CHAPTER 9 INCOME FROM OTHER SOURCES

THEME INDEX

Theme Para

Chargeability 167

Dividend 168-171

Money or property received without or for inadequate consideration 172-174

Interest 176

Excess share premium 177

Life insurance policy 177A

Other incomes taxable under the head IFOS 178

Special provisions 179-180

For para-wise index of contents, refer Index of Contents at the beginning of the book.
We have learnt in para 8.1 that all incomes are classified and computed under 5 heads of
income. We shall learn how to compute income under the head 'Income from Other Sources' or
'IFOS' in this Chapter. This is the 5th and the last head of income. A snapshot of applicable
sections is given below.

Charging section Deeming provision Deductions Disallowances Other provisions

56 59 57 58 -

CHARGEABILITY
167. CHARGE OF INCOME UNDER THE HEAD IFOS [S. 56(1)]
What is charged: IFOS is a residuary head. What is not covered under any other head of
income, gets covered under this head. Therefore, income of every kind is taxable under the
head IFOS if:
1. It is not to be excluded from the total income under the Act, i.e., it is not exempt, and
2. It is not taxable under any other head of income.
Few examples of incomes taxable under the IFOS are interest on income-tax refund, interest on
bank deposit, director's fee, rent from sub-letting of property, etc.
In particular and without prejudice to the generality of the above provision, certain incomes are
specifically taxable under the head IFOS. For example, gifts, winnings (from lottery, crossword
puzzles, etc.), excess share premium, compensation on termination of employment, interest on
compensation, advance forfeited on failed negotiation for transfer of capital asset, etc.
We shall discuss the various incomes taxable under the head IFOS (whether as per the general
provision or specifically taxable under this head) in this Chapter.
Method of accounting: We have learnt in para 8.3 that income under the head IFOS is
computed in accordance with cash or mercantile system of accounting regularly employed by
the assessee [S. 145].
ICDS: Income Computation and Disclosure Standards (ICDS) have been notified which are to
be followed by all assessees following mercantile system of accounting (except individual or
HUF not liable to tax audit). ICDS are applicable for computation of income under the heads
PGBP or IFOS. However, /CDS is not relevant at CA Inter level and, hence, not discussed.
Scope of taxation: We have learnt the scope of total income in para 23. Accordingly, income
under the head IFOS is taxable in India if it accrues/arises in India or is deemed to accrue/arise
in India or is received in India, irrespective of the residential status of the person. If this is not
the case, it is still taxable in the hands of a ROR (on global taxation basis) but not in the hands
of a NR or RNOR. Further, income through or from any property, asset or source of income in
India is deemed to accrue or arise in India, in which case it is taxable even for a RNOR or NR. It
is recommended that you once again go through the aforesaid provisions.
A snapshot chart highlighting the steps to compute income under the head IFOS is given below.
We shall deal with each of these items in detail in this Chapter.

Particulars Rs.

Amounts chargeable under the head IFOS (S. 56) xx

Less: Deduction allowable:

1. Specific deduction (S. 57) (xx)

2. General deduction (S. 57) (xx)

Add: Amount not deductible (S. 58) -

Add: Deemed income (S. 59) xx

Income taxable under the head IFOS xx

As referred in the Chart above, deductions allowable in computing income under the head IFOS
are of two types:
1. Specific deduction: Certain deductions have been specifically prescribed for certain kinds of
income.
2. General deduction: Any expenditure (not being in the nature of capital expenditure) laid out
or expended wholly and exclusively for the purpose of making or earning income, is
deductible in computing the income.
We shall note the deductions allowable for various types of incomes as we study the provisions
in this Chapter. Amount not deductible u/s 58 should be added back if it has been deducted.
However, no adjustment is required if such amount has not been deducted in the first place.
If an income is received after deducting TDS, it should be grossed up for inclusion in the total
income. Income to be included in the total income = Income received x (100 / (100 - Rate of
TDS)). For example, if winning from lottery of Rs. 70,000 is received after deducting TDS @
30%, Rs. 1,00,000 [70,000 x (100/70)) will be included in the total income.
Solve MCQ No. M1-4

DIVIDEND [S. 56(2)(i), 2(22), 8]

168. MEANING OF DIVIDEND [S. 2(22))
Income by way of dividend is taxable under the head IFOS. Dividend is defined u/s 2(22). The
definition expands its meaning beyond what is generally understood as dividend. As per this
section, dividend includes the specified distributions or payments by a company. While para
168.1 refers to various distributions to the shareholders which are treated as dividend, para
168.2 refers to payments made which are treated as deemed dividend.

168.1 Category A - Distribution by a company to its shareholders [S. 2(22)(a) to (d)]1

The following distributions made by a company to its shareholders are treated as dividend.

Section What is treated as dividend? Points to note

2(22)(a) Any distribution by a company of Issue of bonus shares to equity shareholders

accumulated profits if such is not treated as dividend.2
distribution entails the release by the
company to its shareholders of
assets (all or any part) of the
company.

 1: Any distribution to its shareholders Such distribution is treated as dividend even if

by a company of debentures, there is no release of assets like u/s 2(22)(a).
2(22)(b)
debenture-stock or deposit
certificates (in any form), whether
with or without interest;
2: Any distribution to its preference
shareholders by a company of shares
by way of bonus.

 Any distribution made to the Distribution in respect of preference shares

shareholders of a company on its issued for full cash consideration is not
2(22)(c)
liquidation. treated as dividend.
2(22)(d) Any distribution to its shareholders by Distribution in respect of preference shares
a company on the reduction of its issued for full cash consideration is not
capital. treated as dividend.
Sub-division or consolidation of shares into
shares of smaller or larger amounts is not a
reduction of capital and, hence, not treated as
dividend.
Any payment made by a company on
purchase of its own shares from a
shareholder, i.e., on buyback of shares, is not
treated as dividend. In such case, either
Buyback Tax is payable by the company u/s
115QA or capital gain is leviable on the
shareholder u/s 46A (see para 152).

Market value: If the distribution is of assets, the market value of asset is taken as the amount
of dividend.3
Accumulated profits: Above listed distributions are treated as dividend to the extent to which
the company possesses accumulated profits, whether capitalized or not.4 Following points
should be noted:
• Accumulated profits include all profits of the company up to the date of distribution. In case of
liquidation covered u/s 2(22)(c), accumulated profits include all profits up to the date of
liquidation.5
• Accumulated profits which have been capitalized are also included within its meaning.
• Distribution which is in excess of accumulated profits of the company is not treated as
dividend.

ILLUS 168.1: Capitalization of Profits: It means conversion of accumulated profits or

reserves of a company into capital by means of a share issue (bonus issue). Shares are
issued to the existing shareholders by converting the accumulated profits or reserves into
share capital of the company. For example, take a look at the balance sheet given below:

Particulars Rs. Particulars Rs.

Share capital (including bonus shares 50,00,000 Assets 65,00,000

issued of Rs. 5 lakh)

Reserves & surplus 10,00,000

Liabilities 5,00,000

65,00,000 65,00,000

In this case, accumulated profits, whether capitalized or not = 10,00,000 + 5,00,000 =

15,00,000.

ILLUS 168.2 to 168.9: Z Ltd., a domestic company, has accumulated profits of Rs. 15 lakh on 1
May. Determine whether each of the following distribution or payment made to the shareholders
is taxable as dividend and to what extent. Assume that only one of these payments is made in
relation to the aforesaid accumulated profits and that each is made on 1 May.

# Particulars of distribution or payment made to Whether dividend?

shareholders

Cash dividend of Rs. 5 lakh to the shareholders 5 lakh, as there is release of

assets [S. 2(22)(a)]

2 Assets of book value Rs. 2 lakh distributed to shareholders 2.5 lakh (market value is
(market value 2.5 lakh) taken), as there is release of
assets [S. 2(22)(a)]

3 Right issue of equity shares is made for Rs. 10 lakh (market No, as there is no release of
value of shares Rs. 20 lakh) to the shareholders assets

4 Bonus shares of market value Rs. 2 lakh issued to equity No, as there is no release of
shareholders assets

5 Bonus shares of market value Rs. 2 lakh issued to 2 lakh, even if there is no
preference shareholders release of assets to
shareholders [S. 2(22)(b)]

6 Debentures of Rs. 10 lakh, carrying interest of 10%, issued 10 lakh [S. 2(22)(b)]
to preference shareholders.

7 Rs. 10 lakh distributed to shareholders on liquidation of Z 2.5 lakh (to the extent of
Ltd. Distribution is made proportionately from accumulated accumulated profits up to the
profits and share capital. Company goes into liquidation on date of liquidation, i.e., 15 lakh
1 May. On this date, share capital amounts to Rs. 45 lakh / 60 lakh) [S. 2(22)(c)]

8 Rs. 16 lakh is paid to shareholders consequent to reduction 15 lakh (to the extent of
of capital. accumulated profits) [S.
2(22)(d)]

168.2  Category B - Deemed dividend u/s 2(22)(e)6

Any payment by a closely-held company by way of advance or loan is treated as dividend if it is
made to an influential equity shareholder or to any concern in which such shareholder has a
substantial interest. Further, any payment by any such company on behalf of or for the
individual benefit of such shareholder is also treated as dividend. The payment is treated as
dividend to the extent of accumulated profits of the company on the date of such payment. The
dividend in such cases is generally referred to as 'deemed dividend u/s 2(22)(e)'. However,
advance or loan to the aforesaid shareholder or concern made by a company engaged in
money-lending business is kept out of the purview of dividend if it is in the ordinary course of its
business. The provisions of deemed dividend are depicted below for a clear understanding. The
aforesaid 3 categories of payments, treated as deemed dividend, are depicted as A, B and C.
Closely held company: It is a company which is not a company in which the public are
substantially interested. A detailed definition of this term is contained u/s 2(18) which is not
relevant at CA Inter level. What you should note is that private companies or public unlisted
companies fall under this category.
Substantial interest: A person is deemed to have a substantial interest in the concern in the
following situation:

In a company In a concern other than a company

If he is the beneficial owner of equity If he is, at any time during the PY, beneficially
shares carrying > 20% of the voting power entitled to > 20% of the income of such concern.

Set-off: Any dividend paid by a company, which is set off by the company against any previous
payment which was treated as dividend u/s 2(22)(e), is not again treated as dividend, to the
extent it is so set off.7 Trade advances: Trade advances, which are in the nature of
commercial transactions, do not fall within the ambit of the word 'advance' u/s 2(22)(e) and are,
therefore, not treated as deemed dividend [Circular 19/2017]8 Any payment, referred in the
Chart above, which is in excess of the accumulated profits (on the date of payment) of the
company, is not treated as deemed dividend.
Accumulated profits represent all profits of the company up to the date of payment. These are
not computed proportionate to the % shareholding of the shareholder.
Deemed dividend gets triggered once the payment is made. The fact that the amount is repaid
during the same PY or that interest is charged at the market rate, is irrelevant.
Not all payments to shareholder are covered by this provision. Thus, repayment by the company
of amount due to the shareholder is not treated as deemed dividend.
While threshold of equity shareholding for being covered u/s 2(22)(e) is 10%, it is 20% for
substantial interest.
ILLUS 168.10 to 168.18: Determine whether the payments in the following situations will be
treated as dividend u/s 2(22)(e). Accumulated profits of the payer company on the date of
payment are Rs. 15 lakh. Assume that each of the following payments is independently made in
reference to the said amount of accumulated profits.

# Payer Equity Payee Nature of payment Whether deemed

shares dividend u/s 2(22)(e)
of X in
payer

1 Y Pvt. 10% X Loan of 20 lakh given on 1 15 lakh (to the extent of

Ltd. June of the PY at market rate accumulated profits on
of interest. X repays the loan date of payment) as X
after 6 months. holds > 10% equity
shares in Y Pvt. Ltd..

2 Y Ltd. 40% X Advance of 20 lakh given on 1 No, as Y Ltd. is not a

(listed) June of the PY at 10% rate of closely held company
interest (market rate is 12%). since it is a public listed
Advance is outstanding as on company.
31 March of the PY.

3 Y Pvt. 60% X Loan of 10 lakh given on 1 No, as loan is given in the

June of the PY in the ordinary ordinary course of
Ltd.
course of money lending business and money
business which is the main lending is a substantial
business of the company. part of business of Y Pvt.
Ltd.

4 Y Pvt. 10% X HUF (X has Loan of 18 lakh given on 1 15 lakh (to the extent of
20% share in June of the PY. accumulated profits on
Ltd.
income) date of payment), as X
holds > 10% equity
shares in Y Pvt. Ltd. and
loan is to a HUF in which
X is entitled to > 20%
income.

5 Y Pvt. 9% BP & Co (X Advance of 25 lakh given on 1 No, as X does not hold >
has 65% June of the PY. 10% equity shares in Y
Ltd.
profit share) Pvt. Ltd.

6 Y Pvt. 30% BP LLP (X Loan of Rs. 10 lakh given on 1 10 lakh, as X holds > 10%
held 30% June of the PY. equity shares in Y Pvt.
Ltd.
profit share Ltd. and is entitled to >
which was 20% income in BP LLP at
reduced to any time during the PY.
5% on
31.3.2023)
7 Y Pvt. 25% Z, a colleague Payment of Rs. 12 lakh made 12 lakh, as X holds > 10%
of X on 1 June of the PY. X owed equity shares in Y Pvt.
Ltd.
Rs. 12 lakh to Z on account of Ltd. and payment is made
services provided by Z to X. to Z on behalf, or for the
individual benefit of X

8 Y Pvt. 12% X Regular dividend of Rs. 5 lakh 3 lakh (u/s 2(22)(a)) being
declared on 1 June of the PY. regular dividend). Amount
Ltd.
However, only Rs. 3 lakh was set off against earlier
paid to X after setting off Rs. 2 payment treated as
lakh due from X against loan dividend u/s 2(22)(e) is
given to him on 1 January of not again treated as
the preceding PY which was dividend.
treated as dividend u/s
2(22)(e).

