Unit -III: Heads of Income and Rules of Tax

a. Tax Treatment to Income from House property (12.5)

b. Profits and Gains of Business & Profession (5 or 6.5)
c. Capital Gain Taxation (12.5)

a. Tax Treatment to Income from House property

CONDITIONS NECESSARY FOR TAXING INCOME FROM HOUSE PROPERTY

These are:
• The property should consist of any building or land appurtenant thereto

• The assessee should be the owner of the property

• The property should not be used by the owner for the m purpose of any business or
profession carried on by him, the profits of which are chargeable to tax.

Unless all the aforesaid conditions are satisfied, the property income cannot be
charged to tax under the head ‘Income from House property’.

Important provisions related to Computation of Income from House

Property:

Basis of Charge [Section 22]:

Income from house property shall be taxable under this head if following conditions are satisfied:

• The house property should consist of any building or land appurtenant thereto;
• The taxpayer should be the owner of the property. Owner includes deemed owner.
• The house property should not be used for the purpose of business or profession carried
on by the taxpayer.

Deemed owner [Section 27]:

Income from house property is taxable in the hands of its owner. However, in the following
cases, legal owner is not considered as the real owner of the property and someone else is
considered as the deemed owner of the property to pay tax on income earned from such house
property:

• An individual, who transfers otherwise than for adequate consideration any house
property to his or her spouse, not being a transfer in connection with an agreement to live
apart, or to a minor child not being a married daughter, shall be deemed to be the owner
of the house property so transferred;
• The holder of an impartible estate shall be deemed to be the individual owner of all the
properties comprised in the estate;
 • A member of a co-operative society, company or other association of persons to whom a
building or part thereof is allotted or leased under a house building scheme shall be
deemed to be the owner of that building or part thereof;
• 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;
• 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 section 269UA (f), shall be
deemed to be the owner of that building or part thereof.

[i.e. if a person takes a house on lease for a period of 12 months or more, is deemed as the
owner of that building or part thereof] [Sec. 27 (iiib)].

CASE LAWS

O.R.M.S.P.S.V firm v. CIT (1960)

• Income from property acquired in course of money lending business & treated as stock-
in-trade will be taxable as house property.
• Out in case of CIT v. neha builders P ltd Gujarat HC held that rent received by
promoter firm property held as stock-in-trade shall be taxable as PGBP income.

Azimganj estate P ltd v. CIT (2012)

• the Calcutta High Court, in this case, when the builder assessee had vacant flats, which
were let out, the Court held that the rental income was assessable not under the head of
profits or income from business, but as properly assessable under the head income from
house property.
• It was submitted that as long as the assessee continued to be owner of the vacant flats, it
had to be assessed under the head of income from house property.

Meaning of composite rent

When apart from recovering rent of the building, in some cases the owner gets rent of other
assets (like furniture) or he charges for different services provided in the building (for instance,
charges for lifts, security, air conditioning, etc.). The amount so recovered is known as
“composite rent”.
i)Tax treatment of composite rent of building let out along with other assets
Composite rent includes rent of building and rent towards other assets or facilities. The tax
treatment of composite rent is as follows:-
• In a case where letting out of building and letting out of other assets are inseparable (i.e.,
both the lettings are composite and not separable, e.g., letting of equipped theatre), entire
rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of
 business and profession” or “Income from other sources”, as the case may be. Nothing is
charged to tax under the head “Income from house property”.
• In a case where, letting out of building and letting out of other assets are separable (i.e.,
both the lettings are separable, e.g., letting out of refrigerator along with residential
bungalow), rent of building will be charged to tax under the head “Income from house
property” and rent of other assets will be charged to tax under the head “Profits and gains
of business and profession” or “Income from other sources”, as the case may be. This
rule is applicable, even if the owner receives composite rent for both the lettings. In other
words, in such a case, the composite rent is to be allocated for letting out of building and
for letting of other assets.

ii) Tax treatment of composite rent in a case of letting of building along with provision of
services
• In a case letting of building along with provision of services, composite rent includes rent
of building and charges for different services (like lift, watchman, water supply, etc.): In
this situation, the composite rent is to be bifurcated and the sum attributable to the use of
property will be charged to tax under the head “Income from house property” and charges
for various services will be charged to tax under the head “Profits and gains of business
and profession” or “Income from other sources” (as the case may be).

iii) Rental income from sub-letting

• Rental income in the hands of owner is charged to tax under the head “Income from
house property”. Rental income of a person other than the owner cannot be charged to tax
under the head “Income from house property”.
• Hence, rental income received by a tenant from sub-letting cannot be charged to tax
under the head “Income from house property”. Such income is taxable under the head
“Income from other sources” or profits and gains from business or profession, as the case
may be.

iv) Rental income from a shop

• Rental income from a property, being building or land appurtenant thereto, of which the
taxpayer is the owner is charged to tax under the head “Income from house property”.
• To tax the rental income under the head “Income from house property”, the rented
property should be building or land appurtenant thereto. Shop being a building, rental
income will be charged to tax under the head “Income from house property”.

