious purposes
shall be exempt to the extent to which such income is applied for such purposes outside India. This
exemption is, however, subject to the condition that the Central Board of Direct Taxes has, by a general
or special order, issued a direction in either of the above two cases that the income in question would
not be included in the total income of the person in receipt of such income.
(v) Income in the form of voluntary contributions made with a specific direction that they shall form part of
the corpus of the trust or institution shall be fully exempt subject to the condition that such voluntary
contributions are invested or deposited in one or more of the forms or modes specified in sub-section
(5) maintained specifically for such corpus.
Explanation:
In respect of items (i) and (ii) above:
(1) In computing the 15% of the income which may be accumulated or set apart, any such voluntary
contributions as are referred to in Section 12 (dealt with later in this Chapter) shall be deemed to be part
of the income.
(2) If, in the previous year, the income applied to charitable or religious purposes in India falls short of 85%
of the income derived during that year from property held under trust, by any amount on account of (i)
not receiving the income during that year, or (ii) for any other reason, then:
(a) In case referred to in (i), so much of the income applied to such purpose in India during the previous
year in which the income is received or during the previous year immediately following as does
not exceed the said amount shall be deemed to be income applied to such purposes during the

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Computation of Total Income and Tax Liability of various Entities LESSON 11

previous year in which the income was derived; and the income so deemed to have been applied
shall not be taken into account in calculating the amount of income applied to such purposes
during the previous year in which the income is received or during the previous year immediately
following, as the case may be.
(b) In case referred to in (ii), so much of the income applied to such purposes in India during the
previous year immediately following the previous year in which the income was derived as does
not exceed the said amount shall be deemed to be income applied to such purposes during
the previous year in which the income was derived; and the income so deemed to have been
applied shall not be taken into account in calculating the amount of income applied to such
purposes during the previous year immediately following the previous year in which the income
was derived.
Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any
other trust or institution registered under section 12AA, being contribution with a specific direction that they shall
form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or
religious purposes.
For the purposes of determining the amount of application of income, the provisions of section 40(a)(ia) relating
to 30% disallowance for non-deduction of TDS and section 40A(3) and 40A(3A) relating to payment exceeding
Rs. 10,000, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head
“Profits and gains of business or profession”
Where any income as discussed in (a) and (b) above is not applied to charitable or religious purposes in India
within the prescribed time, then such income shall be deemed to be the income of the person in receipt thereof:
(a) In case of not receiving the income: Such income shall be deemed to be the income of the previous year
immediately following the previous year in which the income was received.
(b) In any other case: Such income shall be deemed to be the income of the previous year immediately
following the previous year in which the income was derived [Clause (1B)].

Capital Gains [Section 11(1A)]

1. Asset held wholly for religious purposes or charitable purposes
Sometimes a capital asset held under trust wholly for charitable or religious purposes is transferred
resulting in a capital gain. The net consideration received on such transfer may be utilised wholly or in
part in acquiring another capital asset to be so held wholly for religious or charitable purposes. In such
cases the capital gains arising from the transfer shall be deemed to have been applied for charitable
or religious purposes to the extent stated herein below:
(i) Where the whole of the net consideration is utilised for acquiring the new capital assets, so much
of the capital gains.
(ii) Where only a part of the net consideration is utilised for acquiring the new capital asset, so much
of the capital gain as is equal to the amount by which the amount so utilised exceeds the cost of
the transferred asset.
Example 1: A charitable trust had a capital asset the cost of which was Rs.80,000 and it sold the same
for Rs. 1,00,000. The whole of the consideration, i.e., Rs. 1,00,000 will be exempt from capital gains tax
if a new capital asset is bought for Rs. 1,00,000.
Example 2: If a trust had a capital asset costing Rs.1,00,000 and sold the same for Rs. 1,50,000 and then
bought a capital asset for Rs. 1,30,000, then the working will be as follows:

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Particulars (Rs.)