9 Y Pvt. 15% X Advance of Rs. 7 lakh on 1 No, as it is a trade

June of the PY in relation to a advance in the nature of
Ltd.
works contract carried out by X commercial transaction.
for the company. The amount
was later adjusted against the
bill raised by X for the work
done.

Solve BYC Question Nos. B1-121

168.3 Key differences between Categories A and B referred above in paras 168.1 and
168.2

Parameter Category A - Category B - Payment u/s 2(22)(e)

Distribution u/s
2(22)(a) to (d)

Distribution/payment by By any company By a closely-held company

>>

Distribution/payment to To shareholders To a shareholder holding > 10% equity shares

>> or to a concern in which such shareholder has
SI or to a person on behalf, or for the individual
benefit of such shareholder

Treated as dividend to Accumulated profits Accumulated profits

the extent of >> (whether capitalized
or not)

Accumulated profits Up to the date of Up to the date of payment

are ! determined >> distribution or
liquidation
169  DEDUCTION ALLOWED IN COMPUTING INCOME FROM DIVIDEND [S. 57]
In computing dividend income, deduction is allowed on account of interest expense.
In any PY, such deduction cannot exceed 20% of the dividend income included in the total
income for that year, without such deduction
No other deduction is allowed from such income.
The limit of 20% referred above is applied for each PY.

170  TAXATION OF DIVIDEND [S. 8, 9]

Dividend is taxable in hands of shareholder. It is taxable at regular rates (plus applicable
surcharge and 4% HEC). Rate of surcharge on tax on dividend income cannot exceed 15% (in
the case of an individual, HUF, AOP, BOI, AJP). We have discussed this in para 14 in the
Chapter on 'Rates of Tax'.
We have noted in para 26.3 that dividend paid by an Indian company outside India, is deemed
to accrue or arise in India and is, thus, taxable in India, irrespective of the residential status of
the assessee (ROR, RNOR or NR). Dividend from a foreign company is taxable in India if it is
received in India (i.e., on receipt basis), irrespective of the residential status of the assessee
(ROR, RNOR or NR). If such dividend is received outside India, it is still taxable in the hands of
a ROR on global taxation basis.
For the purposes of inclusion in the total income of an assessee, dividend is deemed to be the
income of the PY as specified u/s 8. This is given below:
• Dividend u/s 2(22) - Any dividend declared/distributed/paid by a company u/s 2(22) (clauses
(a) to (e)) is deemed to be the income of the PY in which it is so declared/distributed/paid.
• Interim dividend - Any interim dividend is deemed to be the income of the PY in which the
amount of such dividend is unconditionally made available by the company to the shareholder
who is entitled to it.
Solve BYC Question No. B13

171.  SPECIAL PROVISION FOR DISTRIBUTION OF ASSETS BY COMPANY IN

LIQUIDATION [S. 2(22)(c), 46]
In case a company goes in liquidation, tax implications arise in the context of dividend and
capital gain. We have noted in para 168.1 above that any distribution made to the shareholder
of a company on its liquidation is treated as dividend u/s 2(22)(c) to the extent of its
accumulated profits. This is taxable in the hands of the shareholder.
The following capital gain implications arise:
1. On the transfer of capital assets by the company to the shareholder by way of such
distribution - Such distribution is not regarded as a transfer by the company and, thus, the
company is not liable to capital gain.
2. On receipt of any money or other assets by the shareholder from the company in lieu of
shares held by him - In such case, the shareholder is liable to capital gain. For computing
capital gain, the FVC is the total of the money received and market value of other assets, as
reduced by the amount assessed as dividend u/s 2(22)(c).9 Further, the POFI of shares is
reckoned up to the date on which the company goes into liquidation.
The provisions are depicted below.

Tax implications in the hands of Tax implications in the hands of the

the company shareholder

Distribution of the assets of the The distribution made to the Capital gain arises
company to its shareholders on shareholders by the company on where the
its liquidation is not regarded as a its liquidation is treated as shareholder receives
transfer for the purpose of capital diividend u/s 2(22)(c) (to the any money or other
gain. Hence, capital gain does extent attributable to the assets from the
not arise in the hands of the accumulated profits of the company in lieu of
company. company immediately before its shares
liquidation, whether capitalized or
not).

Capital gain arising in the hands of the shareholder, as referred above, is computed as follows:

Particulars Rs.

FVC = Money received or the market value of other assets on the date of distribution - xx
Amount assessed as dividend u/s 2(22)(c)

Less: Expenditure on transfer (xx)

Less: COA / ICOA of shares (POH is reckoned up to the date on which the company goes (xx)
into liquidation)

Capital gain xx

ILLUS 171.1: Ramco Pvt. Ltd. is liquidated on 1.6.2023. Its balance sheet as on this date is as
under:

Particulars Rs. Particulars Rs

Share capital 10,00,000 Assets 15,00,000

Reserves & surplus 5,00,000 Cash in hand 5,00,000

Liabilities 5,00,000

20,00,000 20,00,000

Rainy is a shareholder holding 25% equity shares in the company which he purchased for Rs.
1,00,000 on 1.9.2014. Assets are distributed to shareholders on liquidation. Market value of
assets on 1.6.2023 is Rs. 20 lakh. What are the tax consequences for AY 2024-25?
Computation of income from other sources and capital gain
Particulars In the In the
hands of hands of
company Rainy

Income from other sources

Dividend u/s 2(22)(c): Distribution made to shareholders to the extent - 1,25,000

of accumulated profits immediately before liquidation (Rainy's share:
25% of 5 lakh of reserves & surplus)

Capital gain

In the hands of company -

In the hands of Rainy:

FVC = 20 lakh (money received of 5 lakh + market value of assets of 5,00,000

20 lakh - dividend u/s 2(22)(c) of 5 lakh). Rainy's share = 25% of 20
lakh.

Less: Expenditure on transfer Nil

Net consideration 5,00,000

Less: ICOA = COA x (CM of 2023-24/CII of 2014-15) = 1,00,000 x (1,45,000)

(348/240)

Long term capital gain - 3,55,000

Solve BYC Question No. B32. Solve MCQ No. M5-23.

MONEY OR PROPERTY RECEIVED WITHOUT OR FOR INADEQUATE CONSIDERATION

[S. 56(2)(x)]10
The Gift Tax Act, 1858 was abolished in 1998. Later, tax on gifts was introduced in 2004 in the
Income Tax Act. Since then, its scope has been widened consistently over the years. Section
56(2)(x) provides the current version of law dealing with taxation of gifts.

172.  PROVISIONS OF SECTION 56(2)(x)

172.1 Applicability of section 56(2)(x)
A person may receive a sum of money as gift or may receive any movable or immovable
property as gift or for inadequate consideration. Such sum of money or the excess of FMV/SDV
of the property over the consideration, if any, is taxable as income under the head IFOS in the
hands of the recipient assessee. The movable or immovable property should be a capital asset
of the assessee. A threshold of Rs. 50,000 is provided so as to exclude small value
transactions. A list of exceptions is prescribed to avoid hardships in genuine cases. The
provision targets 3 categories of receipts: Sum of money, movable property and immovable
property.
1. Sum of money received as gift during the PY is taxable if the aggregate value of such sum is
> Rs. 50,000.
2. In case of movable property received as gift during the PY, the aggregate FMV is taxable if it
is > Rs. 50,000. If the movable property is received for inadequate consideration, the excess of
the aggregate of FMV over the consideration is taxable if such excess is > Rs. 50,000. A list of 8
movable properties is covered under this provision. Other movable properties are out of the
purview.
3. In case of immovable property, being land or building or both, received as gift during the PY,
the SDV of the property is taxable if it is > Rs. 50,000. If the immovable property is received for
inadequate consideration, the excess of the SDV over the consideration is taxable if such
excess is > Rs. 50,000. However, this provision applies only if the SDV is > 110% of the
consideration.
The provisions are depicted below for a clear understanding followed by notes and points to
keep in mind.
Where any person receives the following, in any PY, from any person or persons

FMV of movable property: It means the value determined in accordance with the rules
prescribed in this regard. Jewellery: The meaning and scope of jewellery is the same as
mentioned in the Chart on Capital Asset in para 126. Provisions similar to 43CA & 50C: We
have learnt the provisions of section 50C in para 144 which deems the SDV of land or building
as the full value of consideration if the SDV is > 110% of consideration. Similar provisions exist
u/s 43CA (para 121) in case the land or building is not a capital asset. Following provisions,
applicable to section 43CA and 50C, apply to section 56(2)(x) as well:
• SDV on the date of agreement can be taken into account (instead of SDV on the date of
registration) where the consideration (or part thereof) has been paid by a specified mode on or
before the date of agreement. For specified modes, see Step 3.3 in para 93.5.
• The AO may refer the valuation to a valuation officer where the assessee claims that the SDV
is more than the FMV and he has not disputed the SDV in any forum. In such case, the value
determined by the valuation officer is taken. However, if the value determined is more than the
SDV, the SDV is taken.
A comparison of sections 43CA, 50C and 56(2)(x) is given in para 173.
Money gifted to NR/RNOR: Income arising outside India, being any sum of money covered u/s
56(2)(x), that is paid by a person resident in India (a) to a non-resident (not being a company) or
to a foreign company, or (b) to a RNOR, is deemed to accrue or arise in India, and is therefore,
taxable in India for such non-resident or RNOR [S. 9(l)(viii)].n Refer para 26.6 in this respect.
This provision applies only to sum of money, not to a movable property or immovable property.
Income u/s 56(2)(x) is taxable in the hands of recipient, i.e., person who receives the sum of
money or property.
Points to note with respect to determination of taxable amount:
• In 'without consideration' cases (i.e.; in case of gift), if the sum/FMV/SDV (as the case may be)
exceeds the limit of Rs. 50,000, the whole of the sum/FMV/SDV is taxable and not just the
amount in excess of Rs. 50,000.
• In 'for consideration' cases, if the excess referred in the Chart is more than the limit of Rs.
50,000, the whole of the excess is taxable and not just the excess which is more than Rs.
50,000.
• In 'for consideration' cases, the excess of FMV/SDV (as the case may be) over consideration
is taxable, not the whole of the FMV/SDV.12
• The limit of Rs. 50,000 should be applied separately for each of the five categories referred in
the Chart, i.e., A, Bl, B2, Cl and C2. The limit is not a consolidated limit for all the categories put
together.
• In case of sum of money or movable property, the aggregate sum of money or the aggregate
FMV of movable property, received from one or more persons during the PY is considered. 13
However, in case of immovable property, the SDV per property is considered.
• Value of sum is to be seen for money, FMV is to be seen for movable property and SDV (not
FMV) is to joe seen for immovable property.
Points to note with respect to the nature of property:
• Property should be a capital asset of the assessee, i.e., in the hands of the recipient.
• Income is not taxable u/s 56(2)(x) if the property is not the capital asset of the assessee, even
if it is the capital asset of the donor. Thus, section 56(2)(x) does not apply to property which is
stock-in-trade, consumable stores or raw material of the business of the recipient.14 For
example, building received by a person engaged in the sale and purchase of real estate.
• Income is taxable u/s 56(2)(x) if the property is the capital asset of assessee, even if it is not
the capital asset of the donor. For example, a building received by a lawyer from a person
engaged in the sale of purchase of real estate.
• The list of specified movable property specified in the Chart above is the same as the list of
assets excluded from the scope of personal effect in the context of capital asset (para 126).
Thus, the acronym 'DAPSAJ(OS)' is same in both cases. The only addition for section 56(2)(x)
is 'BS' which refers to bullion (B) and shares and securities (S).
• Receipt of any movable property, other than the specified movable property, is not taxable u/s
56(2)(x). For example, receipt of mobile phone, furniture, car, etc.15
• Fixed deposit in a bank is not a specified movable property and, thus, not covered u/s 56(2)(x).
However, as per an alternative view, it may be said to be a 'sum of money' covered u/s 56(2)(x).
You may follow a particular view and give a suitable note in your answer.
• Receipt of loan is not covered by section 56(2)(x).
172.2 When is section 56(2)(x) not applicable?
Section 56(2)(x) is not applicable to any sum of money or any property received in the following
cases:
1. From any relative.
2. On the occasion of the marriage of the individual (i.e., the assessee).
3. Under a will or by way of inheritance.
4. In contemplation of death of the payer or donor, as the case may be.
5. From any local authority [defined u/s 10(20)].
6. From any fund, foundation, university or other educational institution, hospital or other
medical institution or any trust or institution [referred u/s 10(23C)].
7. From or by any trust or institution [registered u/s 12A, 12AA or 12AB],
8. By any fund, trust, institution, university or other educational institution, hospital or other
medical institution [referred u/s 10(23C)].
9. By way of certain transaction not regarded as transfer u/s 47: For instance, distribution of
capital asset on the total or partial partition of a HUF [S. 47(i)], transfer by a company to its
wholly owned subsidiary company or vice-versa where the transferee is an Indian company [S.
47(iv)/(v)] and certain business reorganizations.
10. From an individual by a trust created or established solely for the benefit of relative of the
individual.
11. From such class of persons and subject to such conditions, as may be prescribed.
12. By an individual, from any person, in respect of any expenditure actually incurred by him on
his medical treatment or treatment of any member of his family, for any illness related to
COVID-19. To avail the exemption, the individual should keep a record of prescribed16
documents and furnish a statement of amount received in the prescribed manner.
13. By a member of the family of a deceased person (where the cause of death of such person
is illness related to COVID-19), (A) from the employer of the deceased person, or (B) from any
other person or persons (to the extent the sum or aggregate of such sums is not > Rs. 10 lakh).
Following conditions17 should be satisfied to avail the exemption:
a. The death of the individual should be within 6 months from the date of testing positive or from
the date of being clinically determined as a COVID-19 case;
b. The family member of the individual should keep a record of prescribed documents and
furnish a statement of amount received in the prescribed manner;
c. The payment should be received within 12 months from the date of death of such person.
Meaning of family: As referred in #12 and #13 above, 'family', in relation to an individual, means:
1. The spouse and children of the individual; and
2. The parents, brothers and sisters of the individual or any of them, wholly or mainly dependent
on the individual.
Meaning of relative: As noted in #1 above, any sum of money or any property received from any
'relative' is out of the purview of section 56(2)(x) and is, therefore, not taxable under this
provision. Relative means the following persons in the case of an individual or HUF:

In case of an individual In case of a

HUF

Spouse Brother or Parent Any lineal Any member

sister (+ ascendant of such HUF
their or
spouse) descendant
(+ their
spouse)

Brother or Any lineal Brother or

sister of ascendant or sister of
the descendant of either of the
spouse (+ the spouse (+ parents (+
their their spouse) their
spouse) spouse)

Lineal ascendant or descendant means a straight line of relationship either upwards or

downwards. Example, son, his father and grandfather. Parallel or horizontal relations, such as
cousins and uncles, do not constitute a lineal line.
There is no monetary limit for exemption in respect of sum of money or property received in the
cases listed in #1 to #13 above, except in case of sum received by the family member of the
deceased person (who died owing to COVID-19) from a person (other than the employer) where
the sum received is exempt up to Rs. 10 lakh.
Receipt on the occasion of marriage is excluded, whether it is from relatives or non-relatives.
However, the marriage should be that of the assessee.
Receipt on an occasion, other than marriage of the assessee, is not excluded, unless the
receipt is from a relative. For example, anniversary, birthday, engagement, festival, etc.
Receipt by a HUF from its member is excluded (since the member is treated as 'relative' of
HUF) but receipt by a member of HUF from the HUF is not excluded (since the HUF is not
treated as 'relative' of its member). However, receipt by a member of HUF on distribution of
capital asset on the partition of HUF is excluded.
Receipt FROM brother or sister of a parent is excluded (since it is from a relative) but receipt BY
the brother or sister of a parent is not excluded (since it is not from a relative).
Spouse is a relative but fiancee is not a relative.
Reimbursement by the employer to the employee of expenditure on medical treatment in
respect of any illness relating to COVID-19 is covered under the head 'Salaries' and is exempt
[para 47], What is covered u/s 56(2)(x) is the sum received by the individual from a person,
other than the employer (for example, from friends and colleagues) [#12 above] or sum received
by a member of family of the individual in case of his death [#13 above]. Member of family
(referred to in #12 and #13 above) do not include parents, brothers and sisters who are not
dependent on the individual. Thus, exemption is not available, if such persons receive any sum
from the employer or any other person on the death of the individual due to COVID-19 related
illness.
A summary of provisions related to COVID-19 is given below for reference:

Sum received Reimbursement of expenditure Ex-gratia payment on death

Sum received by Individual Individual Member of family Member of family

(employee)

Sum received Employer Any other person Employer of Any other person
from deceased

Medical treatment Self or member of Self or member - -

of family of family

Head of income Salaries IFOS IFOS IFOS

Tax treatment Not taxable Not taxable Not taxable Not taxable

Limit of No limit No limit No limit 10 lakh

exemption

172.3.  Deduction allowed [S. 57]

General deduction is allowed in computing income u/s 56(2)(x), i.e., any expenditure (not being
in the nature of capital expenditure) laid out or expended wholly and exclusively for the
purpose of making or earning income, is deductible in computing the income.
ILLUS 172.1: Jack, a Chartered Accountant in practice, received the following sums of money
and properties during the PY. Compute the income chargeable under the head IFOS on this
account.

# Sums of money and property received

1 Gift of Rs. 10,000 received from friend on birthday

2 Gift of Rs. 55,000 received from father-in-law on Diwali

3 Payment of Rs. 60,000 received from son of brother for providing financial advise

4 Gift of Rs. 1,20,000 received from office employees on marriage of self

5 Gift of Rs. 40,000 received from cousin (son of maternal uncle) on New Year

6 Gift of Rs. 1 lakh from ex-wife, who is on her death bed

7 Rs. 60,000 received from a colleague in respect of expenditure incurred on medical
treatment of father (dependent on Jack) for health complication arising out of COVID-19
suffered within 6 months of being diagnosed COVID-19 positive.

8 Received Rs. 11 lakh on the death of brother (dependent on Jack) due to COVID-19 related
complication within 6 months of testing COVID-19 positive. Amount was received from the
employer of brother after 9 months from the date of death.

9 Jewellery inherited on death of father (FMV 5 lakh)

10 Car received on partition of HUF of which Jack is a member (FMV 2 lakh)

11 Shares gifted by FIUF, of which Jack is Karta (FMV Rs. 25,000)

12 Loose diamonds gifted by elder brother of grandfather (FMV Rs. 30,000) on his
engagement

13 Silver ornaments received under will of a neighbor (FMV Rs. 1 lakh)

14 Gold chain gifted by a client in appreciation of good services (FMV Rs. 1 lakh)

15 Shares of Jill Pvt. Ltd. sold by partnership firm, in which Jack's father is a partner, for Rs.
30,000 (FMV Rs. 75,000)

16 Precious work of art sold by JJ Pvt. Ltd. (in which Jack holds 70% shares) for Rs. 50,000
(FMV 75,000)

17 Mobile phone transferred for Rs. 5,000 by fiancee (FMV Rs. 50,000)

18 Paintings acquired from a trust (registered u/s 12AB) for Rs. 10,000 (FMV Rs. 1 lakh)

19 House gifted by wife's brother (SDV Rs. 20 lakh)

20 Rural agricultural land gifted by grandmother's sister (SDV 15 lakh)

21 Shop sold by friend's wife, a property dealer, for Rs. 10 lakh (SDV Rs. 15 lakh)

22 Vacant plot sold by sister's elder son for Rs. 20 lakh (SDV Rs. 21 lakh)

Sum of money received without consideration

# Particulars Value Remarks

1 Gift of Rs. 10,000 received from 10,000 Not received from a relative
friend on birthday

2 Gift of Rs. 55,000 received from - Received from a relative

father-in- law on Diwali
3 Payment of Rs. 60,000 received - Not a gift but income from profession which is
from the son of brother for taxable under the head PGBP
providing financial advise

4 Gift of Rs. 1,20,000 received - Received on the occasion of marriage of self

from office employees on
occasion of marriage of self

5 Gift of Rs. 40,000 received from 40,000 Not received from a relative
cousin (son of maternal uncle)
on New Year

6 Gift of Rs. 1 lakh from ex-wife, - Received in contemplation of death of payer

who is on her death bed

7 Rs. 60,000 received from a - Received in respect of treatment of COVID-19

colleague in respect of related illness; dependent father is member of
expenditure incurred on medical family
treatment of father (dependent
on Jack) for health complication
arising out of COVID 19
suffered within 6 months of
being diagnosed COVID-19
positive.

8 Received Rs. 11 lakh on the 11,00,000 Though receipt is from the employer of person
death of brother (dependent on who died due to COVID-19 related illness within
Jack) due to COVID-19 related 6 months of testing positive and payment is
complication within 6 months of received within 12 months of death, Jack is not
testing COVID-19 positive. a member of family of the brother as he is not
Amount was received from the dependent on his brother (it is the other way
employer of brother after 9 round). If Jack was dependent on his brother,
months from the date of death. the receipt would be exempt without any limit
(as amount is received from the employer of
deceased person).

11,50,000

Movable property received without consideration

# Particulars FMV Remarks

9 Jewellery inherited on death of father (FMV 5 lakh) Received by way of

inheritance

10 Motor car received on partition of HUF of which Jack is _ Received on partition of

a member (FMV 2 lakh) HUF

11 Shares gifted by HUF, of which Jack is the Karta (FMV 25,000 Not received from a
Rs. 25,000) relative
12 Loose diamonds gifted by elder brother of grandfather 30,000 Not received from a
on his engagement (FMV Rs. 30,000) relative

13 Silver ornaments received under will of a neighbor (FMV - Received under a will
Rs. 1 lakh)

14 Gold chain gifted by a client in appreciation of good - It is taxable as PGBP u/s

services (FMV Rs. 1 lakh) 28(iv) (para 90)

55,000

Movable property received for consideration

# Particulars Excess (FMV- Remarks

Consideration)

15 Shares of Jill Pvt. Ltd. purchased from the 45,000 It is a specified movable
partnership firm, in which Jack's father is a property
partner, for Rs. 30,000 (FMV Rs. 75,000)

16 Precious work of art sold by JJ Pvt. Ltd. (in 25,000 It is a specified movable
which Jack holds 70% shares) for Rs. 50,000 property
(FMV 75,000)

17 Mobile phone transferred for Rs. 5,000 by - It is not a specified

fiancee (FMV Rs. 50,000) movable property

18 Paintings acquired from a trust (registered u/s - It is a specified movable

12AB) for Rs. 10,000 (FMV Rs. 1 lakh) property but received
from a registered trust

70,000

Immovable property received without consideration

# Particulars SDV Remarks

19 House gifted by wife's brother (SDV Rs. 20 lakh) - Received from a

relative

20 Rural agricultural land gifted by grandmother's sister (SDV - Not a capital asset of
15 lakh) Jack

Immovable property received for consideration

# Particulars Excess (SDV - Remarks

Consideration)

21 Shop sold by friend's wife, a property 5,00,000 Excess is > 50,000 & SDV is
dealer, for Rs. 10 lakh (SDV Rs. 15 lakh) > 110% of 10 lakh
22 Vacant plot sold by sister's elder son for - Excess of 1 lakh is > 50,000
Rs. 20 lakh (SDV Rs. 21 lakh) but SDV is not >110% of 20
lakh

Computation of income under the head IFOS

Particulars Rs.

Sum of money received without consideration: Aggregate of 11,50,000 is > 50,000 11,50,000

Movable property received without consideration: Aggregate FMV of Rs. 55,000 is > 55,000
50,000. Aggregate FMV is taxable.

Movable property received for consideration: Excess of 70,000 is > 50,000. Excess 70 000
is taxable.

Immovable property received without consideration (per property) Nil

Immovable property received for consideration (per property) 5,00,000

Income from other sources 17,75,000

Solve BYC Question No. B14-26

173.  COMPARISON OF SECTIONS 43CA, 50C, 56(2)(x)

A transaction of immovable property (land or building) involves a seller and a buyer. The
following provisions are applicable to the seller:
• Section 43CA is relevant in determining the full value of consideration in case of immovable
property (not being a capital asset) (para 121).
• Section 50C is relevant for determining the full value of consideration in case of immovable
property (being a capital asset) (para 144).
On the other hand, section 56(2)(x) is relevant to the buyer in determining the amount taxable
in his hands on receipt of such immovable property (para 172). A brief comparison of the
aforesaid provisions is given below.

Parameter S. 43CA S. 50C S. 56(2)(x)

Assessee covered Seller of land or Seller of land or Buyer of land or building being his
building not building being his capital asset
being his capital capital asset
asset

When applicable? Where SDV is > Where SDV is > Received without consideration:
110% of the 110% of the Where SDV is > Rs. 50,000.
consideration consideration
Received for consideration: Where
excess (SDV - Consideration) is >
Rs. 50,000 & SDV is > 110% of the
 consideration.

Tax implication SDV is taken as SDV is taken as Received without consideration:

the full value of the full value of SDV is taxable. Received for
consideration consideration consideration: The excess is
taxable

Can SDV on date Yes Yes Yes

of agreement be
taken?

Can reference be Yes Yes Yes

made to Valuation
Officer?

174.  INTERPLAY BETWEEN SECTION 56(2)(x) AND CAPITAL GAIN

A transaction in a property (movable or immovable) will involve a transferor (donor) and a
transferee (recipient).
Capital gain may arise in the hands of the transferor and taxable income u/s 56(2)(x) may arise
in the hands of the transferee. Therefore, it is important to understand the interplay between the
various provisions. The following key provisions should be kept in mind while solving questions
involving these angles:
• In case of gift of property, i.e., transfer without consideration, capital gain does not arise in the
hands of transferor [u/s 47(iii)]. When transferee subsequently transfers the property, capital
gain arises in his hands. COA and POH are determined with reference to the previous owner
[u/s 49(1)]. Refer para 136 for details.
• In case of transfer of property for a consideration, business income arises for the transferor
where the property is not a capital asset and capital gain arises where the property is a capital
asset. In case the property is land or building, full value of consideration is determined u/s 43CA
or 50C, as the case may be. In case the property is unquoted share, full value of consideration
is determined u/s 50CA.
• Taxable income arises on receipt of property in the hands of transferee (recipient) if case falls
u/s 56(2)(x).
• When the transferee subsequently transfers the property, the following points should be
noted in computing the capital gain in his hands:

Where the value of the property was subject to Where the value of the property was
tax u/s 56(2)(x) in his hands not subject to tax u/s 56(2)(x) in his
hands
COA of such property is deemed to be the value Capital gain is determined as per the
which was taken into account u/s 56(2)(x) [S. regular provisions. Thus, in case the
49(4)].18 This refers to the FMV/SDV that was taken property was received as a gift, COA is
into account u/s 56(2)(x), not the excess of FMV/SDV the cost to the previous owner and POH
over consideration. includes the POH of the previous owner
u/s 49(1).
POFI is determined on the basis of the period for
which the property was held by him. POFI of the
previous owner is not included even if the property
was received as a gift.19

ILLUS 174.1 to 174.4: Rohan sold a flat to Sohan, his friend, on 1.5.2023. The flat was
purchased by Rohan for Rs. 4,00,000 on 1.10.2022. Sohan sold this flat to Mohan on 1.3.2024
for Rs. 10 lakh (SDV on this date was Rs. 10 lakh). Compute the taxable income arising from
this transaction in the hands of Rohan and Sohan for AY 2024-25 in the following cases.

