Taxation Laws & Practice Course Code: BBALW 30501 Credit Units: 03

Course Contents:

Module I: Concepts

Income tax is one of the form of Direct Taxes. Tax is the financial charge imposed by the Government on
income, commodity or activity. Government imposes two types of taxes namely Direct taxes and Indirect
taxes. Direct tax is one where burden of tax is directly on the payer e.g income tax, wealth tax etc. Indirect
tax is paid by the person other than the person who utilizes the product or service e .g Excise duty, Custom
duty, Service tax, Sales Tax, Value Added Tax.

ASSESSMENT YEAR [SECTION 2(9)]

“Assessment year” means the period of twelve months commencing on 1st April every year and
ending on 31st March of the next year. Income of previous year of an assessee is taxed during the
following assessment year at the rates prescribed by the relevant Finance Act.

PREVIOUS YEAR (SECTION 3)

Income earned in a year is taxable in the next year. The year in which income is earned is known as
previous year. From the assessment year 1989-90 onwards, all assessees are required to follow
financial year (i.e. April 1 to March 31) as previous year. The uniform previous year has to be
followed for all sources of income.

In case of newly set up business or profession or a source of income newly coming into existence,
the first previous year will be the period commencing from the date of setting up of
business/profession or as the case may be, the date on which the source of income newly comes
into existence and ending on the immediately following March, 31.

INCOME - Section2 (24)

The definition of income under the Income Tax Act is of an inclusive nature i.e. apart from the items listed in
the definition, any receipt which satisfies the basic condition of being income i s also to be treated as income
and charged to income tax accordingly. Income, in general, means a periodic monetary return which accrues
or is expected to accrue regularly from definite sources. Income includes:-

 Profits or Gains from business or profession including any benefit, amenity, perquisite obtained in
the course of such business or profession
 Salary Income including any benefit, allowance, amenity or perquisite obtained in addition to or in
lieu of salary.
 Dividend Income
 Winnings from lotteries, crossword puzzles, races, games, gambling or betting
 Capital Gains on sale of capital assets
 Amounts received under a KeyMan Insurance Policy i.e. a life insurance policy taken by a person on
the life of another person who is or was the employee of the first mentioned person or is or was
connected in any manner whatsoever with the business of the first mentioned person.
 Voluntary contributions received by a religious or charitable trust or scientific research association or
a sports promotion association
GROSS TOTAL INCOME

As per section 14, the income of a person is computed under the following five heads:

1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.

If the income is not derived from any of the above sources, it is not taxable under the act. The aggregate
income under these heads is termed as “gross total income”.

TOTAL INCOME - Section 2(45)

Total income means the amount left after making the deductions unde r section 80C to 80U from the gross
total income.

Casual Income

Any receipt which is of a casual and non-recurring nature is called casual income. Casual income includes the
following receipts:

1. Winning from lotteries,

2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.

Capital and revenue receipts and expenditure

Receipts which are non-recurring (not received again and again) by nature and whose benefit is enjoyed over
a long period are called "Capital Receipts", e.g. money brought into the business by the owner (capital
invested), loan from bank, sale proceeds of fixed assets etc. Capital receipt is shown on the liabilities side of
the Balance Sheet.

Receipts which are recurring (received again and again) by nature and which are available for meeting all day
to day expenses (revenue expenditure) of a business concern are known as "Revenue receipts", e.g. sale
proceeds of goods, interest received, commission received, rent received, dividend received etc.

Distinction between Capital Receipt and Revenue Receipt:

Revenue Receipt Capital Receipt

It has short-term effect. The benefit is enjoyed It has long-term effect. The benefit is enjoyed for
1
within one accounting period. many years in future
It occurs repeatedly. It is recurring and regular in It does not occur again and again. It is
2
nature nonrecurring and irregular in nature.
It is shown in profit and loss account on the credit It is shown in the Balance Sheet on the liability
3
side. side.
Capital receipt, when invested, produces revenue
receipt e.g. when capital is invested by the owner,
4 It does not produce capital receipt.
business gets revenue receipt (i.e. sale proceeds
of goods etc.).
 The capital receipt decreases the value of asset or
This does not increase or decrease the value of
5 increases the value of liability e.g. sale of a fixed
asset or liability
asset, loan from bank etc
Sometimes, expenses of capital nature are to be
Sometimes expenses of revenue nature are to be
incurred for revenue receipt, e.g. purchase of
6 incurred for such receipt e.g. on obtaining loan (a
shares of a company is capital expenditure but
capital receipt) interest is paid until its repayment
dividend received on shares is a revenue receipt.