Sale proceeds of old asset 1,50,000

Cost of the old asset (1,00,000)

Capital gain 50,000

Cost of the new asset 1,30,000

Cost of the old asset (1,00,000)

Capital gain utilised 30,000

Capital gain taxable 20,000

2. Assets held partly for religious or charitable purposes

It is quite possible that a capital asset is held by a trust partly for religious or charitable purposes.
Where such a capital asset is transferred and the whole or any part of the net consideration is utilised
for acquiring another capital asset, the appropriate fraction of the capital gain arising from the transfer
shall be deemed to have been applied to charitable or religious purposes to the extent specified here
under:
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole
of the appropriate fraction of such capital gain;
(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount,
if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds
the appropriate fraction of the cost of the transferred asset.
“Explanation” to Section 11(1A) provides:
‘Appropriate fraction’ means the fraction which represents the extent to which the income derived from
the capital asset transferred was immediately before such transfer applicable to charitable or religious
purposes.
‘Cost of the transferred asset’ means the aggregate of the cost of acquisition (as ascertained for the purposes
of Section 48 and 49 of the capital asset which is the subject of the transfer and the cost of any improvement
thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of Section 55.
‘Net consideration’ means the full value of the consideration received or accruing as a result of
the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in
connection with such transfer.

Illustration 17
A trust has a capital asset costing Rs. 2,00,000 and 1/2 of its income is utilised for charitable purpose. It
is sold for Rs. 3,50,000. If the trust buys another capital asset for Rs. 3,50,000 then appropriate fraction
of the capital gain deemed to have been applied for charitable purpose. Supposing that the trust buys
another asset for Rs. 2,90,000.

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Solution:

Particulars (Rs.)
Sale proceeds of Capital asset 3,50,000
Cost of the asset sold 2,00,000
Capital gain on transfer of capital asset 1,50,000
Appropriate fraction i.e. 1/2 75,000
Another asset purchased 2,90,000
Appropriate fraction utilised (1/2 of Rs. 2,90,000) 1,45,000
Appropriate fraction of the original capital asset
1/2 of Rs. 2,00,000 (1,00,000)
Capital gain utilised 45,000
Capital gain not utilised 30,000

Accumulations of Income [Section 11(2)]

While dealing with Section 11 it has been stated that accumulation of income from trust property held for
charitable purpose is permissible up to 15 per cent on the gross receipts without attracting any liability to tax.
Where the balance 85 per cent of the income is not applied or is not deemed to have been applied to charitable
or religious purposes in India during the previous year, such income so accumulated or set apart shall not be
included in the total income if the following conditions are fulfilled:
(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing
Officer, stating the purpose for which the income is being accumulated or set apart and the period for
which the income is to be accumulated or set apart, which shall in no case exceed five years;
(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-
section (5);
(c) the statement referred to in clause (a) is furnished at least two months prior to the due date specified
under sub- section (1) of section 139 for furnishing the return of income for the previous year:
Provided that in computing the period of five years referred to in clause (a), the period during which the income
could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of
any court, shall be excluded.
Explanation: Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub- section (1),
read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust
or institution registered under section 12AA or section 12AB or to any fund or institution or trust or any university
or other educational institution or any hospital or other medical institution referred to in sub- clause (iv) or sub-
clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application
of income for charitable or religious purposes, either during the period of accumulation or thereafter.
It is important to note that to claim exemption subject to Section 11(2) it is enough to invest in Government
securities etc., only that part of the unspent balance which falls over and above 15% of the total income derived
from the property held under trust [C.I.T. v. H.H. Marthanda Varma Elayaraja of Travancore Trust and others (1981)
129 I.T.R. 191 (Ker.)].

