Presentation on

CAPITAL GAINS
Part-I
For the students
of
Semester – IV
[Link].(Hons. & General)

By
DR. ASIM KUMAR MANNA
Meaning: Any profit or gain arising
from transfer of any capital asset
is called capital gains.
Essential conditions:
•There must be a capital asset
•The assessee transfers such
capital asset
•There must be profit or gain on
such transfer
 Basis of charge
This income is chargeable to tax
in the previous year in which the
transfer took place. In some
cases, it is taxable in the previous
year in which consideration is
received (e.g. compulsory
acquisition by the Government.)
 Capital Asset
Any property (fixed or circulating, movable or immovable,
tangible or intangible) held by an assessee, whether or not
connected with his business or profession, but excluding the
following:
•Stock-in-trade, consumable stores, or raw materials held for
the purpose of business or profession.
•Personal effect: Any movable property held for personal use
(i.e. refrigerator, furniture, motor car, electric appliances,
wearing apparel etc.) but excludes jewellery (ornaments
made of gold, silver, platinum etc.), archaeological collections,
drawings, paintings, sculptures or any work of art.
•Agricultural land in rural area in India
•6½% gold bond,1977, 7% Gold Bond,1980, National Defence
Gold Bond,1980, special Bearer Bond, 1991 issued by the
Central Govt., Gold deposit Bonds.
 Types of Capital asset
Holding period
Nature of asset
Short Term Long Term
Shares Not more More than
(Listed)/Securities/Zero- than 12 12 months
Coupon Bonds/Units of UTI months
Shares Not more More than
(Non-listed)/Land/Building/ than 24 24 months
Any Immovable Property months
Others(Including Debt- Not more More than
Oriented Mutual Fund) than 36 36 months
months
 Transfer of Capital Asset
The term “Transfer” includes sale,
exchange or relinquishment of asset,
extinguishment of any right in an asset,
compulsory acquisition of an asset,
conversion of asset into stock-in-trade,
any transaction of immovable property,
maturity or redemption of a zero-coupon
bond.
 Computation of Capital Gains
1. Computation of Short Term Capital Gain (STCG)

Particulars ` `
Full value of consideration ***
Less: Expenses on transfer ***
Net Sale Consideration ***
Less: i) Cost of acquisition ***
ii) Cost of improvement *** ***
Short Term Capital Gain ***
Less: Exemption u/s 54B, 54D, ***
54G & 54GA
Taxable Short Term Capital Gain ***
 2. Computation of Long Term Capital Gain (LTCG)
Particulars ` `
Full value of consideration ***
Less: Expenses on transfer ***
Net Sale Consideration ***
Less: i) Indexed cost of acquisition ***
ii) Indexed cost of improvement *** ***
Long Term Capital Gain ***
Less: Exemption u/s 54B, 54D,
54EC,54ED,54EE,54F,54G,54GA
& 54GB ***
Taxable Long Term Capital Gain ***
Expenditure on Transfer
Brokerage, commission, cost of stamp,
registration fees borne by vendor, travelling
expenses (excluding Securities Transaction
Tax)
Cost of Acquisition: The cost by which a
capital asset can be acquired by the
assessee (in case of self-generated asset
e.g. goodwill, trademark, tenancy right,
route permit and bonus shares acquired by
the previous owner on or after 1.4.2001,
cost of acquisition is nil.)
 Situation Before 01.04.2001 On or after 01.04.2001