Distinction between Capital Expenditure and Revenue Expenditure :

Revenue Expenditure Capital Expenditure

Its effect is long-term, i.e. it is not exhausted
Its effect is temporary, i.e. the benefit is received
1 within the current accounting year-its benefit is
within the accounting year.
received for a number of years in future.
Neither an asset is acquired nor is the value of an An asset is acquired or the value of an existing asset
2
asset increased is increased.
It has no physical existence because it is incurred Generally it has physical existence except intangible
3
on items which are used by the business. assets.
It is recurring and regular and it occurs It does not occur again and again. It is nonrecurring
4
repeatedly. and irregular.
This expenditure improves the position of the
5 This expenditure helps to maintain the business.
business
A portion of this expenditure (depreciation on
The whole amount of this expenditure is shown assets) is shown in trading & P & L A/c and the
6
in trading P & L A/c or income statement. balance are shown in the balance sheet on asset
side.

Person : Section 2(31)

The term “person” includes:

1. an individual;
2. a Hindu undivided family;
3. a company;
4. a firm;
5. an association of persons or a body of individuals , whether incorporated or not;
6. a local authority; and

every artificial juridical person not falling with in any of the preceding categories.

Assessee : Section 2(7)

Every person in respect of whom, any proceeding under the act has been taken for the assessment of his
income or of the income of any other person in respect of which he is assessable or of the loss sustained by
him or by such other person or the amount of refund due to him or to such othe r person may be called an
assessee.
The following Income is exempt from Income tax:-

1. Agriculture Income [Sec. 10(1)]

2. Payments received from family income by a member of HUF [Sec. 10(2)]
3. Share of profit from a firm [Sec. 10(2A)]
4. Scholarship granted to meet the cost of education [Sec. 10(16)]
5. Interest received by a person who is resident outside India on amounts credited in the nonresident
(External) account [Sec. 10(4)]
6. Leave travel concession provided by as employer to his Indian citizen employee, Sec. 10(5)]
7. Remuneration received by foreign diplomats of all categories [Sec. 10(6)]
8. Salary received by a foreign citizen as an employee of a foreign enterprise provided his stay in India
does not exceed 90 days [Sec. 10(6)(vi)]
9. Salary received by a non-resident foreign citizen as a member of ship’s crew provided his total stay
in India does not exceed 90 days [Sec. 10(6)(vii)]
10. Family pension received by family members of armed forces [Sec. 10(19)]
11. House rent allowance subject to certain limits [Sec. 10(13A)]
12. Any amount from provident fund paid to retiring employee more ….

RESIDENTIAL STATUS

An individual may either be a

i. Resident in India or
ii. Non-resident in India

However, individual cannot be simply called resident in India. If indi vidual is a resident in India he will be
either;

a) Resident and Ordinarily resident in India (ROR) or

b) Resident but not Ordinarily resident in India (RNOR).

Basic Condition for a person to be Resident

Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any previous year if
he:

a) is in India in the previous year for a period or periods amounting in all to one hundred and eighty-
two days or more i.e., he has been in India for at least 182 days during the previous year; or,
b) has been in India for at least three hundred and sixty-five days (365 days) during the four years
preceding the previous year and has been in India for at least sixty days (60 days) during the
previous year except in following cases; where if condition (a) is satisfied then an individual is
resident otherwise he will be Non-Resident.

– Citizen of India, who leaves India in any previous year as a member of the crew of an
Indian ship, or for the purpose of employment outside India, or
– Citizen of India or Person of Indian origin engaged outside India (whether for rendering
service outside or not) and who comes on a visit to India in the any previous year.

Therefore, in case of India Citizen being crew member of an Indian Ship, India Citizen going abroad for
employment purpose (other than training) or Indian Citizen/Person of Indian Origin coming on a visit to India
during relevant previous years. Then condition (a) only needs to be checked. If it is satisfied, then individual
is treated as resident, otherwise he will be treated as nonresident.
Resident and not ordinary resident (RNOR)

A resident individual who satisfies either of the following additional conditions will be classified as an RNOR:

– The individual has been an NR in India for at least 9 out of the preceding 10 fiscal years.
– The individual has been in India for 729 days or less during the preceding 7 fiscal years.

If an individual does not satisfy both of these additional conditions, he/she is classified as an ROR.

TAX RATES

For Men/Women below 60 years For Senior Citizens (Age 60 years For Senior Citizens (Age 80 years
of age or more but less than 80 years) or more)
Income Level Tax Rate Income Level Tax Rate Income Level Tax Rate
₹ 2,50,000 Nil Upto ₹ 3,00,000 Nil Upto ₹ 5,00,000 Nil
₹ 2,50,001 - ₹ 500,000 10% ₹ 3,00,001 - ₹ 500,000 10% ₹ 5,00,001 - ₹ 10 Lakhs 20%
₹ 500,001 - ₹ 10 Lakhs 20% ₹ 500,001 - ₹ 10 Lakhs 20% Above ₹ 10 Lakhs 30%
Above ₹ 10 Lakhs 30% Above ₹ 10 Lakhs 30%

– Firms/LLP: A firm/LLP is taxable at the rate 30%.