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Section 11(3) provides that:

(i) if the income accumulated for the specific purpose under Section 11(2) is applied to purposes other
than charitable or religious, or ceases to be accumulated or set apart for application thereto, it will be
chargeable to tax as income of that year. Further, such accumulated income will become liable to be
taxed if,
(ii) it ceases to remain invested in any security or deposited in the manner provided under Section 11(5), or
(iii) it is not utilised for the purpose for which it is so accumulated or set apart during the specified period,
or in the year immediately following the expiry thereof;
(iv) is credited or paid to any trust or institution registered under Section 12AA or section 12AB or to any
fund or institution or trust or any university or other educational institution or any hospital or other
medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of
clause (23C) of Section 10.
it shall be deemed to be the income of the previous year in which it ceases to remain so invested or deposited
or is not so utilised, as the case may be.
Section 11(3A) provides that where due to circumstances beyond the control of the person in receipt of the
income, any income invested or deposited in accordance with the provisions of Section 11(2) cannot be applied
for the purpose for which it was accumulated or set apart, the Assessing Officer may, on an application made
to him in this behalf allow such person to apply such income for such other charitable or religious purpose in
India, as is specified by the person in the application subject further to the condition that it is in conformity with
the objects of the trust.
Provided that the Assessing Officer shall not allow application of such income by way of payment or credit
made for the purposes referred to in clause (d) of Sub-section (3) of section 11.
For the purposes of Section 11, ‘property held under trust’ includes a business undertaking so held and where
a claim is made that the income of any such undertaking shall not be included in the total income of the
persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking
in accordance with the provisions of the Income-tax Act relating to assessment and where any income so
determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be
deemed to be applied to purposes other than charitable or religious.
Provided that the Assessing Officer shall not allow application of such income by way of payment or credit
made for the purposes referred to in clause (d) of Sub-section (3) of Section 11:
Provided further that in case the trust or institution, which has invested or deposited its income in accordance
with the provisions of clause (b) of Sub-section (2), is dissolved, the Assessing Officer may allow application
of such income for the purposes referred to in clause (d) of Sub-section (3) in the year in which such trust or
institution was dissolved.
Sub-section (4A) as substituted by Finance Act, 1991 with effect from 1.4.1992 states that Sub-sections (1) or (3) or
(3A) of Section 11 shall not apply in relation to any business income of a trust or institution unless the business
is incidental to the attainment of the objectives of the trust or institution and separate books of accounts are
maintained by such trust or institution in respect of such business.

Forms and Modes of Investment [Section 11(5)]

The forms and modes for investing funds of charitable and religions trusts and institutions are given hereunder:
(i) Investment in saving certificates as defined in clause (c) of Section 2 of the Government Savings
Certificates Act, 1959, and any other securities or certificates issued by the Central Government under

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the Small Savings Schemes of that Government. Investments in Indira Vikas Patra and Kisan Vikas
Patra also qualify for the purpose of this Section;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the
business of banking (including a co-operative land mortgage bank or a co-operative land development
bank);
Explanation: In this clause, “scheduled bank” means the State Bank of India constituted under the State
Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act,
1959, a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970, or under Section 3 of the Banking Companies (Acquisition and
Transfer of Undertaking Act, 1980, or any other bank being a bank included in the Second Schedule to
the Reserve Bank of India Act, 1934;
(iv) Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963.
(v) Investment in any security for money created and issued by the Central Government or a State
Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal
whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government
or by a State Government;
(vii) investment or deposit in any public sector company;
Provided that where an investment or deposit in any public sector company has been made and such
public sector company ceases to be a public sector company:
(a) such investment made in the shares of such company shall be deemed to be an investment made
under this clause for a period of three years from the date on which such public sector company
ceases to be a public sector company;
Investment in debt instruments issued by and infrastructure Finance Company registered with
RBI.
(b) such other investment or deposit shall be deemed to be an investment or deposit made under this
clause for the period up to the date on which such investment or deposit becomes repayable by
such company;
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing
long-term finance for industrial development in India and which is eligible for deduction under clause
(viii) of Sub-section (1) of Section 36;
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance or construction or
purchase of houses in India for residential purposes and which is approved by the Central Government
for the purposes of clause (viii) of Sub-section (1) of Section 36;
(x) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance for urban infrastructure
in India.
Explanation: For the purpose of this clause:
(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned

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or advanced provide for repayment along with interest thereof during a period of not less than five
years;
(b) “public company” shall have the meaning assigned to it in Section 3 of the Companies Act, 1956;
(c) “urban infrastructure” means a project for providing potable water supply, sanitation and
sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport.
(x) Investment in immovable property.
Explanation: “Immovable property” does not include any machinery or plant (other than machinery or
plant installed in a building for the convenient occupation of the building) even though attached to, or
permanently fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development
Bank of India Act, 1964;
(xii) any other form or mode of investment or deposit as may be prescribed including investments in units of
Mutual Fund and Transfer of Deposits to Public Account of India.
Where any income is required to be applied or accumulated or set apart for application, then, for such purposes
the income shall be determined without any deduction or allowance by way of depreciation or otherwise in
respect of any asset, acquisition of which has been claimed as an application of income under this section in
the same or any other previous year [Section 11(6)].
Where a trust or an institution has been granted registration under clause (b) of sub- section (1) of section 12AA
or 12AB or has obtained registration at any time under section 12A and the said registration is in force for any
previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C), clause (23EC),
clause (46) and clause (46A) thereof] shall operate to exclude any income derived from the property held under
trust from the total income of the person in receipt thereof for that previous year [Section 11(6)].

Income of Trusts or Institutions from Contributions [Section 12]

The income of a trust by way of voluntary contributions would also be treated for all purposes as income
deemed to have been derived by the trust from property held by it under trust except, however, in case where
the voluntary contribution is received with a specific direction that it shall form part of the corpus of the trust.
As a result, voluntary contribution received by a trust should also be applied for charitable purposes before
the end of the accounting year or within 3 months following so that income-tax exemption could be availed
of. However, voluntary contributions could be accumulated for future obligation for charitable purposes in the
same manner as specified earlier.

The value of any services, being medical or educational services, made available by any charitable or religious
trust running a hospital or medical institution or an educational institution, to any person referred to in Clause
(a) or Clause (b) or Clause (c) or Clause (cc) or Clause (d) of Sub-section (3) of Section 13, shall be deemed to
be income of such trust or institution derived from property held under trust wholly for charitable or religious
purposes during the previous year in which such services are so provided and shall be chargeable to income-
tax notwithstanding the provisions of Sub-section (1) of Section 11.

Explanation: For the purposes of this sub-section, the expression “value” shall be the value of any benefit or
facility granted or provided free of cost or at concessional rate to any person referred to in Clause (a) or Clause
or Clause (c) or Clause (cc) or Clause (d) of Sub-section (3) of Section 13.

Notwithstanding anything contained in Section 11, any amount of donation received by the trust or institution in
terms of Clause (d) of Sub-section (2) of Section 80G which has been utilised for purposes other than providing

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relief to the victims of earthquake in Gujarat or which remains unutilised in terms of Sub-section 5(C) of Section
80G in respect of which accounts of income and expenditure have not been rendered to the authority prescribed
under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, and not transferred
to the Prime Minister’s National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the
income of the previous year and shall accordingly be charged to tax.

REGISTRATION OF TRUSTS [SECTION 12A]

The provisions of Sections 11 and 12 shall not apply in relation to any trust or institution unless the following
conditions are fulfilled:

1. The person in receipt of the income has made an application for registration of the trust or institution
in the prescribed form and manner to the Principal Commissioner or Commissioner and such trust or
institution is registered under section 12AA;

2. the person in receipt of the income has made an application for registration of the trust or institution,
and subsequently, it has adopted or undertaken modifications of the objects which do not conform to
the conditions of registration, in the prescribed form and manner, within a period of 30 days from the
date of said adoption or modification, to the Principal Commissioner or Commissioner and such trust or
institution is registered under section 12AA;

3. Notwithstanding anything contained above, the person in receipt of the income has made an application
in the prescribed form and manner to the Principal Commissioner or Commissioner, for registration of
the trust or institution:

(i) where the trust or institution is registered under section 12A or under section 12AA, within three
months from the date on which this clause has come into force;

(ii) where the trust or institution is registered under section 12AB and the period of the said registration
is due to expire, at least six months prior to expiry of the said period;
(iii) where the trust or institution has been provisionally registered under section 12AB, at least six
months prior to expiry of period of the provisional registration or within six months of commencement
of its activities, whichever is earlier;
(iv) where registration of the trust or institution has become inoperative due to the first proviso to sub-
section (7) of section 11, at least six months prior to the commencement of the assessment year
from which the said registration is sought to be made operative;
(v) where the trust or institution has adopted or undertaken modifications of the objects which do not
conform to the conditions of registration, within a period of thirty days from the date of the said
adoption or modification;
(vi) in any other case, at least one month prior to the commencement of the previous year relevant
to the assessment year from which the said registration is sought, and such trust or institution is
registered under section 12AB; [Clause (ac) inserted by Finance Act, 2020]
4. Where the total income of the trust or institution as computed under this Act without giving effect to
the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to
income- tax in any previous year, the accounts of the trust or institution for that year have been audited
by an accountant as defined in the Explanation to sub-section (2) of section 288 and the person in
receipt of the income furnishes along with the return of income for the relevant assessment year the

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report of such audit in the prescribed form duly signed and verified by such accountant and setting forth
such particulars as may be prescribed.

5. The person in receipt of the income has furnished the return of income for the previous year in
accordance with the provisions of sub-section (4A) of section 139, within the time allowed under sub-
section (1) or sub-section (4) of that section.

Where an application has been made, the provisions of sections 11 and 12 shall apply in relation to the income
of such trust or institution from the assessment year immediately following the financial year in which such
application is made.

[Provided that the provisions of sections 11 and 12 shall apply to a trust or institution, where the application is
made under—

(a) sub-clause (i) of clause (ac) of sub-section (1), from the assessment year from which such trust or
institution was earlier granted registration;

(b) sub-clause (iii) of clause (ac) of sub-section (1), from the first of the assessment years for which it was
provisionally registered: [Inserted by Finance Act, 2020]

Provided that where registration has been granted to the trust or institution under section 12AA or section 12AB,
then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under
trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are
pending before the Assessing Officer as on the date of such registration and the objects and activities of such
trust or institution remain the same for such preceding assessment year:

Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or
institution for any assessment year preceding the aforesaid assessment year only for non-registration of such
trust or institution for the said assessment year.

Rule 17A of the Income-tax Rules, 1962 provides that an application for registration of a trust shall be made in
duplicate in Form No. 10A and shall be accompanied by the following documents:

(i) where the trust is created or the institution is established under an instrument, the instrument in original
together with a copy thereof and where it is created otherwise than under an instrument, the document
evidencing the creation of the trust or the establishment of the institution together with one copy thereof.
The Principal Commissioner or Commissioner may accept a certified copy instead of the original where
the original cannot be conveniently produced.

(ii) where the trust is in existence during any year or years prior to the financial year in which the application
for registration is made, two copies each of the accounts of the trust for the three years (immediately)
preceding the years in which the application for which the accounts have been made-up.

Procedure for Registration [Section 12AA]

Nothing contained in this section shall apply on or after the 1st day of June, 2020. [Inserted by Finance
Act, 2020] In terms of Section 12AA, on receipt of application for registration, the Principal Commis sioner or
Commissioner shall call for such documents or information from the trust or institution as he thinks necessary
in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such
inquiries as he may deem necessary in this behalf. He has to either grant or decline registration within six
months from the end of the month in which the application was received. If no order is passed within the said six
months, then it shall be deemed that the trust has been registered.

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Where the Principal Commissioner or Commissioner is satisfied that the activities of the trust or institution are
not genuine or are not carried out in accordance with the objects of the trust or institution then the commissioner
may pass an order in writing for the cancellation of registration granted under section 12AA or under section 12A
after giving an opportunity of being heard.