Particulars Case 1 Case 2 Case 3 Case 4

Sale price charged by Rohan 4,00,000 4,00,000 4,00,000 4,00,000

SDV on date of sale by Rohan 4,25,000 4,60,000 4,45,000 3,90,000

Computation of taxable income arising in the hands of Rohan and Sohan for AY 2024-25

Capital gain in the hand; of Rohan on sale of Case 1 Case 2 Case 3 Case 4
flat to Sohan

Full value of consideration u/s 50C:

• Consideration, as SDV is not > 110% of 4,00,000 - - 4,00,000

consideration

• SDV, as it is > 110% of consideration - 4,60,000 4,45,000 -

Less: Cost of acquisition (4,00,000) (4,00,000) (4,00,000) (4,00,000)

Short term capital gain (as POH is not > 24 Nil 60,000 45,000 Nil
months)

Income in the hands of Sohan u/s 56(2)(x) on Case 1 Case 2 Case 3 Case 4
receipt of flat from Rohan

Excess (SDV - Consideration) is > 50,000 and No Yes No No

SDV is > 110% of consideration?

Income u/s 56(2)(x) for Case 2 = Such excess Nil 60,000 Nil Nil

Capital gain in the hands of Sohan on sale of Case 1 Case 2 Case 3 Case 4
flat to Mohan
Full value of consideration u/s 50C = 10,00,000 10,00,000 10,00,000 10,00,000
Consideration, as SDV is not > 110% of
consideration

Less: Cost of acquisition (as property was not (4,00,000) - (4,00,000) (4,00,000)
subject to tax u/s 56(2)(x))

Less: Cost of acquisition u/s 49(4) = Value taken - (4,60,000) - -

into account u/s 56(2)(x), i.e., SDV (as property
was subject to tax u/s 56(2)(x))

Short term capital gain (as POH of Sohan is not 6,00,000 5,40,000 6,00,000 6,00,000
> 24 months)

Capital gain is taxable in the hands of Rohan in all the cases as per regular provisions. In the
hands of Sohan, the property is not subject to tax u/s 56(2)(x) in Cases 1, 2 and 4 and capital
gain is computed as per regular provisions. However, in Case 4, the property is subject to tax
u/s 56(2)(x). Sohan acquired the property for Rs. 4 lakh and sold it for Rs. 10 lakh, resulting in
an overall gain of Rs. 6 lakh. This gain is taxed in two stages. First u/s 56(2)(x) to the extent of
excess of SDV of Rs. 4.6 lakh over consideration of Rs. 4 lakh (Rs. 60,000) and then as capital
gain to the extent of excess of consideration of Rs. 10 lakh over the value taken into account u/s
56(2)(x) of Rs. 4.6 lakh (Rs. 5.4 lakh).
ILLUS 174.5 to 174.8 - Compute taxable income arising in the hands of B and C from the
following particulars for AY 2024-25:

Particulars Case 1 Case 2 Case 3 Case 4

Transactions by B

Capital asset acquired House Land Unquoted Jewellery

shares

Date of acquisition 1.9.2011 1.9.2011 1.9.2011 1.9.2011

Cost of acquisition 10,00,000 10,00,000 10,00,000 10,00,000

Transfer to C (date) 1.4.2023 1.4.2023 1.4.2023 1.4.2023

Relation of B with C Friend Friend Brother Brother

Consideration for transfer to C Gift 10,00,000 10,00,000 Gift

SDV (Case 1, 2) or FMV (Case 3, 4) on 20,00,000 20,00,000 20,00,000 20,00,000

date of transfer

SDV on date of agreement on 1.3.2023 - 18,00,000 - -

Down payment of 10% on the date of - By cash - -

agreement
Transaction by C

Sale to D 1.12.2023 1.12.2023 1.12.2023 1.12.2023

Sale consideration 30,00,000 30,00,000 30,00,000 30,00,000

SDV (Case 1, 2) or FMV (Case 3, 4) on 40,00,000 40 00,000 40,00,000 40,00,000

date of sale

SDV on date of agreement on 1.11.2023 35,00,000 35,00,000 - -

Down payment of 10% on the date of By NEFT By NEFT - -

agreement

Computation of taxable income in the hands of B

Particulars Case 1 Case 2 Case 3 Case

4

Capital gain on transfer of property to C

Full value of consideration:

Case 2: U/s 50C as capital asset is land: SDV, as it - 20,00,000 - -

is > 110% of consideration. SDV on date of
agreement is not taken as down payment is not
received by a specified mode on that date.

Case 3: U/s 50CA as capital asset is unquoted - 20,00,000 -

share: FMV, since consideration is < FMV

Less: Indexed COA = COA x (CM of 2023-24/CII of - (18,91,304) (18,91,304) -

2011-12) = 10 lakh x (348/184)

Long term capital gain in Case 2, 3 (as asset is - 1,08,696 1,08,696 -

held for > 24 months). Exempt u/s 47(iii) in Case
1, 4 as transfer is by way of gift.

Computation of taxable income in the hands of C

Particulars Case 1 Case 2 Case 3 Case 4

Income u/s 56(2)(x) on receipt of

property from B

Case 1: Immovable property received 20,00,000 - - -

without consideration: SDV is taxable as
it is > 50,000
Case 2: Immovable property received for 10,00,000
consideration: Excess of 10 lakh (SDV of
20 lakh - Consideration of 10 lakh) is
taxable as it is > 50,000 and SDV of 20
lakh is > 110% of 10 lakh. SDV on date
of agreement is not taken as down
payment is not paid by a specified mode
on that date.

Case 3, 4: Not taxable as property is - - Nil Nil

received from a relative

Capital gain on sale of property to D

Full value of consideration:

Case 1, 2: U/s 50C as capital asset is 35,00,000 35,00,000 - -

land and building: SDV, as it is > 110%
of consideration. SDV on the date of
agreement is taken since down payment
is received by specified mode on that
date.

Case 3: U/s 50CA as capital asset is - - 40,00,000

unquoted share: FMV, since
consideration is < FMV

Case 4: Actual consideration - - - 30,00,000

Less: Cost of acquisition:

Case 1, 2: COA u/s 49(4) = Value taken (20,00,000) (20,00,000) - -

into account u/s 56(2)(x), i.e., I SDV (as
property was subject to tax u/s 56(2)(x))

Case 3: COA = Actual cost (as property - - (10,00,000) -

was not subject to tax u/s : 56(2)(x»

Case 4: COA = Actual cost (as property - - - (18,91,304)

was not subject to tax u/s 56(2)(x)). Cost
of previous owner (B) is taken u/s 49(1)
as property was acquired by way of gift.
Indexed COA = COA x (CM of 2023-
24/CII of 2011-12) = 10 lakh x (348/184)

Short term capital gain (since POH of C 15,00,000 15,00,000 30,00,000 -

is not > 24 months)
Long term capital gain (since POH of B - - 11,08,696
and C is > 36 months)

Taxable income = IFOS + Capital gain 35,00,000 25,00,000 30,00,000 11,08,696

Solve BYC Question Nos. B27-32. Solve MCQ No. M24-42a.

176.  INTEREST [5. 56(2)(id)/(viii)]

Before discussing the tax treatment of interest, one should note its meaning. 'Interest' has been
defined u/s 2(28A) as per which it means interest payable in any manner in respect of any
moneys borrowed or debt incurred (including a deposit, claim or other similar right or
obligation) and includes any service fee or other charge in respect of the moneys borrowed or
debt incurred or in respect of any credit facility which has not been utilized. Tax treatment
depends on the nature of interest which can be (a) interest on securities, (b) interest on
compensation, or (c) other interest. The provisions governing tax treatment are tabulated below.

Particulars↓ A: Interest on securities B: Interest on C: Other interest

compensation

What is Income by way of interest on Income by way Any other interest is

taxable? securities is taxable under the head of interest taxable under the head
IFOS if it is not taxable under the received on IFOS if it meets the
head PGBP. compensation conditions referred in
or on para 167, i.e., it is not
Interest on securities is defined u/s
enhanced exempt and is not
2(28B) as per which it means the
compensation taxable under any other
following:
is taxable under head of income. For
1: Interest on any security of the the head IFOS. example, interest on fixed
Government (Central or State); deposit with bank.
2: Interest on debentures or other
securities for money issued by or
on behalf of a local authority or a
company or a corporation
established by a Central, State or
Provincial Act.

PY in which As per the system of accounting It is deemed to As per the system of

taxed regularly employed by the be the income accounting regularly
assessee (cash or mercantile) of the PY in employed by the
(para 167). which it is assessee (cash or
received. mercantile) (para 167).
Deduction Any reasonable sum paid by way A flat deduction General deduction as
of commission or remuneration of 50% of such referred in para 167 is
allowable
to a banker or any other person for income is allowable.
the purpose of realizing such allowed. No
interest on behalf of the assessee other
is allowed as deduction. Further, deduction is
general deduction as referred in allowed. We
para 167 is also allowable. have already
noted this in
para 140.

Exempt: Interest on the following is exempt under the provisions of section 1021:
1. Securities, bonds or certificates issued by the Central Government, if notified
2. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999
3. Deposit certificates issued under the Gold Monetization Scheme, 2015
4. Public Provident Fund (PPF)
5. Sukanya Samriddhi Account
6. 7% Capital Investment Bonds
7. RBI Relief Bonds
8. Post Office Savings Bank Account: In case of an individual account (interest is exempt up
to Rs. 3,500); in case of a joint account (interest is exempt up to Rs. 7,000)
Bonds and certificates referred in #2 and #3 above are not a capital asset (para 126). Thus,
even capital gain does not arise on their transfer.
Interest is taxable under the head IFOS if it is not taxable under any other head (say, PGBP).
However, interest on compensation or enhanced compensation is specifically taxable under the
head IFOS.
Interest on compensation or enhanced compensation is taxable on receipt basis irrespective of
the year or years to which it pertains.
Interest is deemed to accrue or arise in India in certain cases u/s 9(l)(v) and is, therefore,
taxable in India irrespective of the residential status of the assessee (para 26.4).
Interest on NSC (VIII or IX issue) is eligible for deduction from the gross total income u/s 80C
(para 193). Interest on deposit with a bank or Post Office is eligible for deduction from the gross
total income u/s 80TTA or 80TTB (para 203). Thus, such interest is first included as income
under the head IFOS and, thereafter, deduction therefrom is allowed from the gross total
income.
ILLUS 176.1 to 176.11: Determine the amount of taxable interest received by Ruma, a resident,
in the following cases during the PY 2023-24:

# Particulars of interest received Taxable Remarks

1 Interest of Rs. 20,000 on 9% tax-free bonds of - Exempt u/s 10

Government of India
2 Interest of Rs. 27,000 on debentures of Wipro Ltd. (net 27,500 It is interest on
of TDS @ 10%). Commission of2,500 paid to bank for securities. Taxable
realizing such interest. income = 30,000 (gross
of TDS) - Deduction on
account of commission

3 Interest of Rs. 25,000 on savings bank account with 25,000 It is taxable

ICICI Bank

4 Interest of Rs. 54,000 on fixed deposits with Dena 60,000 Taxable income is gross
Bank (net of TDS @ 10%) of TDS

5 Interest of Rs. 1,50,000 on PPF Account - Exempt u/s 10(11)

6 Interest of Rs. 70,000 on Sukanya Samriddhi Account - Exempt u/s 10(11A)

7 Interest of Rs. 30,000 on RBI Relief Bonds - Exempt u/s 10

8 Interest of Rs. 15,000 on Post Office Savings Bank A/c 11,500 Exempt up to 3,500 in
(individual) case of individual
account

9 Interest of Rs. 1,00,000 received on compensation for 50,000 Taxable income =

compulsory acquisition of house during the PY 2020- 1,00,000 compensation
21. 40% interest pertained to FY 2021-22, 40% received - 50%
pertained to FY 2022-23 and the balance pertained to deduction. No other
FY 2023-24. Rs. 20,000 was incurred as litigation deduction is allowed.
expenses to recover the interest.

10 Interest on capital of Rs. 50,000 from the firm in which Interest allowed to the
Ruma is a partner. Rs. 30,000 was allowed as firm is taxable under the
deduction in the hands of the firm. head PGBP, not IFOS
[para 112].

11 Interest of Rs. 10,000 on loan given to a colleague 10,000 It is taxable.

Solve BYC Question Nos. B33-35. Solve MCQ No. M43-47.