– Companies: Domestic Company @ 30% and Foreign Company @40% and 50% in case of certain specific
incomes.

Where tax incidence arises in case of ROR RNOR Non-R

Income received in India (Whether accrued in or outside India) YES YES YES
Income deemed to be received in India (Whether accrued in or outside India) YES YES YES
Income accruing or arising in India (Whether received in India or outside India) YES YES YES
Income deemed to accrue or arise in India (Whether received in India or outside
YES YES YES
India)
Income received and accrued outside India from a business controlled or a
YES YES NO
profession set up in India
Income received and accrued outside India from a business controlled from
YES NO NO
outside India or a profession set up outside India
Income earned and received outside India but later on remitted to India
NO NO NO
(whether tax incidence arises at the time of remittance ?)
Past untaxed profits (not taxable as relates to past years) NO NO NO
Agricultural Income in India [Exempt under Section 10(1)] NO NO NO
Long term capital gain [on STT paid shares or on shares sold through stock
NO NO NO
exchange] Exempt u/s 10(38)
Dividend from a Domestic Company [Exempt u/s 10(34)] or Income from
NO NO NO
Mutual funds specified u/s 10(23D) [Exempt u/s 10(35)]
Gifts from relatives or on marriage or under will etc. (or gifts from others upto ₹
NO NO NO
50,000 in a year)

A HUF can be “not ordinarily resident”

If manager/karta has been a not ordinarily resident in India in the previous year in accordance with the tests
applicable to individuals. Where, during the last ten years the kartas of the H.U.F. had been different from
one another, the total period of stay of successive kartas of the same family should be aggregated to
determine the residential status of the karta and consequently the H.U.F.
In other words, if Karta of Resident HUF satisfies both the following additional conditions (as applicable in
case of Individual) then Resident HUF will be ROR, otherwise it will be RNOR:

Additional Conditions :

1) Karta of Resident HUF should be resident in atleast 2 previous years out of 10 previous year
immediately preceding relevant previous year.
2) Stay of Karta during 7 previous year immediately preceding relevant previous year should be 730
days or more.

Module II: Direct Tax

The total income of a person is segregated into five heads:-

 Income from salaries

 Income from house property
 Profits and gains of business or profession
 Capital gains and
 Income from other sources

Income from Salaries

Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a
result of an express or implied contract. The actual receipt of salary in the previous year is not material as far
as its taxability is concerned. According to Income Tax Act there are certain conditions where all such
remuneration is chargeable to income tax:

1. When due from the former employer or present employer in the previous year, whether paid or not
2. When paid or allowed in the previous year, by or on behalf of a former employer or present
employer, though not due or before it becomes due.
3. When arrears of salary is paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates

Arrears of Salary: Salary in arrears / advance, received in lump sum, is liable to tax in the year of receipt.

Gratuity

Gratuity is the payment made by the employer to an employee in appreciation of past services rendered by
the employee. It is received by the employee on his retirement. Gratuity is exempted up to certain limit
depending upon the category of employee. For the purpose of exemption, employees are divided into 3
categories:

i. Government employees and employees of local authority: In case of such employees, the entire
amount of gratuity received by then is exempted from tax. Nothing will be added to gross salary.
ii. Employees covered under Payment of Gratuity Act, 1972: In case of employees who are covered
under Payment of Gratuity Act, the minimum of the following amounts are exempted from tax:

1. Amount of gratuity actually received.

2. 15 days of salary for every completed years of service or part thereof in excess of six months. (15
/ 26 x [basic salary + Dearness Allowance] x No. of years of service+1 [if fraction > 6 months]).
3. ₹ 10, 00,000 (amount specified by government).
 iii. Other employees: In case of employees not falling in the above two categories, gratuity received
from the employers is exempt to the extent of minimum of following amounts:

1. Actual amount of gratuity received.

2. Half month average salary for every completed year of service (1/2 x average salary of last
10 months x completed years of service).
3. ₹ 10, 00,000 (amount specified by government).

Leave Salary

Employees are entitled to various types of leave. The leave generally can be taken (casual leave/medical
leave) or it lapses. Earned leave is a kind of leave which an employee is said to have earned every year after
working for some time. This leave can either be availed every year, or get encashment for it. If leave is not
availed or encashed, it is allowed to be carried forward. This leave keeps getting accumulated and is
encashed by employee on his retirement.