Further, where a trust or an institution has been granted registration or has obtained registration at any time
under section 12A and subsequently it is noticed that the activities of the trust or the institution are being
carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any
part of the income of such trust or institution due to operation of sub-section (1) of section 13, then, the Principal
Commissioner or the Commissioner may by an order in writing cancel the registration of such trust or institution.

However the registration shall not be cancelled under this sub-section, if the trust or institution proves that there
was a reasonable cause for the activities to be carried out in the said manner.

Procedure for Fresh Registration [Section 12AB]

(1) The Principal Commissioner or Commissioner, on receipt of an application made under clause (ac) of
sub- section (1) of section 12A, shall,—

(a) where the application is made under sub-clause (i) of the said clause, pass an order in writing
registering the trust or institution for a period of five years;

(b) where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-
clause (v) or item (B) of sub-clause (vi) of the said clause,—

(i) call for such documents or information from the trust or institution or make such inquiries as
he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law for the time being in force by
the trust or institution as are material for the purpose of achieving its objects; and

(ii) after satisfying himself about the objects of the trust or institution and the genuineness of its
activities under item (A), and compliance of the requirements under item (B), of sub- clause
(i),—

(A) pass an order in writing registering the trust or institution for a period of five years;

(B) if he is not so satisfied in a case referred to in sub-clause (ii) or sub-clause (iii) or sub-
clause (v) of clause (ac) of sub-section (1) of section 12A rejecting such application
and also cancelling its registration;

(C) if he is not so satisfied in a case referred to in sub-clause (iv) or in item (B) of sub-
clause (vi) of sub-section (1) of section 12A, rejecting such application, after affording
a reasonable opportunity of being heard;

(D) where the application is made under sub-clause (vi) of the said clause, pass an
order in writing provisionally registering the trust or institution for a period of three
years from the assessment year from which the registration is sought, and send a
copy of such order to the trust or institution

(2) All applications, pending before the Principal Commissioner or Commissioner on which no order has

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been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section
has come into force, shall be deemed to be an application made under sub-clause (vi) of clause (ac) of
sub- section (1) of section 12A on that date.

(3) The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section (1) shall be passed,
in such form and manner as may be prescribed,

(i) three months calculated from the end of the month in which the application was received in case
of clause (a);

(ii) six months calculated from the end of the quarter in which the application was received in case of
sub-clause (ii) of clause (b); and

(iii) one month calculated from the end of the month in which the application was received in case of
clause (c).]

(4) Where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-
section and subsequently, the Principal Commissioner or Commissioner is satisfied that the activities of
such trust or institution are not genuine or are not being carried out in accordance with the objects of
the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration
of such trust or institution after affording a reasonable opportunity of being heard.

(5) Without prejudice to the provisions of sub-section (4), where registration of a trust or an institution has
been granted under clause (a) or clause (b) of sub-section (1) and subsequently, it is noticed that—

(a) the activities of the trust or the institution are being carried out in a manner that the provisions of
sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or
institution due to operation of sub-section (1) of section 13; or

(b) the trust or institution has not complied with the requirement of any other law, as referred to in item
(B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever
name called, holding that such non-compliance has occurred, has either not been disputed or has
attained finality,

then, the Principal Commissioner or the Commissioner may, by an order in writing, after affording a
reasonable opportunity of being heard, cancel the registration of such trust or institution.]

Merger of Charitable Trusts or Other Institutions in certain cases [Section 12AC]

Where any trust or institution registered under section 12AB or approved under sub-clause (iv) or sub-clause (v)
or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, merges with another trust
or institution, the provisions of Chapter XII-EB shall not apply if--

(a) the other trust or institution has same or similar objects;

(b) the other trust or institution is registered under section 12AA or section 12AB or approved under sub-
clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case
may be; and

(c) the said merger fulfils such conditions as may be prescribed.