177. EXCESS SHARE PREMIUM [S. 56(2)(viib)]

This provision seeks to charge to tax the excess share premium received by a company for
issue of shares. Share premium is the excess of consideration received for issue of shares (i.e.,
the issue price) over the face value of shares. Excess share premium is the extent to which
such consideration exceeds the FMV of the shares. The provision applies only to a closely-held
company. The provisions are depicted below.

Where a closely-held company receives from any person any consideration for issue of shares
Where the consideration is > face value of Where the consideration is not > face value
the shares of the shares

Section 56(2)(viib) is Section 56(2)(viib) is not

applicable applicable

Income taxable = Aggregate

consideration received for such shares -
FMV of the shares

Income taxable can also be depicted, as given below, for a better understanding:

Closely held company: For meaning, refer para 168.2.

FMV of shares = Higher of the following:
(a) Value determined as per Rule 11U and 11UA, or
(b) Value as may be substantiated by the company to the satisfaction of Assessing Officer,
based on the value (on the date of issue of shares) of its assets, including intangible assets
being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature.
Provision not applicable: This provision is not applicable where the consideration for issue of
shares is received:
1. By a venture capital undertaking from a venture capital company, venture capital fund or
specified fund; or
2. By a company from notified persons.
You should first check if the consideration (issue price) exceeds the face value. Then, you
should check if the consideration (issue price) exceeds the FMV. Income is taxable only if both
these conditions are satisfied.
Excess of consideration (issue price) over FMV is taxable; not excess of consideration (issue
price) over face value. If the consideration (issue price) does not exceed the face value, this
provision does not apply, even if the consideration (issue price) exceeds the FMV.
Income under this provision is taxable in the hands of the company, not the shareholder.
The consideration may be received from a resident or a non-resident, i.e., irrespective of the
residential status.
ILLUS 177.1 to 177.8: Determine the taxable income arising in following situations of issue of
shares by a company to Mr. K.

# Company Face FMV Issue Res. S. 56(2)(viib) applicable? Taxable income =

value price status Consideration - FMV
of Mr. K

1 Z (P) Ltd 100 120 130 ROR Yes, as issue price is > face 130-120 = 10
value

2 B (P) Ltd 100 120 110 RNOR Yes, as issue price is > face Nil as issue price is
value not > FMV

3 C (P) Ltd 100 90 98 ROR No, as issue price is not > Nil
face value

4 D (P) Ltd 100 90 110 RNOR Yes, as issue price is > face 110-90 = 20
value

5 D Ltd 100 110 130 ROR No, since company is not a Nil
(listed) closely-held company

6 D (P) Ltd 100 110 130 NR Yes, as issue price is > face 130-110 = 20
value

7 G (P) Ltd 100 110 90 RNOR No, as issue price is not > Nil
face value

8 J (P) Ltd 100 110 100 ROR No, as issue price is not > Nil
face value

Solve BYC Question Nos. B36-37. Solve MCQ No. M48-52.

177A. LIFE INSURANCE POLICY [S. 56(2)(iv)/(xiii)]

We have discussed the exemption u/s 10(10D) in respect of life insurance policy proceeds in
para 30. What is not exempt u/s 10(10D) is taxable. We have noted therein that proceeds from
a Keyman Insurance Policy, Excess premium Policy and High Premium UUP are taxable.
However, proceeds (except from Keyman Insurance Policy) are not taxable when received upon
death. Taxation of these policies is enumerated below:

177A.1 Keyman Insurance Policy [S. 56(2)(iv)]

Any sum received under a Keyman insurance policy (including the sum allocated by way of
bonus on such policy) is taxable under the head IFOS, if it is not taxable under the head
Salaries or PGBP.
It may be noted that sum received under a Keyman insurance policy by the employer is taxable
under the head PGBP (para 90), sum received by the employee (to whom the policy is
assigned) is taxable under the head 'Salaries' and sum received by any other person is taxable
under the head IFOS.
177A.2 High Premium UUP
Sum received under a High Premium UUP is not exempt u/s 10(10D) (except when received
upon death). Special provisions exist for taxation of such sum under the head Capital Gains.
However, these provisions are not relevant for CA Intermediate. Hence, these have not been
covered in this Book.

177A.3 Excess Premium Policy [S. 56(2)(xiii)]

Any sum received (including amount allocated by way of bonus) under an Excess
Premium Policy (which is not exempt u/s 10(10D) is taxable under the head IFOS. Income
chargeable to tax is computed in the following manner as prescribed under Rule
11UACA:

Situation 1 - Sum is received for the Situation 2 - Sum is received under the policy
first time under the policy during the during the PY subsequent to the first PY
PY ("first PY") ("subsequent PY")

Income 'A' 'B' Income ‘C ‘D’

taxable taxable in
in the Sum (or — Aaareaate of the Sum (or — Aqqreqate of
first PY aggregate premium paid aggregate premium paid
subsequent
of sum) during the of sum) during the term of
PY =
received term of the received the policy till the
under the policy till the under the date of receipt of
policy date of receipt policy sum in the
during of sum in the during the subsequent PY
the first first PY which which has not been
subsequent
PY has not been claimed as
PY
claimed as deduction under
deduction any other provision
under any of the Act (or which
other is included in 'S' or
provision of V' in any of the
the Act PYs, i.e., which has
already been
considered in
calculation in the
earlier PYs)

This provision does not apply to sum received under a High Premium UUP and Keyman
Insurance policy. Tax treatment for these policies is separately provided for which has
been discussed above.
Income computed above is taxable in the PY in which the sum is received.
Life insurance premium can be claimed as deduction u/s 80C (under the optional tax regime)
[para 193], If it is so claimed, it cannot be claimed as deduction in computing the amount
taxable under this provision.
ILLUS 177A.1 to 177A.2: Determine the taxable income arising in the following situations in the
year of maturity of a 10-year life insurance policy taken by the following persons on 15.4.2023.
This is the only life insurance policy that they have.

Particulars I II

Sum assured 30 lakh 60 lakh

Annual premium 3.5 lakh 6 lakh

Amount received on maturity during FY 2033-34 (sum assured & bonus) 37 lakh 65 lakh

Amount deposited in PPF every year - 1.5 lakh

Deduction u/s 80C has been claimed all along in respect of insurance premium and PPF
deposit, wherever available.
Computation of taxable income for AY 2034-35 arising on receipt of sum under the policy for the
first time

Particulars I II

Is policy an Excess Premium policy? Yes (Note 1) Yes (Note 2)

Sum received under the policy (a) 37 lakh 65 lakh

Aggregate of premium paid during the term of 35 lakh [3.5 lakh x 10 60 lakh [6 lakh x 10
policy till the date of receipt of sum (b) years] years]

Premium claimed as deduction u/s 80C (c) 15 lakh [1.5 lakh x 10 Nil (Note 2)
years]

Amount in (b) - (c) = (d) 20 lakh 60 lakh

Taxable amount = (a) - (d) 17 lakh 5 lakh

Note 1: Since the premium payable for any of the policy years is > 10% of sum assured, the
policy is an Excess Premium policy and, thus, not exempt u/s 10(10D). Sum received under the
policy is taxable under the head IFOS u/s 56(2)(xiii).
Note 2 Since policy is issued on or after 1.4.2023 and the premium payable for any of the policy
years is > 5 lakh, the policy is an Excess Premium policy and, thus, not exempt u/s 10(10D).
Sum received under the policy is taxable under the head IFOS u/s 56(2)(xiii). In order to
minimize the taxable amount, deduction u/s 80C has been attributed towards PPF deposit and
not towards insurance premium.
Solve BYC Question Nos. B37a-37b.

178. OTHER INCOMES TAXABLE UNDER THE HEAD IFOS [S. 56]
In addition to the incomes discussed above in this Chapter, the following incomes are also
taxable under the head IFOS.

# What is taxable? Deduction allowed u/s 5723

1 UNITS OF MF [S. 56(1)]: Income in respect of units Interest expense is allowed as
of a Mutual Fund or Unit Trust of India (UTI) is taxable deduction in the same way as
under the head IFOS. allowed for dividend [see para 169].
No other deduction is allowed.

2  WINNINGS [S. 56(2)(ib)]: Any winnings from No deduction is allowed in respect

lotteries, crossword puzzles, races (including horse of any expenditure or allowance
races), card games and other games of any sort or under any provision of the Act.
from gambling or betting of any form or nature, is
taxable under the head IFOS.
Lottery - Includes winnings from prizes awarded to
any person by draw of lots or by chance or in any
other manner whatsoever, under any scheme or
arrangement by whatever name called.
Horse race - Means a horse race upon which
wagering or betting may be lawfully made.
Card game and other game of any sort - Includes any
game show, an entertainment programme on
television or electronic mode, in which people
compete to win prizes or any other similar game.

We have learnt that winnings are taxable at a flat rate of 30% (plus surcharge, as
applicable, and 4% HEC) u/s 115BB [see para 17].
Since no deduction is allowed under any provision of the Act, gross amount of winnings is
taxable. Consequently, benefit of unexhausted basic exemption limit (as available in the
case of capital gain (para 165)) is not available and deductions under Chapter VIA (Chapter
12) are not allowed. However, rebate of tax u/s 87A is allowed from the tax on such
winnings.24
Winnings from horse races, referred above, is different from the income of an assessee,
being the owner of horses maintained by him for running in horse races, from the activity of
owning and maintaining such horses, Thus, the abovesaid provisions do not apply to such
income.25
While as noted above, winnings are generally taxable u/s 115BB, winning from any
online aame is taxable at a flat rate of 30% (plus surcharge, as applicable, and 4%
HEC) u/s 115BBJ 1see para 17]. This rate of tax is applicable on the net winnings
computed as prescribed in Rule 133. Section 115BB, referred above, is not applicable
in such case.
While gross winnings are taxable u/s 115BB, net winnings (computed as per Rule 133) are
taxable u/s 115BBJ.

3 WELFARE FUND [S. 56(2)(ic)]: Any sum received by Such sum which is credited to the
the assessee from his employees as contributions to employee's account in the fund, on
any provident fund or superannuation fund or any or before the due date, i.e., the date
fund set up under the ESI Act, 1948 or any other fund by which the employer is required to
for the welfare of such employees, is taxable under credit the amount to employee's
the head, if it is not taxable under the head PGBP. account as per the rules of fund, is
 allowed as deduction.

This provision corresponds to section 36(1)(va) of PGBP. Refer para 105 for details.

4 LETTING OF MPF [S. 56(2)(ii)/(iii)]: The following Following deductions are allowed:
income from the letting of machinery, plant or
1: Amount paid on account of
furniture (MPF), belonging to the assessee, is taxable
current repairs [5. 30]. Refer para
under the head IFOS, if it is not taxable under the
92.
head PGBP:
2: Insurance premium against the
risk of damage or destruction [S.
30], Refer para 92.
Income IFOS
3: Depreciation [5. 32]. Refer para
93.
1: Income from MPF let on hire. Entire
income If the MPF or building is not
exclusively used for the purpose of
2: Income from letting of MPF and business or profession, the AO may
also buildings: determine the proportionate
deduction having regard to its use
2.1: If the letting of buildings is Entire [S. 38]
inseparable from the letting of MPF. income

2.2: If the letting of buildings is not From

inseparable from the letting of MPF. letting of
MPF

Income referred in #2 above represents income from composite letting. We have studied the
treatment of such income in para 86. Thus, where both the lettings are inseparable, entire
income is taxable under the head IFOS. However, where the lettings are separable, income
from letting of building is taxable under the head IHP and that from letting of MPF is taxable
under the head IFOS. Refer para 86 for details.

5  ADVANCE FORFEITED [S. 56(2(ix)]: Any sum of -

money received as an advance (or otherwise) in the
course of negotiations for transfer of a capital asset,
is taxable under the head IFOS, if (a) such sum is
forfeited; and (b) the negotiations do not result in
transfer of such capital asset.

Such sum forfeited on or after 1.4.2014 is taxable under the head IFOS. Sum forfeited
before 1.4.2014 is not taxable under the head IFOS but is deducted in computing COA of
capital asset for the purpose of capital gain.
 Refer para 135.

6 COMPENSATION [S. 56(2)(xi)]: Any compensation -

or other payment, due to or received by any person,
by whatever name called, in connection with the
termination of his employment or the modification of
the terms and conditions relating thereto, is taxable
under the head IFOS.

Such sum received by the employee from his employer is taxable under the head 'Salaries'.
Such sum received in respect of an agency, business contract or office of management of a
company, is taxable under the head PGBP (para 90). Such sum is taxable under the head
IFOS if it is not taxable under the head Salaries or PGBP as aforesaid.

7 FAMILY PENSION [S. 56(1)]: Family pension, i.e., a Deduction allowed = Lower of (a)
regular monthly amount payable by the employer to 1/3rd of such income or (b) Rs.
a person belonging to the family of an employee in 15,000.
the event of his death, is taxable under the head
IFOS.

While pension received by the employee is taxable under the head 'Salaries' (para 39),
family pension is taxable under the head IFOS (it is not taxable under the head 'Salaries').

8  UNDISCLOSED INCOME: Income from No deduction is allowed in respect

undisclosed sources, referred u/s 68, 69, 69A, 69B, of any expenditure or allowance or
69C or 69D, is taxable under the head IFOS. Refer set off of any loss under any
para 4.3 for details of such incomes. provision of the Act.