 State or Central Government employees: Leave encashment received by government employees is

fully exempted from tax. Nothing is to be included in gross salary

 Other employees: Leave encashment of accumulated leave at the time of retirement received by
other employees is exempted to the extent of minimum of following four amounts:

1. Amount specified by Central Government (3,00,000).

2. Leave encashment actually received.
3. 10 months average salary (10 x average salary of 10 months preceding retirement).
4. Cash equivalent of unavailed leave. (Leave entitlement is calculated on the basis of maximum 30
days leave every year, cash equivalent is based on average salary of last 10 months)

Retrenchment Compensation 10(10B)

Retrenchment compensation is the compensation is received by a workman at the time of (i) closing down of
the undertaking. (ii) transfer (irrespective of by agreement/compulsory acquisition) if the following
conditions are satisfied:

1. Service of workmen interrupted by transfer

2. Terms and conditions of employment after transfer are less favourable
3. New employer is not under a legal obligation whether under the terms of transfer or otherwise to
pay compensation on the basis that the employee’s service has been continuous and has not been
interrupted by transfer. The exemption is granted to the least of the followings:
i. Actual amount received
ii. Amount determined under the Industrial Disputes Act, 1947
iii. Maximum Limit Rs 5,00,000

Voluntary Retirement Compensation 10(10c)

The following Conditions are to be met for claiming exemption:

i. An individual, who has retired under the Voluntary Retirement scheme, should not be employed in
another company of the same management.
ii. He should not have received any other Voluntary Retirement Compensation before from any other
employer and claimed exemption.
 iii. Exemption u/s 10(10C) in respect of Compensation under VRS can be availed by an Individual only
once in his lifetime.

Exemption is allowed to the least of the followings:

i. Actual amount received

ii. Maximum Limit Rs 5,00,000
iii. The lower of the following:
1. Last drawn salary × 3 × No. of fully completed years of service
2. Last drawn salary × Balance of no. of months of service left

House Rent Allowance or H.R.A. [Sec. 10(13A) Rule 2A]

Conditions for claiming exemption:

1. Assessee is in receipt of HRA.

2. He has to pay rent.
3. Rent paid is more than 10% of salary.

An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in
respect of residential accommodation occupied by him is exempt from tax to the extent of least of the
following three amounts:

a) House Rent Allowance actually received by the assessee

b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai, Kolkata,
Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if accommodation is situated in any other
place).

Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of salary for the purpose of
retirement benefits), Commission based on fixed percentage of turnover achieved by the employee.

Entertainment Allowance

This allowance is first included in gross salary under allowances and then deduction is given to only central
and state government employees under Section 16 (ii).

Special Allowances for meeting official expenditure

Certain allowances are given to the employees to meet expenses incurred exclusively in performance of
official duties and hence are exempt to the extent actually incurred for the purpose for which it is given.
These include travelling allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.

Special Allowances to meet personal expenses:

There are certain allowances given to the employees for specific personal purposes and the amount of
exemption is fixed.

i. Children Education Allowance: This allowance is exempt to the extent of Rs.100 per month per child
for maximum of 2 children (grand children are not considered).
ii. Children Hostel Allowance: Any allowance granted to an employee to meet the hostel expenditure
on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
 iii. Transport Allowance: This allowance is generally given to government employees to compensate the
cost incurred in commuting between place of residence and place of work. An amount uptoRs.800
per month paid is exempt. However, in case of blind and orthopedically handicapped persons, it is
exempt up to Rs. 1600 p.m.
iv. Running Allowance (Out of station allowance ): An allowance granted to an employee working in a
transport system to meet his personal expenses in performance of his duty in the course of running
of such transport from one place to another is exempt up to 70% of such allowance or Rs.10000 per
month, whichever is less.
v. Tribal area allowance: Exemption is available as ₹ 200 p.m.
vi. Underground allowance : Exempted up to ₹ 800 p.m.

Fully Exempt Allowances

1. Foreign allowance: This allowance is usually paid by the government to its employees being Indian
citizen posted out of India for rendering services abroad. It is fully exempt from tax.
2. Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.
3. Allowances from UNO organization to its employees are fully exempt from tax.

Income from House Property

The annual value of a property, consisting of any
buildings or lands appurtenant thereto, of which the The computation of income from let-out
assessee is the owner, is chargeable to tax under the property is as under:-
head ‘Income from house property’. However, if a
house property, or any portion thereof, is occupied Gross annual value (GAV) 1 xxxx
by the assessee, for the purpose of any business or Less: Municipal Taxes paid (xxx)
profession, carried on by him, the profits of which Net Annual value (NAV) xxxx
are chargeable to income-tax, the value of such Less: Deductions under section 242 (xxx)
property is not chargeable to tax under this head. Income from House property xxxx
1
The GAV is higher of Annual Letting Value (ALV) and Actual rent received/receivable during the year. The
ALV is higher of fair rent and municipal value, but restricted to standard rent fixed by Rent Control Act.
2
Only two deductions are allowed under this head by virtue of section 24, viz.,

 30% of Net annual value as Standard deduction

 Interest on capital borrowed for the purpose of acquisition, construction, repairs, renewals or
reconstruction of property (subject to certain provisions).

The principle of determining GAV is :

Expected Rental Value OR Actual Rent received for full year,

Whichever is more.