A. Assets directly acquired by the

assessee
1. STCG: Cost of Acquisition Higher of:
i) Actual cost of acquisition Actual cost of acquisition
ii)FMV as on 1.4.2001
2. LTCG: Indexed Cost of Higher of cost of acquisition or FMV Cost of acquisition x
Acquisition as on 1.4.2001 x CII for the year of transfer
CII for the year of transfer CII for the year of acquisition
CII for the year 2001-02(i.e.100)
B. Assets acquired by the
assessee from the previous owner
specified in sec.49(1),i.e. gift,
inheritance, etc
1. STCG: Cost of Acquisition Higher of:
i) Actual cost to the previous owner Actual cost to the previous owner
ii)FMV as on 1.4.2001
2. LTCG: Indexed Cost of (a) Previous owner acquired the
Acquisition Higher of cost of acquisition or FMV asset before 1.4.2001
as on 1.4.2001 x Higher of cost of acquisition or FMV as
CII for the year of transfer on 1.4.2001 x
CII for the year 2001-02(i.e.100) CII for the year of transfer
CII for the year in which the
Asset is first held by the assessee
(b) Previous owner acquired the
asset on or after 1.4.2001
Actual cost to the previous owner x CII
for the year of transfer
CII for the year in which the
Asset is first held by the assessee
Cost of Improvement: Expenditure incurred to increase the productive
efficiency of capital asset (addition, alteration to capital assets)
Situation Before On or after 1.4.2001
1.4.2001
A. Expenses incurred by the assessee himself
1. STCG: Cost of improvement
Nil Actual cost of improvement
2. LTCG: Indexed Cost of iimprovement Nil Cost of improvement x
CII for the year of transfer
CII for the year of improvement
B. Expenses incurred by the previous owner [other
than a mode of acquisition specified in
sec.49(1),i.e. gift, inheritance, etc.]
1. STCG: Cost of improvement Nil Actual cost of improvement
2. LTCG: Indexed Cost of improvement Nil Cost of improvement x
CII for the year of transfer
CII for the year of improvement
C. Expenses incurred by the previous owner [in a
mode of acquisition specified in sec.49(1), i.e. gift,
inheritance, etc]
1. STCG: Cost of improvement Nil Actual cost of improvement
2. LTCG: Indexed Cost of improvement Nil Cost of improvement x
CII for the year of transfer
CII for the year in which
improvement was made by the
previous owner
Cost Inflation Index (CII): 75% of average rise in the Consumer
Price Index (urban) as notified by the Central Government in the
Official Gazette. CII for different financial years is as follows:
 Presentation on
CLUBBING OF INCOME
PART - I
For the students
of
Semester – IV
[Link].(Hons. & General)