We have learnt that undisclosed income is taxable at a flat rate of 60% (plus surcharge of
25% and HEC 4%) u/s 115BBE [see para 17 for details].
Since no deduction is allowed under any provision of the Act, gross amount is taxable.
Consequently, benefit of unexhausted basic exemption limit (as available in the case of
capital gain (para 165)) is not available and deductions under Chapter VIA (Chapter 12) are
not allowed. However, rebate u/s 87A is allowed from the tax on such income.26
9  OTHER INSTANCES: Given below are few other
instances of incomes taxable under the head IFOS.
The list is not exhaustive and any income meeting
the criteria for taxation under the head IFOS (para
167) is taxable under this head.
• Remuneration, other than from the employer. For
example, remuneration of a MP or MLA,
remuneration for setting question paper for exams,
etc.
• Award or reward.
• Rent or revenue from land.
• Payment from unrecognized provident fund on
retirement, etc., being interest on employee's
contribution [para 41.2].
• Income from letting of vacant land or from sub-
letting of house property, if not taxable under the
head PGBP.27
• Director's fee.
• Royalty, if not taxable under the head PGBP.

Daily allowance and constituency allowance received by MP/MLA is exempt u/s 10(17) (only
under optional tax regime; not under default tax regime) [para 30],
Remuneration received by a partner from the firm is neither taxable under the head Salaries
nor IFOS. It is taxable under the head PGBP. Refer para 112.
Award or reward instituted or approved in public interest by the Government is exempt u/s
10(17A) [para 30].
Rent or revenue from agricultural land in India is exempt as agricultural income u/s 10(1)
[para 28.1],

 Based on the discussion in this Chapter, we have noted that while certain incomes are
specifically taxable under the head IFOS, certain other incomes are taxable under the head
IFOS if they are not taxable under any other head of income. A list of such incomes is given
below for ready reference.

Income taxable under the head IFOS Income taxable under the head IFOS, if not
taxable under any other head
• Dividend • Interest on securities
• Money or property received as gift or for • Sum received as employee's contribution to
inadequate consideration employee welfare fund
• Share premium • Letting of machinery, plant or furniture
belonging to the assessee
• Winnings from lotteries, etc.
• Sum received under Keyman insurance policy
• Interest on compensation or enhanced
compensation • Compensation for termination or modification of
terms & conditions of employment
• Advance forfeited on failed negotiation for
transfer of a capital asset • Any other taxable income not taxable under any
other head
• Family pension

Solve MCQ No. M53-66.1

SPECIAL PROVISIONS
179. AMOUNTS NOT DEDUCTIBLE [S. 58]
The following amounts are not deductible in computing the income under the head IFOS:

# Amount not deductible Remarks

1 Any personal expenses of the assessee. This corresponds to section 37(1) of PGBP
[para 114].

2 Any interest chargeable under this Act which is This corresponds to section 40(a)(i) of
payable outside India on which tax has not PGBP in relation to interest [para 115].
been paid or deducted.

3 Any payment which is chargeable under the This corresponds to section 40(a)(iii) of
head "Salaries", if it is payable outside India if PGBP [para 115].
tax has not been paid or deducted therefrom.

4 30% disallowance of any sum payable to a Provisions of section 40(a)(ia) apply in

resident if tax has not been deducted in the computing income under the head IFOS as
PY or, has been deducted but has not been they apply in computing the income under
paid on or before the due date to furnish return the head PGBP. Refer para 115.
u/s 139(1).

5 Payment to any related party to the extent Provisions of section 40A(2) apply in
considered to be excessive or unreasonable. computing income under the head IFOS as
they apply in computing the income under
the head PGBP. Refer para 116.

6 Any expenditure in respect of which a payment Provisions of section 40A(3) apply in

(or aggregate of payments) made to a person computing income under the head IFOS as
in a day, otherwise than by a specified mode, they apply in computing the income under
exceeds Rs. 10,000. the head PGBP. Refer para 117.
180. RECOVERY AGAINST DEDUCTION ALREADY ALLOWED [S. 59]
The provisions of section 41(1) (deemed profits arising on recovery against deduction already
allowed) apply in computing income under the head IFOS as they apply in computing income
under the head PGBP. Refer para 119.
ILLUS 180.1: Comprehensive - Compute the total income and tax liability of Harsh, a resident
and ordinarily resident aged 62 years, from the following particulars pertaining to the PY. He has
opted out of the default tax regime.
1. Dividend of Rs. 50,000 from IX Ltd., a foreign company. Rs. 2,500 were paid to the bank as
realization charges.
2. Loan of Rs. 2,00,000 given by PQ Pvt. Ltd. to H&M, partnership firm, on 10 May of the PY.
Harsh held 10% equity shares in PQ Pvt. Ltd. and was entitled to 20% share of income in the
partnership firm during the year. Accumulated profit of PQ Pvt. Ltd. on 10 May of the PY was
Rs. 1,50,000.
3. Gift of Rs. 50,000 received from a close friend on the occasion of his marriage anniversary.
4. Bullion worth Rs. 51,000 gifted by father-in-law on the occasion of his birthday.
5. Vacant plot of land gifted by the mother of a friend on 5 July of the PY. FMV and SDV on this
date: Rs. 10,00,000 and Rs. 9,00,000, respectively.
6. Interest on capital and remuneration received from H&M, partnership firm, of Rs. 50,000 and
Rs. 1,50,000, respectively. This was allowed as deduction in the hands of the firm.
7. Interest on debentures of PQR Ltd.: Received Rs. 50,000 (net of TDS @ 10%). Commission
of 1% paid to the agent for realizing the interest.
8. Interest of Rs. 1,50,000 received on compensation on account of compulsory acquisition of
plot of land by the Government on 1 January of the preceding PY. 40% interest pertained to the
preceding PY and the rest pertained to the current PY. Litigation expenses of Rs. 30,000 were
incurred in realizing the interest.
9. Interest on fixed deposits with SBI credited net of TDS @ 10%: Rs. 67,500.
10. Interest on Post Office Savings Bank Account (individual) of Rs. 5,000.
11. Interest credited to PPF Account of Rs. 2,50,000.
12. 1,000 equity shares (face value Rs. 100 per share) issued by MNP Pvt. Ltd, at Rs. 500 per
share (FMV on date of issue Rs. 300 per share).
13. Income from Mutual Fund units Rs. 40,000.
14. Winning from horse race received after TDS @ 30%: Rs. 70,000. Rs. 10,000 was incurred
as expenditure in earning this income.
15. Rent from letting out of house along with a motor car. Rent charged is Rs. 20,000 p.m. out
of which 10% is towards the motor car. Insurance premium of Rs. 5,000 and Rs. 3,000 was paid
for the car and the house during the year, respectively. Repair expenses of Rs. 10,000 and Rs.
15,000 were incurred for the car and the house, respectively.
16. Advance of 10%, received in connection with the sale of a building for Rs. 10,00,000, was
forfeited by Harsh due to unsuccessful negotiations.
17. Family pension of Rs. 3,000 p.m. was received from the employer of his late mother.
18. Remuneration of Rs. 15,000 was received from RMN College for setting the examination
question paper. Harsh incurred Rs. 10,000 as expenses on typesetting and stationery (out of
this, Rs. 6,000 were spent in procuring stationery for his children).
19. Rs. 50,000 was received as award instituted by the State Government.
20. Rent of Rs. 5,000 p.m. from sub-letting of a house property of which he was the tenant. He
paid rent of Rs. 20,000 to the landlord on 10 January of the PY in cash in respect of this
property.
21. Royalty of Rs. 1,00,000 from publication and sale of a book on culinary arts. Rs. 50,000
were incurred as expenses on proof reading paid to spouse. Market charges for similar work
were Rs. 20,000.
22. Rs. 1,00,000 invested in PPF account of self.
Computation of total income of Harsh

Particulars Rs. Rs.

Income from house property:

Annual value = 18,000 p.m. (in absence of any other information, rent is 2,16,000
taken to be the annual value). Rent p.m. = 20,000 - 2,000 for car

Less: Standard deduction @ 30% (64,800)

1,51,200

Profits and gains of business or profession:

Interest on capital and remuneration received from H&M, partnership 2,00,000

firm, allowed as deduction in the hands of the firm: Taxable under the
head PGBP u/s 28(v).

Income from other sources:

Dividend from ZX Ltd. (realization charges are not deductible u/s 57) 50,000

Loan by PQ Pvt. Ltd. (in which Harsh holds > 10% equity shares) to a 1,50,000
concern in which he has substantial interest (> 20% share of income) is
deemed dividend u/s 2(22)(e), to the extent of accumulated profits of
the company on the date of payment.

Gift from a close friend on the occasion of marriage anniversary: Not -

taxable u/s 56(2)(x) as the value ; of sum of money is not > 50,000.

Bullion gifted by father-in-law on birthday: Not taxable u/s 56(2)(x) as it -

is received from a relative.

Vacant plot of land gifted by mother of friend: SDV is taxable u/s 9,00,000
56(2)(x) as it is > 50,000.

Interest on debentures of PQR Ltd.: Taxable amount = Interest 50,000 49,500

(gross of TDS) - Commission for realizing the interest 500

Interest on compensation: Taxable on receipt basis u/s 56(2)(viii) r/w 75,000

145B = 1,50,000 - 50% deduction. Litigation expenses are not
deductible separately.

Interest on FD with SBI credited net of TDS @ 10%: Taxable amount = 75,000
Gross interest = 67,500 x (100/90)

Interest on Post Office Savings Bank Account (individual) = 5,000 - 1,500

Exemption u/s 10 of 3,500

Interest on PPF: Exempt u/s 10(11) -

Equity shares issued by MNP Pvt. Ltd.: Issue price is > Face value. -
Amount taxable in the hands of MNP Pvt. Ltd. u/s 56(2)(viib) = 200 per
share (500 - 300). It is not taxable in the hands of Harsh.

Income from Mutual Fund units: Taxable 40,000

Winning from horse race: Taxable u/s 56(2)(ib) = Gross winning = 1,00,000
1,00,000 [70,000 x (100/70)]. No deduction is allowed.

Rent from letting out of house along with a motor car: Since both 9,000
lettings are separable, rent from house is taxable under the head IHP
and rent from motor car is taxable under the head IFOS. Taxable
income under IFOS = 24,000 (@ 2,000 p.m.) rent - 5,000 insurance
premium - 10,000 repair expenses (assuming these are revenue in
nature).

Advance for sale of building forfeited: Taxable u/s 56(2)(ix) as it is 1,00,000

forfeited on or after 1.4.2014

Family pension: Taxable u/s 56(1) = 36,000 - Deduction of 12,000 24,000

(lower of 1/3rd of 36,000 or 15,000).

Remuneration from RMN College for setting the examination question 11,000
paper: Taxable = 15,000 - Expenses on typesetting and stationery
4,000 (personal expenses of 6,000 are disallowed u/s 58)

Award instituted by the State Government: Exempt u/s 10(17A) (see -

para 30)

Rent from sub-letting house property = 60,000 (@ 5,000 p.m.) rent 60,000
received - Nil rent paid (cash payment to a person in a day of > 10,000
disallowed u/s 58 r/w 40A(3))
Royalty from publication and sale of a book on culinary arts = 1,00,000 80,000
royalty - 20,000 expenses on proof reading paid to spouse (excess of
30,000 is disallowed u/s 58 r/w 40A(2) as spouse is a related party)

17,25,000

Gross total income 20,76,200

Less: Deductions under Chapter VIA (refer Chapter 12):

Deduction u/s 80C on account of investment in PPF (1,00,000)

Deduction u/s 80TTB on account of interest from bank and Post Office (50,000)
(up to the limit of 50,000)

Total income 19,26,200

Computation of tax liability of Harsh

Particulars Rs.

Composition of total income:

Income taxable u/s 115BB (winning from horse race) 1,00,000

Balance income 18,26,200

19,26,200

Tax u/s 115BB @ 30% 30,000

Tax on balance income at normal rates 3,57,860

3,87,860

Add: HEC @ 4% 15,514

Tax liability 4,03,374

Tax liability (rounded off) 4,03,370

ILLUS 180.2: Tax liability - Compute the tax liability in the following cases for Dhruv, a resident
of age 25 years.

Particulars Case I Case II Case III Case IV

Interest on bank FD 4,50,000 3,00,000 3 00 000 3,75,000

Winning from lottery 50,000 50,000 50 000 10,000

Short term capital gain on sale of equity shares (STT - - 1,40,000 -

paid on sale/purchase)

Long term capital gain on sale of equity shares (STT - - - 2,25,000

paid on sale/purchase)

Deposit in PPF 1,50,000 1,50,000 1,50,000 1,50,000

Applicable tax regime Default Optional Default Optional

Computation of tax liability

Computation of total income Case 1 Case II Case III Case IV

Income from other sources:

• Interest on bank FD 4,50,000 3,00,000 3,00,000 3,75,000

• Winning from lottery 50 000 50 000 50,000 10,000

Capital gain:

• STCG u/s 111A - - 1,40,000 -

• LTCG u/s 112A - - - 2,25,000

Gross total income 5,00,000 3,50,000 4,90,000 6,10,000

Less: Deduction u/s 80C (for deposit in PPF) (not - (1,50,000) - (1.50,000)
allowed from income taxable at special rates, i.e.,
winning from lottery, STCG u/s 111A, LTCG u/s
112A; anyways, not allowed under the default tax
regime; refer para 193)

Total income 5,00,000 2,00,000 4,90,000 4,60,000

Incomes included in total income

Winning from lottery taxable u/s 115BB 50,000 50,000 50,000 10,000

STCG taxable u/s 111A - - 1,40,000 -

LTCG taxable u/s 112A - - - 2,25,000

Other income 4,50,000 1,50,000 3,00,000 2,25,000

Computation of tax liability

On winning from lottery u/s 115BB @ 30% (benefit 15,000 15,000 15,000 3,000
of unexhausted BEL is not available in Case II)

On STCG u/s 111A @ 15% of 1,40,000. - - 21,000 -

On LTCG u/s 112A @ 10% in excess of 1 lakh: - - - 10,000

Unexhausted BEL = 25,000 (2,50,000 BEL -
2,25,000 other income). Taxable LTCG = 2,25,000 -
25,000 = 2,00,000. Tax = 10% of 1,00,000.