Here, Expected Rental Value is calculated as follows:

 If the let out property is not subject to Rent Control Act ERV is: FRV or MRV whichever is higher.
 If the let out property is subject to Rent Control Act ERV is: FRV or MRV whichever is higher
OR Standard Rental Value , Whichever is less.
Tax Law Requirements for Accounting System including books, Records, Vouchers etc. to be maintained

Maintenance of books of accounts by Professionals:

Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding
maintenance of books of accounts under Income tax Act. As per section 44AA(1) read with rule 6F
the persons carrying on any of the profession are required to maintain books of accounts and other
documents as may enable the assessing officer to compute his total income, if yearly gross receipts
of the profession exceeded Rs 150000.

When no books of accounts are required to be maintained by professionals covered u/s 44AA(1):

Proviso to Rule 6F (1) provides that if the gross receipts of a profession do not exceed Rs 150000 in
any one of the three years immediately preceding the previous year or where the profession has
been newly setup in the previous year, his total gross receipts in the profession for that year are not
likely to exceed the said amount, then such professional need not to maintain any books of accounts
as mentioned in sub rule 2 of rule 6F.

Maintenance of Books of accounts by other Persons covered u/s 44AA (2):

In relation to any other persons engaged in any other profession or carrying on any business other
than section 44AA (1), the requirement of compulsory maintenance of books of accounts applies if -
either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts
exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.

When no books of accounts are required to maintained by other persons covered u/s 44AA (2):

If the Income or the gross receipts or gross turnover of a person carrying on business or profession
other than profession as mentioned u/s 44AA (1) do not exceed in any one of the three years
preceding the previous year then no books of accounts will be required to be maintained u/s 44AA
(2).

What books of accounts are required to be maintained by persons covered u/s 44AA(1):

As per Rule 6F(2) the following books of accounts and documents are required to be maintained:

1. Cash book,
2. Journal, if the accounts are maintained as per mercantile system of accounting,
3. Ledger
4. Carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in
respect of sums exceeding Rs 25,
5. Original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a
case where the cash book maintained by the person contains adequate particulars in respect of the
expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.

For how many years books of accounts are required to be preserved:

Rule 6F(5) provides that the books of accounts and other documents are to be kept for at least 6
years from the end of relevant assessment year. That means from the assessment year 2009-10 one
should keep books of accounts up to the assessment year 2003-04 i.e. books of accounts of financial
year 2002-03
Advance tax

Under this scheme, every assessee is required to pay tax in a particular financial year, preceding the
assessment year, on an estimated basis. However, if such estimated tax liability for an individual who is not
above 60 years of age at any point of time during the previous year and does not conduct any busine ss in the
previous year, and the estimated tax liability is below ₹ 10,000, advance tax will not be payable. The due
dates of payment of advance tax are :

In case of corporate assessee Otherwise

On or before 15 June of the previous year Up to 15% of advance tax payable -
On or before 15 September of the previous Up to 45% of balance of advance Up to 30% of advance
year tax payable tax payable
On or before 15 December of the previous Up to 75% of balance of advance Up to 60% of advance
year tax payable tax payable
Up to 100% of balance of advance Up to 100% of
On or before 15 March of the previous year
tax payable advance tax payable

There are five categories of Income Tax returns.

 Normal return: In business, "normal" is any gained revenue that exceeds the cost, expenses, and
taxes needed to sustain the business or an activity.
 Belated return: In case of failure to file the return on or before the due date, belated return can be
filed before the expiry of one year from the end of the relevant assessment year.
 Revised return: In case of any omission or any wrong statement mentioned in the normal return can
be revised at any time before the expiry of one year from the end of the relevant assessment year.
 Defective return: Assessing Officer considers that the return is defective, he may intimate the defect.
One has to rectify the defect within a period of fifteen days from.
 Returns in response to notice:

Tax deducted at source

Tax deducted at source (TDS), as the very name implies aims at collecti on of revenue at the very source of
income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you
earn” and “collect as it is being earned.” Its significance to the government lies in the fact that it prepones
the collection of tax, ensures a regular source of revenue, provides for a greater reach and wider base for
tax. At the same time, to the tax payer, it distributes the incidence of tax and provides for a simple and
convenient mode of payment.
Module III: Indirect Tax

Value Added Tax – VAT

A value-added tax (VAT) or general sales tax (GST) is a form of consumption tax. From the perspective of the
buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a
product, material or service, from an accounting point of view, by this stage of its manufacture or
distribution. The manufacturer remits to the government the difference between these two amounts and
retains the rest for themselves to offset the taxes previously paid on the inputs.
Value-added taxation in India was introduced as an indirect value added tax (VAT) into the Indian taxation
system from 1 April 2005. The existing General Sales Tax Laws were replaced with the Value Added Tax Act
(2005) and associated VAT Rules.