By
DR. ASIM KUMAR MANNA
 CLUBBING OF INCOME
As per the Indian Income Tax laws, every person is liable to pay taxes on
his/ her income, if the taxable income exceeds the basic exemption limit and
he is not liable to tax for income of another person. However, in certain
situations a taxpayer may have to pay tax on the income of another person.
The practices of diverting self income to some other person like spouse,
minor child, etc. to reduce own Income-tax liability was very popular in India.
The same was noticed by the Income-tax Department. Accordingly
amendments were made in the Income Tax Act specifying certain cases
where income of one person is statutorily required to be included in the
income of another person if some conditions are satisfied. The situation in
which the income of another person is included in the income of the
taxpayer is called clubbing of income and the income which is so included is
called deemed income. Besides, one very important aspect of these
clubbing of income provisions is that they are applicable only for individuals
and no other type of assessee like firm, Company etc.
Example: If a husband diverts some part of his income to his wife to reduce
his tax burden, then, such transferred income of a wife is added and taxed
as income of husband only and not his wife. The clubbing provisions are
applicable even if there is no intention to reduce tax liability.
AN OVERVIEW OF CLUBBING OF INCOME
The Following are the circumstances where the income of the
other person is included in the income of the assessee.
1. Transfer of income without the transfer of asset (Sec 60).
2. Revocable transfer of assets (sec 61)
3. Income of an individual to include income of spouse, minor
child etc. (Sec 64)
i. Remuneration of a spouse from a concern in which the other
spouse has substantial interest. [Sec 64(1)(ii)]
ii. Income from assets transferred to the spouse. [64(1)(iv)]
iii. Income from assets transferred to son’s wife [ 64(1)(vi)]
iv. Income from assets transferred to a person for the benefit of
Spouse of the transferor[64(1)(vii)]
v. Income from assets transferred to a person for the benefit of
son’s wife of the transferor [64(1)(viii)]
vi. Clubbing of income of a minor child [64(1A)]
 TRANSFER OF INCOME WITHOUT THE
TRANSFER OF ASSET (SEC 60)
When a taxpayer, while retaining the ownership of an asset,
transfers the income from such asset to another person by an
agreement or in any other way, such income will be taxable in
the hands of the taxpayer. It does not matter whether such
transfer is revocable or not and whether this has taken place
before or after the commencement of Income Tax Act.
This section is applicable if-
Taxpayer owns an asset;
He transfers the income earned from this asset to another
person;
But he keeps the ownership of that asset with himself;
Then such income is clubbed in the income of transferor.
Example 1: Mr. Ajay is having an FD with a bank.
He transfers interest earned on FD Rs. 1,60,000/- to
his friend Mr. Boman. However, Mr. Ajay kept the
ownership of FDs with him. In this case, interest
earned of Rs. 1,60,000/- shall be treated as income
of Mr. Ajay only and not of Mr. Boman.
Example 2: Ankit owns a house property in Delhi.
He has rented the property for Rs. 25,000 per month.
However, he has requested the tenant to make the
payment of rent in his father's bank account. In this
situation, though the income is received by his father,
Ankit has to report the rental income as part of his
income, since he is the legal owner of the house
property.
 2. REVOCABLE TRANSFER OF ASSETS (SEC 61)
Any income arising to any person by virtue of
revocable assets is chargeable to tax as the income
of the transferor.
This section is applicable if-
Taxpayer owns an asset;
He transfers the ownership of this asset to another
person;
But the transfer is revocable* or cancellable;
Then such income is clubbed in the income of
transferor.
•Revocable/Cancellable transfer: A taxpayer
transfers his asset to another person on the condition
that such transfer can be cancelled by him at any
time, then this transfer shall be treated as Cancellable
transfer.
Following are the various examples of Cancellable
Transfer-
Example 1: Mr. Sujay transfers his land to Mr.
Yogesh under an agreement with a condition that Mr.
Sujay can cancel the agreement anytime and take
back the asset. Then income earned from such land
is added in the income of Mr. Sujay.

Example 2: Mr. Pranav transfer his land to Mr.

Shaan under an agreement where the agreement
states that Mr. Pranav can re-transfer the land in his
name at anytime. Then income earned from the land
is added in the income of Mr. Pranav.
 3. INCOME OF AN INDIVIDUAL TO INCLUDE INCOME OF
SPOUSE, MINOR CHILD ETC. (SEC 64)
a). Remuneration of spouse from a concern in which other
spouse has substantial interest. [Sec 64(1) (ii)].
Spouse's income is required to be clubbed in the hands of the
taxpayer if any payment is received by the spouse by way of
salary, commission, fees or any other form of remuneration,
from a concern in which the taxpayer has a substantial
interest.
This section is applicable if-
Taxpayer is an individual;
He/she has a substantial interest* in any organisation;
Spouse of the taxpayer is working in that organisation;
Spouse is not having any technical or professional
knowledge or experience.
Then the salary paid to spouse is clubbed in the income of
the taxpayer.
 *Substantial interest
In case of He beneficially holds not less than 20% of
company its equity shares at any time during the
previous year. Such share may be held by
the assessee or partly by
assessee and partly by one or more of his
relatives.
Other concern He is entitled to not less than 20% of the
profits of such concern at any time during the
previous year. Such share of profit may be
held by the assessee himself or together with
his relatives.