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Levy of tax where the charitable institution ceases to exist or converts into a non-charitable
organization
Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of income derived from
property held under trust and voluntary contributions, subject to various conditions contained in the said sections.
The primary condition for grant of exemption is that the income derived from property held under trust should
be applied for the charitable purposes, and where such income cannot be applied during the previous year,
it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance
with various conditions provided in the section. If the accumulated income is not applied in accordance with
the conditions provided in the said section within a specified time, then such income is deemed to be taxable
income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles
them to be able to get the benefit of sections 11 and 12. It also provides the circumstances under which the
registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under
section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its
activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may
convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as
to how the assets of such a charitable institution shall be dealt with.
In order to ensure that the intended purpose of exemption availed by trust or institution is achieved, a new
chapter has been introduced that provides for levy of additional income-tax in case of conversion into, or
merger with, any non-charitable form or on transfer of assets of a charitable organization on its dissolution to a
non- charitable institution. The elements of the regime are under:
(i) The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of
trust or institution into a form not eligible for registration u/s 12AA or on merger into an entity not having
similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any
charitable institution registered u/s 12AA or approved under section 10(23C) within a period of twelve
months from dissolution.
(ii) Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the
specified date. The method of valuation is proposed to be prescribed in rules. The asset and the liability
of the charitable organisation which have been transferred to another charitable organisation within
specified time will be excluded while calculating accreted income.
(iii) The taxation of accreted income shall be at the maximum marginal rate.
(iv) This levy shall be in addition to any income chargeable to tax in the hands of the entity.
(v) This tax shall be final tax for which no credit can be taken by the trust or institution or any other person,
and like any other additional tax, it shall be leviable even if the trust or institution does not have any
other income chargeable to tax in the relevant previous year.
(vi) In case of failure of payment of tax within the prescribed time, a simple interest @ 1% per month or part
of it shall be applicable for the period of non-payment.
(vii) For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the
institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes
shall apply. Further, the recipient of assets of the trust, which is not a charitable organisation, shall also
be liable to be held as assessee in default in case of non-payment of tax and interest. However, the
recipient’s liability shall be limited to the extent of the assets received.

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CASE LAWS
CIT vs Anil Hardware Stores (2010) 323 ITR 368 (HP):
Remuneration payable to partners in equal proportion in which the profit and losses to be distributed to
them, Even though there is no provision in partnership deed. Provided that the advancement of any other
object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity
in the nature of trade, commerce or business, or any activity of rendering any service in relation to any
trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use
or application, or retention, of the income from such activity, unless -
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other
object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty
per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that
previous year.

LESSON ROUND-UP

l The term ‘Hindu undivided family’ has not been defined in the Income-tax Act. However, in general
parlance it means an undivided family of Hindus. Creation of a HUF is a God-gifted phenomenon. As
soon as a married Hindu gets a child, a new HUF comes into existence. It is not at all necessary that
every HUF must have joint property or family income.

l A Hindu Joint Family consists of Coparceners & members.

l The gross total income of the family for the relevant previous year shall be computed under the relevant
heads (as per the provisions of the Income-tax Act) as it is computed for other assessees.

l ‘Partition’ signifies division of property. In the cases of property capable of physical division, share of
each member is determined by making physical division thereof. It must be noted that a division of
income without physical division of property does not amount to partition.
l Partnership Firm: Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and
“partnership” have the meanings respectively assigned to them in the Indian Partnership Act, 1932 and
Limited Liability Partnership Act, 2008.

l As per the scheme, a partnership firm shall be assessed as a firm if the following conditions are satisfied:

- The partnership is evidenced by an instrument i.e. partnership deed.

- The individual shares of the partners are specified in that instrument.

- A copy of the partnership deed certified by all the partners in writing (other than the minors)
is submitted along with the return of income in respect of which assessment as a firm is first
sought.

l As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his
share in the total income of the firm will not be included in computing his total income. Partner includes
a minor admitted to the benefits of partnership as per Section 2(23) of the Act.