Minimum Alternate Tax

The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that
companies having large profits and declaring substantial dividends to shareholders but who were not
contributing to the Govt by way of corporate tax, by taking advantage of the various incentives and
exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.

Minimum Alternate Tax (MAT) is applicable at a rate of 19.06 percent or 20.01 percent in the case of Indian
companies with applicable surcharge and education cess. The rate of MAT for foreign companies is 19.06
percent or 19.44 percent with applicable surcharge and education cess.

Module IV: Assessment of Individual

Clubbing of incomes

Clubbing of income means Income of other person included in assesse’s total income, for example: Income
of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in
the hands of the husband. Under the Income Tax Act a person has to pay taxes on his income. A person
cannot transfer his income or an asset which is his one of source of his income to some other person or in
other words we can say that a person cannot divert his income to any other person and says that it is not his
income. If he do so the income shown to be earned by any other person is included in the assessee’s total
income and the assessee has to pay tax on it. Inclusion of other’s Incomes in the income of the assessee is
called Clubbing of Income and the income which is so included is called Deemed Income. It is as per the
provisions contained in Sections 60 to 64 of the Income Tax Act.

For example: A purchased a house property in the name of his wife B. A let out this house property. The
rental income earned by A in name of his wife B is taxable in the hands of A.

1. Transfer of income without transfer of Asset: If any person transfers income without transferring the
ownership of the asset, such income will be taxable in the hands of the transferor. Ex. X owns 4000, 14%
debentures of A ltd. of Rs. 100 each , he transfers interest income to his friend Y without transferring the
ownership of Debentures . In this case although interest will be received by Y but it is taxable in t he
hands of X.
2. Revocable transfer of Asset: If any person transfers any asset to any other person in such form and
condition that such transfer is revocable at any time during the lifetime of the transferee , the income
earned through such asset is chargeable to tax as the income of the transferor. For ex. X transfers a
house property to A. However, X has right to revoke the transfer during the life time of A . It is a
revocable transfer and income arising from the house property is taxable in the hands of X.

3. Remuneration to Spouse: An individual is chargeable to tax in respect of any remuneration received by

the spouse from a concern in which the individual has *substantial interest. This provision has an
exception. If the remuneration is received by spouse by the application of technical or professional
knowledge or experience clubbing provisions will not take place. For ex. X has substantial interest in A
ltd. and Mrs. X is employed by A ltd. without any technical or professional qualification. In this ca se
salary income of Mrs. X shall be taxable in the hands of X.
4. Income from assets transferred to spouse: Where an asset is transferred by an individual to his spouse
directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to
live apart, any income from such asset is deemed to be the income of the transferor. For ex. Mrs. A
transfer’s 100 debentures of IFCI to her husband without adequate consideration. Interest income on
these debentures will be included in the income of Mrs. A

5. Income from asset transferred to son’s wife: If an individual, directly or indirectly transfers asset ,
without adequate consideration to son’s wife , income arising from such asset is included in the income
of the transferor. For ex. Mrs. A transfer’s 100 debentures of IFCI to her son’s wife without adequate
consideration. Interest income on these debentures will be included in the income of Mrs. A.

Set off, or carry forward and set off

Loss from exempted source of income cannot be adjusted against taxable income

If income from a particular source is exempt from tax, then loss from such source cannot be set off against
any other income which is chargeable to tax. E.g., Agricultural income is exempt from tax, hence, if the
taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable
income.

Meaning of intra-head adjustment

If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is
allowed to adjust such loss against income from any other source falling under the same head.

The process of adjustment of loss from a source under a particular head of income against income from
other source under the same head of income is called intra-head adjustment, e.g. Adjustment of loss from
business A against profit from business B.

Restrictions to be kept in mind while making intra-head adjustment of loss

Following restrictions should be kept in mind before making intra-head adjustment of loss:

1. Loss from speculative business cannot be set off against any income other than income from
speculative business. However, non-speculative business loss can be set off against income from
speculative business.
2. Long-term capital loss cannot be set off against any income other than income from long-term
capital gain. However, short-term capital loss can be set off against long-term or short-term capital
gain.
3. No loss can be set off against income from winnings from lotteries, crossword puzzles, race including
horse race, card game, and any other game of any sort or from gambling or betting of any form or
nature.
4. Loss from the business of owning and maintaining race horses cannot be set off against any income
other than income from the business of owning and maintaining race horses.
5. Loss from business specified under section 35AD cannot be set off against any other income except
income from specified business (section 35AD is applicable in respect of certain specified businesses
like setting up a cold chain facility, setting up and operating warehousing facility for storage of
agricultural produce, developing and building a housing projects, etc.).
Meaning of inter-head adjustment

After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year,
the taxpayer has incurred loss under one head of income and is having income under other head of income,
then he can adjust the loss from one head against income from other head, E.g., Loss under the head of
house property to be adjusted against salary income.