Meaning of Self-occupied property

A self-occupied property means a property owned by the taxpayer which is occupied throughout
the year by the owner for the purposes of his own residence and is not actually let out during the
whole or any part of the year.
Thus, a property not occupied by the owner for his residence cannot be treated as a self occupied
property. However, there is one exception to this rule. If the following conditions are satisfied,
then the property can be treated as self-occupied and the annual value of a property will be “Nil”,
even though the property is not occupied by the owner throughout the year for his residence:

• The taxpayer owns a property;

 • Such property cannot actually be occupied by him owing to his employment, business or
profession carried on at any other place and he has to reside at that other place in a
building not owned to him;
• The property mentioned in (a) above (or part thereof) is not actually let out at any time
during the year;
• No other benefit is derived from such property.

Computation of income from house property:

Income from a house property shall be determined in the following manner:

Particulars Amount

Gross Annual Value –

Less: Municipal Taxes –

Net Annual Value ****

Less: Standard deduction at 30% [Section 24(a)] –

Less: Interest on borrowed capital [Section 24(b)] –

Income from house property ****

Gross Annual value [Sec. 23(1)]

The Gross Annual Value of the house property shall be higher of following:
a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out
from year to year. Expected rent shall be higher of municipal valuation or fair rent of the property,
subject to maximum of standard rent;
b) Rent actually received or receivable after excluding unrealized rent but before deducting loss
due to vacancy
Out of sum computed above, any loss incurred due to vacancy in the house property shall be
deducted and the remaining sum so computed shall be deemed to the gross annual value.

Computation of gross annual value of a let out property. [Sec. 23(1)]

Gross Annual Value of a property is let out throughout the year is determined in the following
manner:
Step 1 Compute reasonable expected rent of the property
Step 2 Compute actual rent of the property
Step 3 Compute gross annual value
Computation of reasonable expected rent of a let out property (i.e. step 1).

Reasonable expected rent will be higher of the following:

• Municipal value of the property (Note 1); or
• Fair rent of the property (Note 2).

If a property is covered under Rent Control Act, then the reasonable expected rent cannot
exceed standard rent (Note 3).

• Note 1: Meaning of Municipal Value For collection of municipal taxes, local authorities
make periodic survey of all buildings in their jurisdiction. Such value determined by the
municipal authorities in respect of a property, is called as municipal value of the property.
• Note 2: Meaning of Fair Rent It is the reasonable expected rent which the property can
fetch. It can be determined on the basis of rent fetched by a similar property in the same
or similar locality.
• Note 3: Meaning of Standard Rent It is the maximum rent which a person can legally
recover from his tenant under the Rent Control Act. Standard rent is applicable only in
case of properties covered under Rent Control Act.
Deductions:

Description Nature of Deductions

Municipal Taxes Municipal taxes including service-taxes levied by any local authority in
respect of house property is allowed as deduction, if:
a) Taxes are borne by the owner; and
b) Taxes are actually paid by him during the year.

Standard 30% of net annual value of the house property is allowed as deduction if
Deduction[Section property is let-out during the previous year.
24(a)]

Interest on Borrowed a) In respect of let-out property, actual interest incurred on capital borrowed
Capital * [Section for the purpose of acquisition, construction, repairing, re-construction shall
24(b)] be allowed as deduction

b) In respect of self-occupied residential house property, interest incurred on

capital borrowed for the purpose of acquisition or construction of house
property shall be allowed as deduction up to Rs. 2 lakhs. The deduction shall
be allowed if capital is borrowed on or after 01-04-1999 and acquisition or
construction of house property is completed within 5 years.

c) In respect of self-occupied residential house property, interest incurred on

capital borrowed for the purpose of reconstruction, repairs or renewals of a
house property shall be allowed as deduction up to Rs. 30,000.
* Any interest pertaining to the period prior to the year of acquisition/ construction of the house
property shall be allowed as deduction in five equal installments, beginning with the year in which
the property was acquired/ constructed.
* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following
circumstances:
a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a
house property;
b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or
renewals of a house property;
c) If capital is borrowed on or after 01-04-1999 but construction of house property is not
completed within five years from end of the previous year in which capital was borrowed.
Note: With effect from Assessment Year 2020-21, deduction for interest paid or payable on
borrowed capital shall be allowed in respect of two self-occupied house properties. However, the
aggregate amount of deduction under this provision shall remain same i.e., Rs. 30,000 or Rs.
2,00,000, as the case may be.

CASE

CIT v. R. Venugopala Reddiar (1965)

In case of property situated outside India, taxes levied by local authority of the country in which
the property is situated is deductible. & is used in deciding AV of that country.