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l When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is
known as succession of one firm by another firm. If a firm is dissolved and some of the partners take
over the firm’s business or carry on a similar business with or without new partners, it would be a case
of succession by a new firm .

l Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is
not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or
deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.

l Alternate Minimum Tax: From the assessment year 2012-13 onwards, where the regular income tax
payable for a previous year by a person other than a company is less than the alternate minimum tax
payable for such previous year then the adjusted total income shall be deemed to be the total income
of such person for such previous year and it shall be liable to pay income tax on such adjusted total
income @ 18.5% + SC plus health and education cess (HEC) @ 4%. AMT is applicable if adjusted total
income exceeds Rs. 20 lakh.

l Association of persons: “Association of persons” means an association in which two or more persons
join in a common purpose or common action to produce income, profits or gains.

l For the formation of an AOP the association need not necessarily be on the basis of a contract, consent
and understanding may be presumed.

l Section 167B makes the following provisions as regards the incidence of charge of tax on the association
of persons.

l Where shares of members are determinate, tax is chargeable on the income of the association of
persons at the same rate as applicable to an individual. However, where the total income of any member
of the association of persons for the previous year (excluding his share of income from the association
of persons) exceeds the maximum amount not chargeable to tax in the case of an individual, tax will
be charged on the total income of the AOP at the maximum marginal rate of 30%, i.e., the highest slab
applicable to an individual.

l Where the shares of the members are indeterminate, tax will be charged on the total income of the
AOP at the maximum marginal rate, that is, the rate of tax as well as surcharge, if any, applicable to the
highest slab of income in the case of an individual as specified in the Finance Act of the relevant year

l Section 67A seeks to provide for the method of computing a member’s share in the income of an
association of persons or a body of individuals, wherein the shares of the members are determinate, in
the same manner as provided for in Sub-sections (1) to (3) of Section 67 for computing a partner’s share
in a firm.

l Co-operative Society means a co-operative society registered under the Co-operative Societies Act,
1912, or under any other law for the time being in force in any State for the registration of co-operative
societies.

l The income of a co-operative society is computed in the same manner as provided for other assessees.

l Section 80P provides for certain deductions from the gross total income of a Co-operative Society.

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TEST YOURSELF

(These are meant for recapitulation only. Answers to these questions are not to be submitted for
evaluation.)
Multiple Choice Questions “MCQs”
1. Alternative Minimum Tax (AMT) is applicable if adjusted Total Income of individual, AOP, artificial juristic
person, Firm etc. exceeds:
(a) 15 lakhs
(a) 20 lakhs
(a) 25 lakhs
(a) 10 lakhs
Answer: (b)
2. Share in the profits of the firm is taxable in the hands of partner under the head:
(a) Salary
(b) Business & Profession
(c) Income from other sources
(d) Exempt from tax
Answer: (d)
3. Salary, fees, bonus received by a partner from the firm is Taxable in the hands of partner under the
head:
(a) Salary
(b) Business & Profession
(c) Income from other sources
(d) Exempt from tax
Answer: (b)
4. Income earned from sale of “Stridhan” is taxable in the hands of:
(a) HUF
(b) Husband of such woman
(c) Such woman herself
(d) None of above
Answer: (c)
5. Personal earning including income from Self Acquired Property of a member of the HUF is included
in Income of:
(a) HUF income
(b) Son’s income
(c) Individual’s income
(d) None of these
Answer: (c)

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LIST OF FURTHER READINGS

l Direct Taxes Law and Practice

Author: Dr. Vinod K. Singhania & Dr. Kapil Singhania

Publisher: Taxmann
l Direct Taxes Ready Reckoner with Tax Planning

Author: Dr. Girish Ahuja & Dr. Ravi Gupta

Publisher: Wolters Kluwer

OTHER REFERENCES (INCLUDING WEBSITES AND VIDEO LINKS)

l Income Tax Act, 1961: [Link]

l Income Tax Rules, 1962: [Link]

l Circulars: [Link]

l Notifications: [Link]

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