Restrictions to be kept in mind while making inter-head adjustment of loss

Following restrictions should be kept in mind before making inter-head adjustment:

1. Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
2. Loss from speculative business cannot be set off against any other income. However, non-
speculative business loss can be set off against income from speculative business.
3. Loss under head “Capital gains” cannot be set off against income under other heads of income.
4. No loss can be set off against income from winnings from lotteries, crossword puzzles, race including
horse race, card game, and any other game of any sort or from gambling or betting of any form or
nature.
5. Loss from the business of owning and maintaining race horses cannot be set off against any other
income.
6. Loss from business specified under section 35AD cannot be set off against any other income (section
35AD is applicable in respect of certain specified businesses like setting up a cold chain facility,
setting up and operating warehousing facility for storage of agricultural produce, developing and
building housing projects, etc.)
7. Loss from business and profession cannot be set off against income chargeable to tax unde r the
head “Salaries”.

Carry forward of unadjusted loss for adjustment in next year

Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains
unadjusted. Such unadjusted loss can be carried forward to next year for adjustment against subsequent
year(s)’ income. Separate provisions have been framed under the Income-tax Law for carry forward of loss
under different heads of income.

Provisions under the Income-tax law in relation to carry forward and set off of business loss other than
loss from speculative business

If loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in
which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year.
In the subsequent year(s) such loss can be adjusted only against income charged to tax under the head
“Profits and gains of business or profession”

Loss under the head “Profits and gains of business or profession” can be carried forward only if the return of
income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the
return, as prescribed under section 139(1).

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is
incurred.

Provisions under the Income-tax Law in relation to carry forward and set off of house property loss

If loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss
is incurred, then unadjusted loss can be carried forward to next year.
In the subsequent years(s) such loss can be adjusted only against income chargeable to tax under the head
“Income from house property”. Such loss can be carried forward for eight years immediately succeeding the
year in which the loss is incurred.

Loss under the head “Income from house property” can be carried forward even if the return of income/loss
of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as
prescribed under section 139(1).

Provisions under the Income-tax law in relation to carry forward and set off of capital loss

If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then
unadjusted capital loss can be carried forward to next year.

In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head
“Capital gains”, however, long-term capital loss can be adjusted only against long-term capital gains. Short-
term capital loss can be adjusted against long-term capital gains as well as short-term capital gains.

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is
incurred.

Such loss can be can carried forward only if the return of income/loss of the year in which loss is incurred is
furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

Carry forward of loss in case of change in the constitution of business

Generally, the person incurring the loss is only entitled to carry forward the loss to be adjusted in
subsequent year(s). However, in certain cases of reconstitution of the business like amalgamation,
demerger, conversion of proprietary firm into company or conversion of partnership firm into company, etc.,
the reconstituted entity is entitled to carry forward the unadjusted loss of predecessor entity (provided that
conditions specified in this regard are satisfied).

Provisions relating to carry forward of loss in case of retirement of a partner from a partnership firm

Section 78 contains provisions relating to carry forward and set off of loss in case of change in constitution of
a partnership firm due to death or retirement of a partner (i.e. when a partne r goes out of firm by
retirement or death). In such a case, the share of loss attributable to the outgoing partner cannot be carried
forward by the firm.

Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of
unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning
expenditure.

Special provisions relating to carry forward and set off of loss in case of a company in which public are not
substantially interested

As per section 79 of the Income-tax Act, where a change in shareholding has taken place in a previous year in
the case of a company, not being a company in which the public are substantially interested, no loss incurred
in any year prior to the previous year shall be carried forward and set off against the income of the previous
year unless.

On the last day of the previous year the shares of the company carrying not less than fifty-one per cent of
the voting power were beneficially held by person who beneficially held shares of the company carrying not
less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was
incurred.
Restriction of section 79 is applicable only in case of loss and is not applicable in case of adjustment of
unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning
expenditure.

Further, the provisions of section 79 are not applicable in case of change in share holding on account of
death of shareholder or on account of transfer of shares by way of gift to

DEDUCTIONS FROM GROSS TOTAL INCOME

In computing the total income of an assessee, deductions specified under sections 80C to 80U will be
allowed from his Gross Total Income. However, the aggregate amount of deductions under this chapter shall
not, in any case, exceed the gross total income of the assessee.

Total Income = Gross Total Income – Deductions under sections 80C to 80U.