On balance income at normal rates 7,500 Nil Nil Nil

Tax on total income 22,500 15,000 36,000 13,000

Less: Rebate u/s 87A (not available from tax u/s (22,500) (12,500) (25,000) (3,000)
112A in Case IV)

Nil 2,500 11,000 10,000 |

Add: Surcharge Not applicable as total income is - - - -|

not > 50 lakh

Nil 2,500 11,000 10,000 i

Add: HEC@ 4% Nil 100 440 400

Tax liability Nil 2,600 11,440 10,400

Solve BYC Question Nos. B38-54. Solve MCQ No. M67-69.

 ADVANCE TAX
As noted in para 211, advance tax is a form of prepaid tax which is recovered from the
assessee in the PY itself without waiting for it to be paid after the assessment of total income.
We shall now study these provisions.
226.  LIABILITY TO PAY ADVANCE TAX [S. 207, 208, 219]
Advance tax: Advance tax is the tax payable in advance during any FY in respect of the total
income of the assessee which would be chargeable to tax for the AY immediately following that
FY. Such income is hereafter referred to as "current income". Advance tax is payable by the
following assessee:

Senior citizen: Means an individual resident in India of the age of 60 years or more at any
time during the PY.72
Credit: Any sum (other than penalty or interest) paid by or recovered from an assessee as
advance tax is treated as a payment of tax in respect of the relevant PY. Consequently, credit
of such advance tax is given to the assessee in the regular assessment.
Every person is liable to pay advance tax, except a senior citizen not having income under the
head PGBP, if the amount of advance tax payable is Rs. 10,000 or more.
A senior citizen, relieved from the liability to pay advance tax, needs to discharge his tax liability
by way of other modes being TDS, TCS and self-assessment tax, as applicable.
227.  INSTALMENTS AND DUE DATES OF ADVANCE TAX [S. 211]73
Advance tax on the current income, calculated in the manner laid down in section 209 [para
229], is payable in instalments during each FY. The due date and the amount of each instalment
is given below.

Due date of Amount payable

instalment
Assessee who Any other assessee
declares profits and
gains u/s 44AD or
44ADA

On or before 15 June - Not less than 15% of the advance tax

On or before 15 Not less than 45% of the advance tax - Amount,

September if any, paid in the earlier instalment
On or before 15 - Not less than 75% of the advance tax -
December Amount(s), if any, paid in the earlier
instalment(s)

On or before 15 100% of the advance 100% of the advance tax - Amount(s), if any,
March tax paid in the earlier instalment(s)

15 March to 31 March: An assessee may pay advance tax even after 15 March of that FY. It is
provided that any amount paid by way of advance tax on or before 31 March is also treated as
advance tax paid during that FY for all the purposes of the Act. Thus, credit of such advance tax
paid is given to the assessee as referred to in para 226 above. Although interest u/s 234B for
default in payment of advance tax [para 230] is not levied to the extent of the advance tax paid,
interest u/s 234C for deferment of advance tax [para 231] is levied.
Adjustment: The assessee can increase or reduce the amount of advance tax payable in the
remaining instalments to align with the changes that may take place in the estimate of his
current income.
Above stated due dates of advance tax are common to a company and non-company assessee.
Relief available to the assessee declaring profits and gains u/s 44AD or 44ADA is not available
to the assessee declaring profits and gains u/s 44AE [para 124].
228. PAYMENT OF ADVANCE TAX BY SELF OR PURSUANT TO ORDER OF ASSESSING
OFFICER [S. 210]
Advance tax can be paid by the assessee of his own accord or in pursuance of an order of the
Assessing Officer. The provisions are explained below.
1 - Payment of advance tax by assessee of his own accord
Every person, liable to pay advance tax, should pay advance tax of his own accord, i.e., on his
own, as per the due dates and instalments [specified in para 227], He need not submit the
details of estimation of advance tax to the Assessing Officer. Advance tax should be so paid by
the person whether or not he has been previously assessed by way of regular assessment.
2 - Payment of advance tax by assessee pursuant to order of Assessing Officer74
The Assessing Officer can make an order in writing requiring a person to pay advance tax and
issue to him a notice of demand specifying the instalments in which such tax is to be paid. Such
order can be made where:
• The person has already been assessed by way of regular assessment in respect of total
income of any PY; and
• The Assessing Officer is of opinion that such person is liable to pay advance tax.
The order can be made by the Assessing Officer at any time during the FY but not later than the
last day of February. The law also provides for amendment of the order by the Assessing
Officer.
If the person estimates the advance tax payable on his current income to be lesser than that
specified in the order of the Assessing Officer, he may send an intimation in the prescribed
Form to the Assessing Officer to that effect and pay the advance tax as per his estimate in
accordance with the instalments and due dates [specified in para 227] falling after the date of
such intimation.
However, if the person estimates the advance tax payable on his current income to be higher
than that specified in the order of the Assessing Officer or intimated by him as above, he
should pay the appropriate part or, as the case may be, the whole of such higher amount of
advance tax as per his estimate, on or before the due date of the last instalment [specified in
para 227],
If the assessee does not pay advance tax as per the order of the Assessing Officer and does
not send the aforesaid intimation to the Assessing Officer for a lower estimate OR does not pay
advance tax as per his higher estimate, he is deemed to be an assessee in default in respect
of such instalment(s).
229.  COMPUTATION OF ADVANCE TAX [S. 209]
The amount of advance tax payable by an assessee in the FY is computed in two steps. The
first step is to compute the current income. The second step is to compute the advance tax
payable on such current income. Step 1: Compute the current income as given below.

Situation Current income

Where the calculation is made by assessee The assessee should estimate his current
for purposes of payment of advance tax of his income.
own accord or based on his estimation which
is lesser or higher than that specified in the
order of Assessing Officer [para 228]

Where the calculation is made by the Higher of the following is taken to be the current
Assessing Officer for the purpose of making income:
an order [para 228]
1: Total income of the latest PY in respect of
which assessee has been assessed by way of
regular assessment, or
2: The total income returned by the assessee in
any return furnished by him for any
subsequent PY.

While current income is calculated by the assessee based on self estimation, it is calculated by
the Assessing Officer based on available data.
Current income includes the incomes taxable at regular rate as well as special rate (for
example, capital gain, winning from lottery, etc.).
Since current income is the total income for the purpose of discharge of advance tax liability, it
is computed after considering all exemptions, deductions, etc., allowed under the Act.
Step 2: Compute the advance tax payable on the current income as given below.

Computation of advance tax payable Rs.

Calculate tax on the current income at the rates in force in the FY xx

Reduce rebate u/s 87A and add surcharge (adjusted for marginal relief, if any) and HEC @ xx
4%

xx
Reduce TDS or TCS deducted or collected during the FY from any income which has (xx)
been taken into account in computing the current income

Advance tax payable xx

If the assessee has agricultural income, advance tax is calculated after integrating the
agricultural income with the non-agricultural income for rate purposes [refer para 28.3],
The amount of TDS or TCS is allowed to be reduced in computing the advance tax payable only
when it has been deducted or collected. Thus, in effect, the assessee is required to pay
advance tax on the incomes on which TDS or TCS was deductible or collectible but has not
been deducted by the payer or collected by the collector.75
ILLUS 229.1 to 229.3: Compute the advance tax liability in the following cases for the current
FY assuming that the assessee, a resident and ordinarily resident, wishes to opt out of the
default tax regime:

Particulars Mr. B, 45 yrs Mr. C, 55 yrs Mr. D, 65 yrs

Salary (computed) 6,00,000 4,00,000 4,00,000

• TDS deducted thereon 20,000 1.000 15,000

Income from house property (1,00,000) (1,00,000) (1,00,000)

Prof its and gains of business or profession 2,00,000 2,00.000 10,00,000

• TDS deducted thereon (TDS deductible 4,000 4,000 4,000

10,000)

Short term capital gain on sale of equity 50.000 50,000 50,000

shares u/s 111 A

Interest on bank fixed deposits 60,000 60,000 60,000

• TDS deducted thereon (TDS deductible 6,000 6.000 6,000

6,000)

Dividend 50,000 50,000 50,000

• TDS deducted thereon (TDS deductible 5,000 5,000 5,000

5,000)

Deposit in PPF account 1,50,000 1,50,000 1,50,000

Computation of advance tax payable for the current FY

Particulars Mr. B, 45 Mr. C, 55 Mr. D, 65

yrs yrs yrs

Salary (computed) 6,00,000 4,00,000 4,00,000

Income from house property (1,00,000) (1,00,000) (1,00,000)

Profits and gains of business or profession 2,00,000 2,00,000 10,00,000

Short term capital gain on sale of equity shares u/s 50,000 50,000 50,000
111A

Income from other sources

• Interest on bank fixed deposits 60,000 60,000 60,000

• Dividend 50,000 50,000 50,000

Gross total income 8,60,000 6,60,000 14,60,000

Less: Deduction under Chapter VIA:

• U/s 80C for deposit in PPF account (1,50,000) (1,50,000) (1,50,000)

• U/s 80TTB for interest on bank fixed deposits - - (50,000)

Total income (current income) 7,10,000 5,10,000 12,60,000

Tax on STCG u/s 111A @ 15% of 50,000 7,500 7,500 7,500

Tax on balance income at regular rates 44,500 10,500 1,73,000

52,000 18,000 1,80,500

Less: Rebate u/s 87A (not available as total income is - -

> 5 lakh)

52,000 18,000 1,80,500

Add: Surcharge (not applicable as total income is not > - - -

50 lakh)

52,000 18,000 1,80,500

Add: HEC @ 4% 2,080 720 7,220

54,080 18,720 1,87,720

Less: Tax deducted at source (35,000) (16,000) (30,000)

Advance tax payable 19,080 2,720 1,57,720

Advance tax is payable in case of Mr. B since it is not < Rs. 10,000. Advance tax is not payable
in case of Mr. C as it is < Rs. 10,000. Advance tax is payable in case of Mr. D since although he
is a senior citizen, he has income chargeable under the head PGBP and the amount of advance
tax payable is not < Rs. 10,000.
ILLUS 229.4 to 229.6: Compute the advance tax instalments with the due dates in the following
cases for the current FY:
1. Mr. B: Tax liability is estimated at Rs. 1,50,000.
2. Mr. C: Tax liability is estimated on 1 April at Rs. 1,50,000, it is revised on 15 October to Rs.
2,00,000 and further revised on 15 February to Rs. 1,75,000.
3. Mr. D: Tax liability is estimated at Rs. 1,50,000. Fie has declared business income u/s 44AD.
Computation of advance tax instalments

Due date of Amount payable

instalment
Mr. B Mr. C Mr. D

On or before Not less than 15% of the 15% of Rs. 15% of Rs. -
15 June advance tax 1,50,000 = Rs. 1,50,000 = Rs.
22,500 22,500

On or before Not less than 45% of the 45% of Rs. 45% of Rs.
15 advance tax - Amount, if any, 1,50,000 - Rs. 1,50,000 - Rs.
September paid in the earlier instalment 22,500 = 45,000 22,500 = 45,000

On or before Not less than 75% of the 75% of Rs. 75% of Rs.
15 advance tax - Amount(s), if 1,50,000 - Rs. 2,00,000 - Rs.
December any, paid in the earlier 67,500 = 45,000 67,500 = 82,500
instalment(s)

On or before 100% of the advance tax - 100% of Rs. 100% of Rs. 100% of Rs
15 March Amount(s), if any, paid in the 1,50,000 - Rs. 1,75,000 - Rs.
1.50.000
earlier instalment(s) 1,12,500 = Rs. 1,50,000 = Rs.
37,500 25,000 1.50.000

Solve BYC Question Nos. B164-170

230.  INTEREST FOR DEFAULTS IN PAYMENT OF ADVANCE TAX [S. 234B]
Interest is chargeable where the assessee defaults in payment of advance tax. An assessee is
liable to pay interest u/s 234B where, in any FY, he is liable to pay advance tax, but:
1. He has failed to pay such tax, or
2. The advance tax paid by him is < 90% of the assessed tax.
Interest is payable on the amount of shortfall, i.e., assessed tax less advance tax paid, if any.
Assessed tax = Tax on total income determined u/s 143(1) (i.e., upon processing of return) or
determined under regular assessment (where a regular assessment is made) less the following:
1. TDS deducted or TCS collected on any income which is taken into account in computing such
total income;
2. Relief allowed u/s 89 [para 77];
3. AMT credit allowed to be set off u/s 115JD [para 209.3],
Additional income tax is payable upon furnishing of an updated return. We will learn about this
concept in para 235B and 242. Tax on total income determined u/s 143(1) or under regular
assessment, as referred to above, does not include such additional income tax.
Computation of interest u/s 234B is depicted below for a clear understanding:

Interest is computed from Point A, i.e., from 1 April next following the FY in which advance tax is
payable. It is computed from Point A to Point C. However, the assessee is required to furnish
his return before Point C. Tax due as per the return is to be paid before furnishing such return.
Interest u/s 234B, chargeable till this point, is also to be paid along with such tax. Thus, in such
case, interest is computed from Point A to Point B. Such interest paid is then adjusted against
the interest finally chargeable as computed from Point A to Point C. This is explained below.
Self-assessment: Where any tax is payable on the basis of the return, the assessee is liable to
pay such tax (together with interest and fee payable, if any) before furnishing the return. Since
such amount is self-assessed by the assessee, it is called self-assessment tax u/s 140A. This
has been discussed in para 241. Where, before the date of determination of total income u/s
143(1) or completion of a regular assessment (Point C in the Chart above), tax is paid by the
assessee u/s 140A or otherwise (Point B in the Chart above), interest u/s 234B is computed as
under:
1. Assessed tax is computed based on the tax on total income as declared in the return.
2. Interest is computed up to the date on which the tax is so paid, i.e., Point B in the Chart
above.
Such interest paid is then adjusted against the interest finally chargeable till Point C of the Chart
above, i.e., determination of total income u/s 143(1) or regular assessment.
Rounding off: For calculating interest, any fraction of a month is deemed to be a full month.
Any amount on which interest is to be calculated is rounded off to the nearest multiple of Rs.
100 and for this purpose any fraction of Rs. 100 is ignored. [R. 119A].
Interest is not payable if advance tax paid is 90% or more of the assessed tax or where advance
tax is not payable (i.e., in case of a senior citizen not having income chargeable under the head
PGBP or where the amount of advance tax is < Rs. 10,000).
Interest is computed on the amount of shortfall (Assessed tax - Advance Tax paid); not on '90%
of Assessed tax - Advance Tax paid'.
Interest is computed @ 1% per month, not per annum.
Even though the assessee pays self-assessment tax u/s 140A with interest u/s 234B computed
based on the total income declared in the return, final calculation of interest is based on the tax
on assessed income, i.e., that determined on processing of return u/s 143(1) or on regular
assessment, which happens after filing of the return. Thus, if income declared in return is the
same as assessed income and the entire tax, along with interest, was paid on self-assessment
before furnishing of return, no further interest remains to be paid. However, if the income
assessed is higher than that declared in the return, additional interest becomes payable upon
such assessment.
ILLUS 230.1: Mr. C, a resident individual aged 34, needs to pay self-assessment tax along with
furnishing his return of income on 15.12.2024 for the AY 2024-25. He submits the following
details:
1. Turnover from retail stationery business of Rs. 1.90 crore out of which Rs. 80 lakh are
received by account payee cheque, Rs. 60 lakh by NEFT and rest in cash. He has opted for
section 44AD.
2. Income from other sources of Rs. 4,00,000.
3. Tax deducted at source of Rs. 60,000.
4. Advance tax of Rs. 1,50,000 paid on 10.3.2024.
Compute the interest payable u/s 234B at the time of self-assessment. Mr. C wants to opt out of
the default tax regime.
Computation of interest u/s 234B

Particulars Rs.

Income computed u/s 44AD = Rs. 8.4 lakh (6% of Rs. 1.4 crore) + Rs. 4 lakh (8% of 12,40,000
Rs. 50 lakh)

Income from other sources 4,00,000

Total income 16,40,000

Tax on total income 3,04,500

Add: HEC @ 4% 12,180

3,16,680

Less: Tax deducted at source (60,000)

Assessed tax 2,56,680

90% of assessed tax 2,31,012

Interest u/s 234 is chargeable as advance tax paid of Rs. 1,50,000 is < 90% of
assessed tax

Simple interest u/s 234B = 1% p.m. x 9 months (1.4.2024 to 15.12.2024 being the 9,594
date of payment of self- assessment tax; part of a month is taken as full month) x
Rs. 1,06,600 (Rs. 2,56,680 assessed tax - Rs. 1,50,000 advance tax paid = Rs.
1,06,680. This is rounded off to Rs. 1,06,600 (any fraction of Rs. 100 is ignored))

Solve BYC Question Nos. B171-172

231.  INTEREST FOR DEFERMENT OF ADVANCE TAX [S. 234C]
Interest is chargeable u/s 234C for deferment of advance tax. Where, in any FY, the assessee
is liable to pay advance tax on the current income but there is shortfall in the payment of such
advance tax (referred in Column 2 below), simple interest is payable u/s 234C (computed as
per Column 3 below). However, interest is not payable where the advance tax is paid up to a
certain extent (referred in Column 4 below).

Due date of Shortfall in payment of Simple interest When is interest u/s

advance ' tax advance tax payable u/s 234C 234C not payable?
instalment

On or before 15 15% of tax due on returned 1% p.m. x 3 When advance tax

June income - Advance tax paid up months x Amount paid up to 15 June is
to 15 June of shortfall not < 12% of tax due
on returned income

On or before 15 45% of tax due on returned 1% p.m. x 3 When advance tax

September income - Advance tax paid up months x Amount paid up to 15
to 15 September of shortfall September is not <
36% of tax due on
returned income

On or before 15 75% of tax due on returned 1% p.m. x 3

December income - Advance tax paid up months x Amount
to 15 December of shortfall

On or before 15 100% of tax due on returned 1% x Amount of

March income - Advance tax paid up shortfall
to 15 March

Where the assessee has failed to pay advance tax, the advance tax paid is taken to be zero in
the Table above.
In the case of an assessee declaring profits and gains u/s 44AD or 44ADA [para 124], only the
last row of the Table above is applicable.76
Tax due on returned income = Tax chargeable on the total income declared in the return
furnished by the assessee for the relevant AY less the following:
1. TDS deductible or TCS collectible on any income which is taken into account in computing
such total income;
2. Relief allowed u/s 89 [para 77];
3. AMT credit allowed to be set off u/s 115JD [para 209.3],
Relief for certain incomes: Interest u/s 234C is not chargeable in respect of any shortfall in the
payment of tax due on returned income where such shortfall is on account of under-estimate or
failure to estimate the following:
1. The amount of capital gains [Chapter 8]; or
2. Any winnings from lotteries, crossword puzzles, races (including horse races), card games
and other games of any sort or from gambling or betting of any form or nature whatsoever [para
178]; or
3. Income under the head PGBP in cases where the income accrues or arises under this head
for the first time [Chapter 7]; or
4. The amount of dividend income (not being dividend u/s 2(22)(e)) [para 168].
provided the assessee has paid the whole of the amount of tax payable in respect of such
income (a) as part of the remaining instalments of advance tax which are due, or (b) by 31
March of the FY where no such instalments are due.77
Rounding off: For calculating interest, any amount on which interest is to be calculated is
rounded off to the nearest multiple of Rs. 100 and for this purpose any fraction of Rs. 100 is
ignored. [R. 119A].
Interest in respect of the due date of 15 March is levied only for 1 month. Interest in respect of
other due dates is levied for 3 months.
Advance tax is payable with reference to the tax on 'current' income [para 229], interest u/s
234B is chargeable with reference to the tax on 'assessed' income [para 230] and interest u/s
234C is chargeable with reference to tax on 'returned' income.
Since interest u/s 234C is chargeable with reference to the tax due on returned income, it does
not get impacted even if the total income is assessed at an amount lower or higher than the
returned income.
Interest is computed @ 1% per month, not per annum.
Winnings from lottery, etc., are taxable @ 30% u/s 115BB (plus SC and HEC) [para 178] while
TDS thereon is deductible u/s 194B or 194BB @ 30% (without adding SC and HEC; if the
amount of winnings during the FY is > Rs. 10,000) [para 214]. Thus, the advance tax liability
would arise only if the amount of SC and HEC on such winnings, along with the tax on other
incomes, if any, is not < Rs. 10,000 (i.e., the threshold for advance tax). If this is not the case,
neither advance tax would be payable nor interest u/s 234B or 234C would be chargeable.
ILLUS 231.1: Total income of Kanchan, resident aged 40 years, for PY 2023-24 is Rs. 9,00,000
but she has not paid advance tax during the FY 2023-24. She is going to file her return of
income on 25.7.2024. What is the total amount of tax which she will need to pay as self-
assessment along with interest, if any? Assume that she has decided to opt out of the default
tax regime.
Computation of tax on total income

Particulars Rs.

Tax on total income of Rs. 9,00,000 92,500

Add: HEC @ 4% 3,700

96,200

Computation of interest chargeable u/s 234Bfor default in payment of advance tax

Particulars Rs.

Amount on which interest is chargeable: Assessed tax of 96,200 - Advance tax paid 96,200
of Nil

Period for which interest is chargeable: From 1.4.2024 to 25.7.2024, i.e., date of 4
payment of self-assessment tax (part of a month is taken as full month) months
Simple interest u/s 234B = 1% p.m. for 4 months of Rs. 96,200 3,848

Computation of interest chargeable u/s 234C for deferment of advance tax

Due date Shortfall in payment of advance tax Simple interest payable u/s Rs.
of advance 234C
tax

On or 15% of tax due on returned income - Payable since advance tax 432
before 15 Advance tax paid up to 15 June = 15% of paid up to 15 June is < 12%
June Rs. 96,200 - Nil = Rs. 14,430. Rounded off of Rs. 96,200. Interest = 1%
to Rs. 14,400 (fraction of Rs. 100 is p.m. x 3 months x Rs. 14,400
ignored)

On or 45% of tax due on returned income - Payable since advance tax 1,296
before 15 Advance tax paid up to 15 September = paid up to 15 September is <
September 45% of Rs. 96,200 - Nil = Rs. 43,290. 36% of Rs. 96,200. Interest =
Rounded off to Rs. 43,200 (fraction of Rs. 1% p.m. x 3 months x Rs.
100 is ignored) 43,200

On or 75% of tax due on returned income - Interest = 1% p.m. x 3 months 2,163

before 15 Advance tax paid up to 15 December = x Rs. 72,100
December 75% of Rs. 96,200 - Nil = Rs. 72,150.
Rounded off to Rs. 72,100 (fraction of Rs.
100 is ignored)

On or 100% of tax due on returned income - 1% x Rs. 96,200 962

before 15 Advance tax paid up to 15 March = 100%
March of Rs. 96,200 - Nil = Rs. 96,200.

4,853

Total tax and interest to be paid at the time of self-assessment = Rs. 96,200 tax + Rs. 3,848
interest u/s 234B + Rs. 4,853 interest u/s 234C = Rs. 1,04,901.
ILLUS 231.2 - Shivam, a resident aged 37 years, has derived the following incomes during PY
2023-24:
• Income from retail business started 5 years back: Rs. 10,00,000.
• Long term capital gain on sale of gold on 1.12.2023: Rs. 2,00,000.
• Deduction available for payment of life insurance premium: Rs. 1,50,000.
• TDS deducted: Rs. 20,000
• Advance tax paid: Rs. 5,000 paid on 10.6.2023, Rs. 19,000 paid on 10.9.2023, Rs. 50,000
paid on 15.12.2023, Rs. 30,000 paid on 15.3.2024
Compute the interest u/s 234C which he will need to pay on self-assessment while filing his
return of income. He has decided to opt out of default tax regime.
Computation of tax on returned income
Particulars Rs.

Tax on income till the advance tax instalment due on 15 September

Income from retail business 10,00,000

Long term capital gain on sale of gold on 1.12.2023 -

Gross total income 10,00,000

Less: Deduction u/s 80C (1,50,000)

Total income 8,50,000

Tax on total income at regular rates 82,500

Add: HEC @ 4% 3,300

85,800

Less: TDS (20,000)

Tax on returned income 65,800

Tax on income after the advance tax instalment due on 15 September

Income from retail business 10,00,000

Long term capital gain on sale of gold on 1.12.2023 2,00,000

Gross total income 12,00,000

Less: Deduction u/s 80C (1,50,000)

Total income 10,50,000

Tax on LTCG of Rs. 2,00,000 u/s 112 @ 20% 40,000

Tax on balance income of Rs. 8,50,000 at regular rates 82,500

1,22,500

Add: HEC @ 4% 4,900

1,27,400

Less: TDS (20,000)

Tax on returned income 1,07,400

Computation of interest chargeable u/s 234C

Due date Shortfall in payment of advance tax Simple interest payable u/s Rs.
of advance 234C
tax

On or 15% of Rs. 65,800 (tax due on returned Payable since advance tax 144
before 15 income) - Advance tax paid up to 15 June paid up to 15 June of Rs. 5,000
June of Rs. 5,000 = Rs. 4,870. Rounded off to is < 12% of Rs. 65,800. Interest
Rs. 4,800 (fraction of Rs. 100 is ignored) = 1% p.m. x 3 months x Rs.
4,800

On or 45% of Rs. 65,800 (tax due on returned Not payable since advance
before 15 income) - Advance tax paid up to 15 paid up to 15 September of Rs.
September September of Rs. 24,000 = Rs. 5,610. 24,000 is not < 36% of Rs.
Rounded off to Rs. 5,600 (fraction of Rs. 65,800
100 is ignored)

On or 75% of Rs. 1,07,400 (tax due on returned Interest = 1% p.m. x 3 months 195
before 15 income) - Advance tax paid up to 15 x Rs. 6,500
December December of Rs. 74,000 = Rs. 6,550.
Rounded off to Rs. 6,500 (fraction of Rs.
100 is ignored)

On or 100% of Rs. 1,07,400 (tax due on returned Interest = 1% x Rs. 3,400 34

before 15 income) - Advance tax paid up to 15 March
March of Rs. 1,04,000 = Rs. 3,400

373

Solve BYC Question Nos. B173-177. Solve MCQ No. M72-85.