Relative here includes spouse, brother or sister or any lineal

ascendant or descendant of that individual [Sec. 2(41)].
 Where both, husband and wife, have substantial
interest in a concern
When both, husband and wife have substantial interest
in a concern and both are drawing remuneration from
that concern without possessing any specific
qualification.
Remuneration from such concern will be included in the
total income of husband or wife, whose total income
excluding such remuneration, is higher.
Where such income is once included in the total income
of either of the spouse, then such income arising in any
subsequent years cannot be included in the total
income of the other spouse unless the Assessing
Officer is satisfied that it is necessary to do so.
However, Assessing Officer will do so only after giving
to the other spouse an opportunity of being heard.
When both, husband and wife, are not having
any other income
When both, husband and wife have substantial
interest in a concern and both are drawing
remuneration from that concern without
possessing any specific qualification and both
are not having any other income apart from the
said remuneration or having equal taxable
income excluding such remuneration.
Remuneration from such concern will not be
clubbed.
 Computation of salary, fee, commission,
remuneration etc
Income prescribed in sec. 64(1)(ii) shall be first
computed (allowing all deductions from the
respective income) in the hands of recipient and
thereafter net income shall be clubbed in the
hands of the other spouse e.g. salary,
remuneration, etc shall be first calculated as per
provisions of sec. 15 to 17, in the hands of recipient
and thereafter, net taxable salary shall be clubbed
in the hands of the other spouse.
B). INCOME FROM ASSET TRANSFERRED TO SPOUSE [SEC 64(1)(IV)]

Where an asset (other than house property) is transferred by

an individual to his or her spouse directly or indirectly
otherwise than for adequate consideration or in connection
with an agreement to live apart, any income from such asset
will be deemed to be the income of the transferor.
This provision is not applicable to the house property
because in that case, the transferor is deemed to be the
owner of the house property and the annual value of the
property is taxed in the hands of the transferor as per
section 27. However, when there is a capital gain on the
transfer of such house property, such capital gain will be
first be computed in the hands of the transferee and
thereafter the same will be clubbed with the income of the
transferor as per provisions of this section.
B). INCOME FROM ASSET TRANSFERRED TO SPOUSE [SEC 64(1)(IV)]

This section is applicable if-

Taxpayer is an individual;
He/she owns an asset;
He/she transferred this asset to his/her spouse directly or indirectly;
Asset is transferred without adequate consideration (i.e. lower
amount than its fair market value) or in connection with an
agreement to live apart;
Then the income earned from this asset is clubbed in the income of
the taxpayer.
The income from the transferred assets shall not be clubbed in the
following cases:-
•If the transfer is for adequate consideration
•If the transfer is under an agreement to live apart.
•If the relationship of husband and wife does not exist, either at the
time of transfer of such asset or at the time of accrual of the income.
Points to remember:
•The asset so transferred need not remain in its original
form, i.e., the transferred asset may be held by the
transferee spouse in the same form or in different form.

•Pin money Income from assets acquired by spouse out of pin

money or household savings is not subject to clubbing.

•Consideration must be measurable in terms of money. Therefore

natural love and affection, spiritual or religious benefit cannot be
treated as adequate consideration.
•Capital gain Profit on sale of property, which is gifted to spouse, shall be
clubbed in hands of the transferor.

•Accretion of asset Income arising to the transferee from the accretion of

such property or Income arising to the transferee from the accumulated
income of such property shall not be clubbed in the total income of the
transferor.

•After the death of either husband or wife clubbing provision of Sec. 64(1)(iv)
will not be attracted, as a widow or widower is not a spouse.
Inadequate consideration
If property has been transferred to spouse directly or indirectly
for a consideration which is inadequate (i.e., less than the fair
market value), then only the part of income which is referable to
transfer for inadequate consideration, shall be clubbed.
Asset invested in the business
If assets so transferred, is invested in business then tax
treatment shall be as under:
If invested in Proprietary business
Value of such assets as on the 1st day
Income of such of the P.Y.
x
business Total investment in the business by the
transferee as on the same day
If invested in Partnership business
Profit from the firm shall not be clubbed as it is exempted u/s
10(2A).