These deductions are divided into two categories. They are:

A. Deductions in respect of certain payments

B. Deductions in respect of certain incomes.

U/S 80-C (For Individuals and HUF)

1. Life Insurance Premium paid for self/wife/husband/child. In case of HUF, life insurance premium
paid for any member of HUF.
2. Premium paid on deferred annuity plan.
3. Contribution to Provident Fund by income tax payers (Only employees’ contribution).
4. Deposit with Public Provident Fund up to Rs.1,50,000/=. In Financial year 2013-14 maximum limit of
deposit in PPF account was Rs.100000/=. With effect from 13.05.2005 HUFs are not permitted to
open PPF Account. However, accounts already open shall continue till maturity. No extension shall
be allowed). Normally the extension is done for another 5 years after completing 15 years. An
individual can avail as many as extension in respect of his/her public provident fund account. For
example: Mr. X opened a public provident fund account with State Bank of India on 1.4.1999.
Accordingly the maturity of this PPF account will be on 31.3.14. Now, if Mr. X wants to extend his
PPF account he can extend the same for another 5 years i.e. upto 31.03.19 and can further extend in
same manner.
5. Investment in National Saving Certificates.
6. Interest accrued on NSC is deemed to be reinvested. Therefore, accrued interest amount is allowed
as deduction under section80-C
7. Contribution In Unit Link Insurance Plan Of UTI/LIC Mutual Fund
8. Contribution to a specified pension fund.
9. Tuition fees whether at the time of admission or thereafter (maximum for two children).
10. Repayment of loan installment for residential house but any deduction made u/s 24 out of income
from house property cannot be allowed.
11. Subscription of equity shares of any Indian public company in infrastructure business.
12. Fix Deposit with scheduled banks at least for 5 years.
13. Five year post office time deposit account.

Note: Maximum amount of deduction under above heads will be Rupees one lac fifty thousand only.

U/S 80-CCC (Allowed for individual tax-payers)

If any amount is contributed to Pension Fund of Life Insurance Corporation of India (Jeevan Suraksha) or of
other insurance companies, shall be allowed as deduction.
Note:

 Maximum amount of deduction of Rs.100000/= is allowed under section 80-CCC.

 Any amount received under this plan shall be taxable at the time of receipt whether that is bonus,
pension, interest or surrender of the plan by the individual concerned or his/her nominee.

U/S 80-CCD (Allowed for individual tax-payers)

Deduction in respect of any amount contributed to Pension Scheme of Central Government.

Note:

 In case of employee the amount should not exceed 10% of his salary.
 In case of other individuals the amount should not exceed 10% of his gross total income.
 Any amount received under this plan shall be taxable at the time of receipt.
 The maximum limit of deposit under this scheme shall be Rupees one lakh only.

Note: The aggregate amount of deduction u/s 80-C, 80-CCC & 80-CCD for Rs.150000/= Is allowed in financial
year 2014-15. In financial year 2013-14 the maximum limit of these deductions was Rupees one lakh only.

DEDUCTION IN RESPECT OF MEDICAL TREATMENT AND DEPOSIT MADE FOR MAINTENANCE OF

HANDICAPPED DEPENDENTS (SECTION 80DD)

These deductions are allowed for resident individual and Hindu Undivided family as under:-

1. Any expenses incurred on one or more dependent disabled person during financial year 2014-15 in
respect of his medical treatment or for training or rehabilitation.
2. Any amount deposited under any scheme of Life Insurance corporation of India or other insurance
company or Unit Trust of India, for the benefit of dependent disable person.

Disabled Person means the person who has any disability of 40% or more.

Severe Disable Person means the person who has any disability of 80% or more.

Dependent for this deduction means:- In case of individual. Son, daughter, wife, father, mother, brother,
sister, wife’s brother and sister, brother and sister of parents, parents of wife.

In case of Hindu Undivided Family, depended disable person means any member of HUF.

Amount of Deductions Allowed in respect of dependent disable person: During financial year 2014-15, the
maximum amount of Rs.50000/= can be allowed as deduction from the income of the assessee in respect of
expenses incurred or amount deposited as above mentioned. An assessee can claim Rs.50000/= whether he
has spent less or more money.

Amount of Deductions Allowed in respect of dependent severe disable person: During financial year 2014-
15, maximum amount Rs.100000/= can be claimed whether the assesse has spent more than one lakh or less
than one lakh.

Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not more than thirty six
months immediately preceding the date of its transfer. However, in the following cases, an asset, held for
not more than twelve months, is treated as short-term capital asset—

a. Quoted or unquoted equity or preference shares in a company

b. Quoted Securities
c. Quoted or unquoted Units of UTI
 d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)
e. Quoted or unquoted zero coupon bonds

Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term capital asset. Under the
existing law, profits and gains arising from the transfer of capital asset made in a previous year is taxable as
capital gains. A capital asset is distinguished on the basis of the period of holding. A capital asset, which is
held for more than three years, is categorized as a long-term capital asset. However, if the capital asset is in
the nature of equity, it is categorized as a long term capital asset if it is held for more than one year. All
capital assets other than long-term capital asset are termed as a short-term capital asset.

TOPIC NOT PART OF THIS NOTE: DEPRECIATION, PROVISIONS IN SALES TAX,

CENTRAL EXCISE ACT, INCOME TAX, INCOME FROM BUSINESS OR PROFESSION, CAPITAL GAINS and MORE …