Calculation of Income from House Property

The annual value of a house property is determined differently for different categories. House
properties are divided into 3 categories for this purpose. These are as follows:

Category A: House Property which is let out throughout the previous year
The Gross annual value of a property which was let out throughout the previous year is taken to
be higher of the following:
(a) Expected rent/Deemed Rent which is taken as the higher of the Municipal valuation or Fair
Rental Value
Or
(b) The actual rent received (or receivable) by the owner of a property which is partly or fully let
out.

• This implies that in case the actual rent received is in excess of the expected rent then the
actual rent received is taken as the gross annual value. On the other hand, if actual rent
received is less than the expected rent then, expected rent is taken as gross annual value.
 • Expected rent or Deemed Rent is the rent which the owner is expected to receive,
calculated on notional basis from the higher of the Municipal value or Fair Rental value
subject to maximum of the standard rent,

Category B: House Property which was partly let out and partly vacant during the year.
In such cases where the house property was partly let out and partly vacant during the year, there
are two scenarios, which affect the actual rent received owing to such vacancy.

Scenario 1: When the actual rent received or receivable is more than the expected rent despite
the vacancy. In that case, the gross annual value is taken as actual rent received as it is higher
than the expected rent. Expected rent is calculated as higher of the municipal valuation or fair
rent.
Scenario 2: When the actual rent received or receivable is less than the expected rent due to the
vacancy of the property for some time during the year. The gross annual value of the property
will be actual rent received or receivable.

Category C: House Property which was let out for part of the year and rest of the year
occupied for own residence.
Since the house was let out for a part of the year and was self-occupied for the rest of the year,
the gross annual value is calculated as the rent that could have been received in case property
was let out for the whole year. The period of self-occupation is irrelevant.

The Gross annual value is taken as higher of the

a) Expected rent by letting out the property for the whole year i.e. higher of the municipal
valuation or fair rent,
b) Actual rent received or receivable only for the period it was let out

Points to Remember:
1. The income from house property which is occupied by the owner for the purpose of his own
residence or could not be occupied by the owner for his residential purpose due to his
employment at other place is taken as NIL. The assessee, in this case, will not be entitled to the
standard deduction of 30% in this case. However, he is allowed deduction of interest paid on
house loan including the accumulated interest of the pre-construction period.
2. Income from House property is added to the person's total income only if such house or part of
the house is let out for whole or part of the year, or any other benefit derived from the house by
the owner.
3. When the assessee has more than one house then, then he/she can exercise an option to treat
anyone of the house to be self-occupied. The other house(s) shall be deemed to be let out.

Income from property situated in foreign country

• R/ROR- taxable in india (irrespective of place where it is received)(arunachalam chettiar

v. CIT)
• NR/NOR- taxable in india(only if received in india) annual value shall be determined as
if property is situated in india.
Note: in case of double taxation avoidance agreement, entered by india with other countries, then
income from immovable property shall be taxed in the country where immovable property is
situated irrespective of residential status.

b. Capital Gain Taxation

Chargeability:
Capital gains shall be chargeable to tax if following conditions are satisfied:
a) There should be a capital asset. In other words, the asset transferred should be a capital asset
on the date of transfer;
b) It should be transferred by the taxpayer during the previous year;
c) There should be profits or gain as a result of transfer.

Meaning of Capital Asset [Sec 2(14)]

Capital Asset is defined to include:
a) Any kind of property held by an assessee, whether or not connected with business or
profession of the assessee.
b) Any securities held by a FII which has invested in such securities in accordance with the
regulations made under the SEBI Act, 1992.
However, the term ‘capital asset’ shall exclude the following:
a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or
profession;
b) Movable property held for personal use of taxpayer or for any member of his family
dependent upon him. However, jewellery, costly stones, and ornaments made of silver,
gold, platinum or any other precious metal, archaeological collections, drawings, paintings,
sculptures or any work of art shall be considered as capital asset even if used for personal
purposes;
c) Specified Gold Bonds and Special Bearer Bonds;

d) Agricultural Land in India, not being a land situated:

a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment
board and which has a population not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality
or cantonment board:
i) not being more than 2 KMs, if population of such area is more than 10,000 but not
exceeding 1 lakh;
ii) not being more than 6 KMs , if population of such area is more than 1 lakh but not
exceeding 10 lakhs; or
iii) not being more than 8 KM ,if population of such area is more than 10 lakhs.
e) Deposit certificates issued under the Gold Monetisation Scheme, 2015
Type of Capital Assets
A. Short Term Capital Asset (2(42A)
Capital asset held for not more than 36 months immediately prior to the date of transfer shall be
deemed as short-term capital asset. However, following assets held for not more than 12 months
shall be treated as short-term capital assets:
a) Equity or preference shares in a company which are listed in any recognized stock exchange in
India;
b) Other listed securities;
c) Units of UTI;
d) Units of equity oriented funds; or
e) Zero Coupon Bonds.
Note: Unlisted shares and immovable property (being land or building or both) held for not more
than 24 months immediately prior to the date of transfer shall be treated as short-term capital
asset.