Value of such assets as on the 1st day

of the P.Y.
Interest on capital x
Total investment in the firm by the
transferee as on the same day
 Presentation on
CLUBBING OF INCOME
PART - II
For the students
of
Semester – IV
[Link].(Hons. & General)

By
DR. ASIM KUMAR MANNA
 C). INCOME FROM ASSETS TRANSFERRED TO
SON’S WIFE [SEC. 64(1)(VI)]
In computing the total income of an individual, income arising
(directly or indirectly) from assets transferred to son’s wife (after
31.5.1973), without adequate consideration, shall be included in
income of that individual. Aforesaid relationship must subsist on
the date of transfer of assets as well as on the date of accrual of
income.
This section is applicable if-
•Taxpayer is an individual;
•He/she owns an asset;
•He/she transferred this asset to his/her son’s wife;
•Asset is transferred for lower amount than its fair market value;
•Asset is transferred after 31.5.1973 directly or indirectly
Then the income earned from this asset is clubbed in the income
of the taxpayer.
 Points to remember:
•The asset so transferred need not remain in its original
form, i.e., the transferred asset may be held by the
son’s wife in the same form or in different form.
•Consideration must be measurable in terms of money.
Therefore natural love and affection, spiritual or
religious benefit cannot be treated as adequate
consideration.
•Capital gain Profit on sale of property, which is gifted
to son’s wife, shall be clubbed in hands of the
transferor.
•At the time of transfer of such asset or at the time of
accrual of the income the relationship of father-in-law
or mother-in-law and daughter-in-law does exist.
 INCOME FROM ASSETS TRANSFERRED TO ANOTHER
PERSON (FOR THE BENEFIT OF SPOUSE) [SEC. 64(1) (VII)]:

In case an asset is transferred to other person or an association of

persons, otherwise than for adequate consideration, for
immediate or deferred benefit of spouse, then income on asset so
transferred shall be clubbed in the hands of the transferor (to the
extent income from such asset is for the immediate or deferred
benefit of his or her spouse).
This section is applicable if-
•Taxpayer is an individual;
•He/she owns an asset;
•He/she transferred this asset to any other person or persons;
•Asset is transferred for the benefits of the spouse of the taxpayer;
•Asset is transferred for lower amount than its fair market value.
Then the income earned from this asset is clubbed in the income
of the taxpayer.
 INCOME FROM ASSETS TRANSFERRED TO ANOTHER
PERSON (FOR THE BENEFIT OF SON’S WIFE)
[SEC. 64(1)(VIII)]:
Where an asset is transferred to any other person or association of
persons, without adequate consideration for the benefit of Son’s wife
of the individual as well as for some other persons, income on such
asset to the extent of benefit which accrues to the Son’s Wife, shall
be included in the total income of the individual.
This section is applicable if-
•Taxpayer is an individual;
•He/she owns an asset;
•He/she transferred this asset to any other person or persons;
•Asset is transferred for the benefits of son’s wife of the taxpayer;
•Asset is transferred for lower amount than its fair market value.
•At the time of transfer of such asset or at the time of accrual of the
income the relationship of spouse and son’s wife does exist.

Then the income earned from this asset is clubbed in the income of
the taxpayer.
 INCOME OF MINOR CHILD [SEC.64(1A)]:
Any income earned by a minor child (including married minor
daughter) will get clubbed with income of the parent whose total
income is higher (before inclusion of income of minor child).
•From next year onwards whenever the minor child earns any
income again, this income is clubbed in the income of same
parent as it was clubbed earlier, unless the Tax Officer believes
it is necessary to change the same.
•In case the marriage of the parents does not subsist(divorce),
then the income of minor is added in the income of a parent
who maintains that minor in that financial year.
•If both the parents of a minor are not alive, then income of
minor shall not be clubbed in the income of any grandparents,
relatives, guardian or any other person or even the minor.
•Child in relation to an individual includes a stepchild & adopted
child but does not include a grandchild [Sec. 2(15B)]
•Capital gain Profit on sale of the property, which is gifted to
minor child, shall be clubbed in hands of parent as per the
provision of sec. 64(1A)
 Exemption [Sec. 10(32)]