B. Long Term Capital Asset (2(29A)

Capital Asset that held for more than 36 months or 24 months or 12 months, as the case may be,
immediately preceding the date of transfer is treated as long-term capital asset.

Capital Gains:
Any profits or gains arising from the transfer of a capital asset effected in the previous year shall
be chargeable to income-tax under the head capital gains. Examples of assets are a flat or
apartments, land, shares, mutual funds, gold among many others. There are two types of capital
gains:
Short-term capital gain:(2(42B) capital gain arising on transfer of short term capital asset.
Long-term capital gain:(2(29B) capital gain arising on transfer of long term capital asset.

Capital gains can be taxed subject to the following conditions:

• The assessee must have owned a capital asset
• The assessee must have transferred the capital asset in the previous year.
• There must have been profit or gains as a result of such transfer

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:
(i) Sale, exchange or relinquishment of the asset;
(ii) Extinguishment of any rights in relation to a capital asset;
(iii) Compulsory acquisition of an asset;
(iv) Conversion of capital asset into stock-in-trade;
(v) Maturity or redemption of a zero coupon bond;
(vi) Allowing possession of immovable properties to the buyer in part performance of the
contract;
(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of)
immovable property; or
(viii) Disposing of or parting with an asset or any interest therein or creating any interest in
any asset in any manner whatsoever
Meaning of ‘Zero Coupon Bond’ – Income Tax
S.2(48) of Income Tax Act, 1961 defines Zero Coupon Bonds, as under:
Unless the context otherwise requires, the term “zero coupon bond” means a bond-
(a) issued by any infrastructure capital company or infrastructure capital fund or public
sector company or scheduled bank on or after the 1st day of June, 2005;
(b) in respect of which no payment and benefit is received or receivable before maturity or
redemption from infrastructure capital company or infrastructure capital fund or public
sector company or scheduled bank; and
(c) which the Central Government may, by notification in the Official Gazette, specify in this
behalf.

Meaning of ‘slump sale’

In simple words, ‘slump sale’ is nothing but transfer of a whole or part of business concern as a
going concern; lock, stock and barrel.
As per section 2(42C) of Income -tax Act 1961, (computed under section 50B)
Slump Sale means
• -the transfer of one or more undertakings
• -as a result of the sale
• -for a lump sum consideration
• -without values being assigned to the individual assets and liabilities in such sales.
As per Explanation 1 to section 2(19AA), ‘undertaking’ shall include any part of an undertaking
or a unit or division of an undertaking or a business activity taken as a whole, but does not
include individual assets or liabilities or any combination thereof not constituting a business
activity.

Computation of Capital Gains:

Particulars Rs.
Full value of consideration xxx
Less:
a) Expenditure incurred wholly and exclusively in connection with
transfer (xxx)
b) Cost of acquisition*
c) Cost of improvement* (xxx)
(xxx)
Less:
Exemption under Sections 54 to 54GB (if any) (xxx)
Short Term/ Long Term Capital Gain or Loss xxx

* Benefit of indexation shall also be allowed with respect to cost of acquisition and improvement
while calculating Long term capital gains.

Full Value of Consideration:

Full value of consideration is the amount in lieu of transfer of such an asset can be received in
cash or in kind. Generally, if the consideration is received in kind then its fair market price to be
taken as full value consideration. However, this is not always applicable and one may require to
calculate the full value of consideration in alternate ways that those are prevalent.

Expenditure Incurred in Connection with Transfer:

• One can deduct the amount that he may have encountered as an expenditure in
connection with transfer of a capital asset while he is calculating his capital gains.
• Some of such expenditures are brokerage or commission paid to a third party, stamp duty
paid while making the transfer, any kind of registration fee that you may have
encountered, any kind of travelling fees or legal expenses in relation to the transfer of
capital assets.
• However, if this expenditure is done in respect to any of the money that you have paid to
the Securities Transaction Tax then this amount cannot be deducted from your capital
gains while you are calculating your capital gains.

Cost of Acquisition
• Cost of acquisition of an asset is the amount for which it was originally acquired by the
assessee.
• It includes expenses of capital nature incurred in connection with such purchase or for
completing the title of the property.

Meaning of indexation
Indexed C.O.A

• It means the amount which bears to the C.O.A in the same proportion as cost inflation
index for the year in which assets is transferred bears to the C.I.I for the 1st year in which
the asset was held by assessee or for year beginning 1st april, 1981 whichever is later,
• Cost of inflation X CII OF THE YEAR OF TRANSFER / CII OF YEAR OF
ACQUISITION

Cost inflation index

• Cost Inflation Index is calculated to match the prices to the inflation rate. In simple
words, an increase in the inflation rate over a period of time will lead to an increase in the
prices.
• Central Government specifies the cost inflation index by notifying in the official gazette.
• Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for
the immediately preceding year.
• *Consumer Price Index compares the current price of a basket of goods and services
(which represent the economy) with the price of the same basket of goods and services in
the previous year to calculate the increase in prices.
 H. H. Maharaj Rana Hemant Singhji vs Commissioner Of Income-Tax

FACTS:
• Maharaja died . On the day following his demise all the movable valuables possessed by
him were taken over and sealed by the Government of Rajasthan because of the dispute
regarding succession to the throne.
• Maharaja Shri Hemant Singhji, the appellant herein, who was then a minor, was
recognised by the Government of India as successor of the former Maharaja and the
aforesaid assets.
• It was released by the Rajasthan Government and handed over to Rajmata in her
capacity as the adoptive mother and guardian of the appellant. silver coins and silver bars
were sold at the suggestion of the Government of India.
Income was taxed as capital gains as per old act.
When minor became adult, he filed case against tax authorities saying that they are not capital
gains. As-
• They were of personal use,
• This treasure was used in worship.

ISSUE: "Whether on the facts and in the circumstances of the case the assets sold were capital
assets within the meaning of section 2(4A) chargeable to capital gains tax under section 12B of
the Income-tax Act, 1922." ?

Observation

For a proper decision of the point in question, it is necessary to refer to section 2(4A) of the
Act, the relevant portion whereof runs thus:

"2(4A). 'Capital asset' means property of any kind held by an assessee" whether or not connected
with his business, profession or vocation, but does not include-

(i) ................

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery, and
furniture) held for personal use by the assessee or any member of his family dependent on him;"

• The expression "personal use" occurring in clause (ii) of the above quoted provision is
very significant. A close scrutiny of the context an; which the expression occurs shows
that only those effects can legitimately be said to be personal which pertain to the
assessse's person.
• An intimate connection between the effects and the person of the assessee must be shown
to exist to render them "personal effects".

HELD: Therefore, the aforesaid articles were capital assets and not personal effects as
contended on behalf of the assessee-appellant and as such could not be excluded while
computing the gains.
 EXEMPTIONS

Exemption under Section 54

When an individual sells a residential property and buys another residential property, he will be
eligible for exemption under Section 54. Conditions to avail the benefit of exemption under
Section 54 includes:

• The taxpayer (ie. seller) needs to be an individual or HUF. Thus, firms, LLP’s and
companies cannot utilize the benefits of this section.
• Asset needs to be classified as a long-term capital asset.
• The asset sold is a Residential House. Income from such a house should be chargeable as
Income from House Property
• The seller should purchase a residential house either 1 year before the date of
sale/transfer or 2 years after the date of sale/transfer. In case the seller is constructing a
house, the seller has an extended time, ie. the seller will have to construct the residential
house within 3 years from the date of sale/transfer. In case of compulsory acquisition, the
period of acquisition or construction will be determined from the date of receipt of
compensation (whether original or additional compensation)
• The new residential house should be in India. The seller cannot buy or purchase a
residential house abroad and claim the exemption.

The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller
cannot avail the benefit of the exemption under Section 54.
Conditions For Availing Exemption Under Section 54B
• Exemption under section 54B is available only to an individual or a HUF;
• Exemption under section 54B is available only on sale of urban agricultural land;
• Exemption is available on both long term capital assets and / or short term capital assets;
• In order to claim exemption under section 54B, the urban agricultural land must have
been used by the individual or by the parents of the individual for agricultural purpose for
the period of at least 2 years prior to the date of transfer. It must be noted that in case of
transfer of land by a HUF, land should have been used by any of the member of the HUF;
• Exemption under section 54B is available only if the taxpayer acquires another
agricultural land within a period of two years from the date of transfer. It must be noted
that the taxpayer has an option to re-invest in both urban and rural agricultural land;

[Section 54D] : Exemption of Capital Gains on Compulsory Acquisition Of Land And

Buildings forming part of Industrial Undertaking

Sec 54F of IT Act provides that the taxpayers are exempted for the capital gains for the transfer
of any capital asset other than residential house and the net consideration has been re-invested in
purchase of one residential house within a year before the transfer or within 2 years after the
transfer, If the taxpayer possess more than one residential property, then he will be deemed from
exemption.
If he constructs an addition residential property within 3 years from the transfer date, then he
will be exempted from capital gain tax.

Profits and Gains of Business & Profession

Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to
taxation.
➢ The term "business" includes any
(a) trade,
(b)commerce,
(c)manufacture, or
(d) any adventure or concern in the nature of trade, commerce or manufacture.

Lakshmi narayan ram gopal vs govt. of Hyderabad

Court pointed out that the activities which constitute carrying on of business need not necessarily
consist of activities by way of trade, commerce or manufacture or activities in the exercise of
profession & vocation. They may even consist of rendering services to others of variegated
characters.

CIT v. dharma reddy

Definition of business is an inclusive one & not exhaustive, it is indicative of extension &
expansion & not restriction.

Barendra Prasad roy v. ITO

The word business is of wide import & it means activity carried on continuous & systematically
by a person by the application of labor & skill to earn income.

➢ The term "profession" implies professed attainments in special knowledge as

distinguished from mere skill; "special knowledge" which is "to be acquired only after
patient study and application".

CIT vs. manmohan das

Profession involves occupation, requiring purely intellectual & manual skills.

Krishna menon v. CIT

In order to call an activity as vocation it need not be shown that it is an organized activity & that
it is indulged into profit motive.

➢ The words 'profits and gains' are defined as the surplus by which the receipts from the
business or profession exceed the expenditure necessary for the purpose of earning those
receipts. These words should be understood to include losses also, so that in one sense
'profit and gains' represent plus income while 'losses' represent minus income.
 Ingredients
1. There should be a business or profession
2. The business or profession should be carried on by the assessee
Safuddin ali mohd. v. CIT
Where the court takes away the right of the owner to carry on the business and appoints someone
else to carry on the business, the owner will not be assessable on incomes from such business.

3. The business or profession should be carried on for some time during the previous year
CIT v. kali kutti
Business need not to be carried for whole part of year, even if carried on for some part then also
business activity.

CIT v. vikram cotton mills

In case of temporary suspension of business to overcome business crisis without any intention of
the assessee to part with the business, if the business assets are leased out for a certain period
then the lease rent would be assessed as business income.

4. The charge is in respect of the profits and gains of the previous year of the business or
profession &

Lakshmipath singhania v. CIT

Where the assessee maintains his income on mercantile basis, income which has accrued but
escaped, assessment can’t be sort to be taxed in the year in which it was recorded.

5. The charge extends to any business or profession carried on.

Chargeability
The following types of income are chargeable to tax under the heads profits and gains of
business or profession:-
• Profits and gains of any business or profession
• Any compensation or other payments due to or received by any person specified
in section 28 of the Act
• Income derived by a trade, profession or similar association from specific services
performed for its members
• Profit on sale of import entitlement licences, incentives by way of cash compensatory
support and drawback of duty
• The value of any benefit or perquisite, whether converted into money or not, arising from
business
• Any interest, salary, bonus, commission, or remuneration received by a partner of a firm,
from such a firm
• Any sum whether received or receivable in cash or kind, under an agreement for not
carrying out any activity in relation to any business or not to share any know-how, patent,
 copyright, franchise, or any other business or commercial right of similar nature or
technique likely to assist in the manufacture or processing of good
• Any sum received under a keyman insurance policy
• Income from speculative transactions.

In the following cases, income from trading or business is not taxable under the head
"profits and gains of business or profession":-
• Rent of house property is taxable under the head " Income from house property". Even if
the property constitutes stock in trade of recipient of rent or the recipient of rent is
engaged in the business of letting properties on rent.
• Deemed dividends on shares are taxable under the head "Income from other sources".
• Winnings from lotteries, races etc. are taxable under the head "Income from other
sources".
Profits and gains of any other business are taxable, unless such profits are subjected to
exemption.

EXCEPTIONS:

In these cases, certain receipts are taxable as income from business even though no business is
being carried on by the assessee in the year of receipt.
➢ Recovery against loss expenditure or trading liability earlier allowed as a deduction
(section 41(1)
➢ Balancing charge in case of electricity companies (section 41(2))
➢ Sale of capital asset used for scientific research. (section 41(3))
➢ Recovery against bad debts (section 41(4))
➢ Amount withdrawn from special reserve. (section 41(4A))
➢ Receipt of discontinued business under cash system of accounting (section 176(3A), (4))

BUSINESS LOSS:

It is obvious that business profit cannot be computed without allowing a business loss. A trading
loss of business is deductible in computing the profit earned by the business even though there is
no specific provision in the act for allowance thereof.

Such trading losses can be claimed as a deduction provided the following conditions are
satisfied:

1. It should be a real loss and not notional or fictitious

2. It should be a loss on revenue account and not on capital account
3. It must have actually arisen and been incurred, not merely anticipated as certain to occur
in future.
4. It should be one that is incidental to the carrying on of the business and must arise or
spring directly from or be incidental to the carrying out of an operation of the business.
5. There should be no prohibition in the act, express or implied , against the deductibility
thereof.
Examples:
➢ Losses sustained before incorporation of business.
➢ Losses due to damage and destruction of capital assets.
➢ Losses which aren’t incidental to business
➢ Losses due to sale of securities held as investment

CASES
badridas daga v. CIT
a loss another than capital loss, which is really incidental to the trade is allowable to be deducted
under section 28 itself, even though its not allowed under any specific section of the act, but it is
allowed by virtue of ordinary principles of commercial trading.

Commissioner wealth trust (india) ltd v. CIT

If there is direct proximate nexus between the loss & business operation, only then it will be
allowed as deduction.

Cases where income from certain business is not taxable under the head
‘profits & gains of business’.
1. Rent from house property: where an assessee is carrying on a business of owning &
letting out of residential houses, the income derived by him, from such letting, shall be
taxable under the head ‘income from house property’ and not as business income.
2. Dividend income: an assessee who is carrying on a business of dealing in shares and
securities and earns income by way of dividend on such business assets shall be taxable
in respect of the dividends, under the head ‘income from other sources’ and not under this
head.
3. Winning from lotteries, races etc: any winning from lotteries, races etc, are taxable under
the head ‘income from other sources’ even if, it is derived as a regular business activity.

INCOME FROM BUSINESS OR PROFESSION- HOW TO BE COMPUTED

Income from profits and gains of business or profession, how computed The income referred to
in section 28 shall be computed in accordance with the provisions contained in sections 30
to 43D.

General principles for allowability of deductions

i) Expenditure should have been incurred during the previous year

ii) Expenditure should be incurred for the purpose of the business
iii) No deduction Is allowable in respect of a discontinued business.
iv) Expenses incurred before the setting up of a business are not allowed.

SECTION 30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the
purposes of the business or profession, the following deductions shall be allowed-
(a) where the premises are occupied by the assessee-
 i. as a tenant, the rent paid for such premises; and further if he has undertaken to
bear the cost of repairs to the premises, the amount paid on account of such
repairs ;
ii. otherwise than as a tenant, the amount paid by him on account of current repairs
to the premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes ;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction
of the premises.

Explanation.-For the removal of doubts, it is hereby declared that the amount paid on account of
the cost of repairs referred to in sub-clause (i), and the amount paid on account of current repairs
referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of
capital expenditure.

SECTION 31. Repairs and insurance of machinery, plant and furniture In respect of repairs and
insurance of machinery, plant or furniture used for the purposes of the business or profession, the
following deductions shall be allowed-
i. the amount paid on account of current repairs thereto;
ii. the amount of any premium paid in respect of insurance against risk of damage or
destruction thereof.

SECTION 32 :What is Depreciation?

• Depreciation under the Income Tax Act is a deduction allowed for the decline in the real
value of a tangible or intangible asset used by a taxpayer.
• The Income Tax Department uses the concept of depreciation for the purpose of writing
off the cost of an asset over its useful life.
• Depreciation is a mandatory deduction and the Act allows the deduction either under
straight-line method or written down value (WDV) method.
• They calculate the deduction for depreciation under the WDV method except for
undertaking engaged in generation or generation and distribution of power.
• The Act also allows a deduction for additional depreciation in the year of purchase in
certain circumstances.

Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of

assets falling within a class of assets comprising of:
• Tangible assets, being building, machinery, plant or furniture,
• Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature

Conditions For Claiming Depreciation

You can avail deduction for depreciation, only if it satisfies the following conditions.

1. The assets must be owned, wholly or partly, by the assessee.

 2. They must be in use for the business or profession of the taxpayer. If the assets are not
used exclusively for the business, but for other purposes as well, depreciation allowable
would be proportionate to the use of business purpose. The Income Tax Officer also has
the right to determine the proportionate part of the depreciation under Section 38 of the
Act.
3. Co-owners can claim depreciation to the extent of the value of the assets owned by each
co-owner.
4. You cannot claim depreciation on the cost of land.
5. Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have
been allowed as a deduction irrespective of a claim made by a taxpayer in the profit &
loss account.

Written Down Value- Meaning

As per Section 32(1) of the IT Act depreciation should be computed at the prescribed percentage
on the WDV of the asset, which in turn is calculated with reference to the actual cost of the
assets. In the context of computing depreciation, it is important to understand the meaning of the
term ‘WDV’ & ‘Actual Cost’.

WDV under the Income Tax Act means:

1. Where the asset is acquired in the previous year, the actual cost of the asset shall be
treated as WDV.
2. Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred
less depreciation actually allowed under the Act.

How to calculate?

Section 43(1)
10/100 x actual cost to assessee himself

SOME PROVISIONS (PGBP)

1. Tea/Coffee/Rubber Development Account [Section 33AB]

Deduction under section 33AB is available to an assessee who satisfies the following conditions:
Essential Conditions :
(i) the assessee is engaged in the business of growing and manufacturing tea or coffee or
rubber in India;
(ii) the assessee has, within six months from the end of the previous year or before the due
date of furnishing return of income whichever is earlier;
(iii)the assessee must get its accounts audited by a Chartered Accountant and furnish the
report of such audit in Form No. 3AC, along with the return of income.

Quantum of Deduction:
Quantum of deduction shall be:
 • the amount(s) deposited in the schemes referred to above; or
• 40% of the Profits of such Business computed under the head profits and gains of
business or profession,
whichever is less.

2. Site Restoration Fund [Section 33ABA]

Deduction under section 33ABA is allowed to an assessee who satisfies the following
conditions:

Essential Conditions :
1. The assessee is carrying on business consisting of prospecting for or extraction or
production of petroleum or natural gas or both in India and in relation to which the
Central Government has entered into an agreement with such assessee for such business.
2. The assessee has before the end of the previous year—
• deposited with the State Bank of India any amount(s) in a special account maintained by
the assessee with that bank, in accordance with and for the purposes specified in, a
scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the
Government of India; or
• deposited any amount in the Site Restoration Account opened by the assessee in
accordance with, and for the purpose specified in a scheme framed by the aforesaid
Ministry. This scheme is known as Deposit Scheme.
3. The assessee must get its accounts audited by an Accountant as defined in the
Explanation below section 288(2) and furnish the report of such audit in the Form No.
3AD alongwith the return of income. In a case where the assessee is required by or any
other law to get its accounts audited, it shall be sufficient compliance if such assessee
gets the accounts of such business audited under such law and furnishes the report of the
audit as required under such other law and a further report in the form prescribed.
Quantum of deduction:

Quantum of Deduction shall be:—

1. the amount deposited in the scheme referred to above; or
2. 20% of the Profit of such Business computed under the head profits and gains of business
or profession,
Whichever is Less.

3. Expenditure on Scientific Research [Section 35)

• The term “scientific research” means “any activity for the extension of knowledge in the
fields of natural or applied sciences including agriculture, animal husbandry or fisheries”.
The term ‘scientific research’ has a wide scope.
• It does not necessarily mean only invention or successful scientific research. With a view
to accelerating scientific research, section 35 provides tax incentives.
Under this section amount deductible in respect of scientific research may be classified as
under:
Expenditure on Research carried on by the Contribution to Outsiders (OUTSOURCED)
Assessee (IN HOUSE)
1. Revenue Expenditure under Section 35(1))(i) 1. Contributionto an Approved Research
Association under Section 35(1)(ii)/(iii)
2. Capital Expenditure under Section 35(2) 2. Payment to National Laboratory under
Section 35(2AA)
3. Expenditure on an Approved in-House 3. Contribution to an Indian Scientific Research
Research under Section 35(2AB) Company.

4. General Deductions [Section 37]

General Deductions [Section 37]
• Any expenditure (not being expenditure of the nature described in Sections 30 to 36) and
not being in the nature of capital expenditure or personal expenditure of the assessee, laid
out or expended wholly and exclusively for the purposes of the business or profession,
shall be allowed as deduction in computing the income chargeable under the Head
"Profits and Gains of Business or Profession".

The twin requirements, therefore, are that the expenditure should be—
i. Wholly and exclusively.
ii. For the purpose of business.

Examples of Expenditure Allowable as a Deduction u/s 37(1)

Remuneration to Employees:
Salary and perquisites paid to the employees of the assessee are allowable as a deduction. Salary
paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.

Payment of Penalty / Damages:

• Penalty is normally levied for breach of law and are, therefore, generally not allowable as
deduction. However, at times an amount though termed as penalty, is purely
compensatory in nature.
• For example, damages, penalty or interest paid for delay in completion of a contract,
though termed as penalty are really in the nature of a compensatory payment and are
therefore, allowable as a deduction.
• However, penalties paid to customs authorities, sales-tax authorities, income-tax
authorities, etc for infringement of law are not allowed.
• Levy for failure to pay sales tax within time is partly compensatory and partly penal,
compensatory part is allowable and penal part is disallowable.
Legal Expenses:
All legal expenses, incurred in connection with the business or profession of the assessee, are
allowable, irrespective of the result of the legal proceedings. However, legal expenses on
criminal prosecution are not deductible, as they are not incidental to the business or profession.

Expenditure on Raising Loans:

• Expenses of various types incurred in connection with raising of loans, for the purposes
of the business, are allowable as a deduction.
• Therefore, legal charges for obtaining the loans from financial institutions, legal charges
for drafting various deeds, brokerage paid for raising loans, stamp and registration
charges, shall be allowed as deduction.

Interest:
While Section 36(1)(iii) makes a specific provision for allowing a deduction in respect of interest
on money borrowed for the purpose of business, other kinds of interest payments in respect of
interest do not fall under that Section. If these payments have been made wholly and exclusively
for the purposes of business, they can be allowed u/s 37(1). Some of these could be:
1. interest on deferred payment for purchase of assets;
2. interest on delayed payment of electricity charges;
3. interest on purchase price of raw material;
4. any amount paid 'in lieu of interest' in compromising a dispute with a trade creditor.

Expenditure on Advertisement:
• Any expenditure incurred during the previous year on advertisement for the purpose of
business and profession shall be allowed as deduction.
• Expenditure incurred for sports tournaments organised, which directly result in publicity
and advertisement of the assessee and its products, qualify for deduction.

Expenses Allowable under Specific Instructions of CBDT:

1. Diwali and Mahurat expenses.
2. Payment for telephone/telex connection.
3. Payment to Registrar of Companies: The fee paid to the Registrar of Companies are in
connection with the company's legal obligations to be discharged under the Company law
and are an essential part of the company's business activities and are therefore, allowed.
4. Annual listing fee: Annual listing fee paid to a stock exchange is allowable.
5. Professional tax by the business assessee.