In case income of a minor child is clubbed in hands

of parent as per provision of sec. 64(1A), the
assessee (parent) can claim exemption of an
amount being minimum of the following:
(i) Rs. 1,500; or
(ii) Income so clubbed
Such exemption shall be available for each child
(irrespective of the number of children) whose
income is so clubbed.
Situations when income of minor is not clubbed:
•If a minor is suffering from a disability covered
U/s. 80U of the Income Tax Act, 1961 (i.e.
Blindness, low vision, mental retardation, mental
illness, locomotors disability, autism etc.), then
income of such minor is not clubbed in the income
of parent;
•If minor has earned the income using his own
manual work;
•If minor has earned the income using his skills,
talent or experience.
Example: Kapil, a minor, received Rs. 1,50,000/- during a year as
gifts from his relatives on the occasion of his birthday. For that year,
Gross Total Income (before clubbing under this section) of his father
is Rs. 5,00,000 whereas that of his mother is Rs. 4,20,000/-. Hence,
the income of minor shall be clubbed in the income of his father
since his Gross Total Income is more than mother.
Also, father can claim the exemption of Rs. 1,500/- from clubbed
income of Rs. 1,50,000/-.

Example: Rohit has 2 daughters and he has opened fixed deposits

in their names. The fixed deposits earned interest income of Rs.
5,000 each. Rohit should report interest income of Rs. 10,000 as a
part of his total income. However, he would be eligible claim
exemption of Rs. 3,000 on this income (i.e. 1500 for each child).
Hence, the taxable interest income for him from these fixed deposits
(on account of the clubbing provisions) would be Rs. 7,000.
 Presentation on
INCOME FROM OTHER
SOURCES
For the students
of
Semester – IV
[Link].(Hons. & General)

By
DR. ASIM KUMAR MANNA
 Income from Other Sources
Any income which is not
chargeable to tax under any
other heads of income and
which is not to be excluded
from the total income shall be
chargeable to tax as residuary
income under the
head “Income from Other
Sources”.
 Income from other sources
examples
Interest on saving bank account, bank deposits (fixed,
recurring), loans or company deposits,
Family pension (received by legal heirs of an
employee)
Dividend: Dividend is the payment made by a
company to its shareholders or members out of the
profit earned by the company.
Gift
Interest received from the IT Dept.
Examiner-ship fees received by a teacher (not from
the employer),
Income from royalty,
Insurance commission,
 Income from other sources
examples
Income from sub-letting of house property by a
tenant,
Agricultural income from agricultural land situated
outside India,
Remuneration received by Members of Parliament,
Casual receipts and receipts of non-recurring nature,
Director’s commission for standing as guarantor to
bankers,
Winnings from Lotteries, Crossword Puzzles, Horse
Races, and Card Games,
Interest on securities,
Income from letting out of machinery, plant or
furniture, etc.
 Dividend [sec.56(2)(i)]
A. Dividend received from Indian Company:
(i) If amount of dividend ≤ `10,00,000, then fully
exempt u/s 10(34)( if it is chargeable to dividend
distribution tax under Section 115-O)
(ii) If amount of dividend > `10,00,000, then
taxable u/s 115BBDA @10% on excess of
` 10,00,000(i.e.,10%+ 4%HEC)
B. Dividend received from foreign Company / Co-
operative society:
-- Fully Taxable
 Casual Income
Casual income means income in the nature of winning from
lotteries, crossword puzzles, races including horse races, card
games and other games of any sort, gambling, betting etc.
Conditions:
a. No expenditure or allowance can be allowed from such income.
b. Deduction under Chapter VI-A is not allowable from such
income.
c. Adjustment of unexhausted basic exemption limit is also not
permitted against such income.

Tax is charged on such income (Gross amount) at a flat rate of 30%

+ HEC(4%) u/s 115BB.
Grossing up if it is given net of TDS:
Gross amount =
Any sum received by an employer from his
employees as contribution towards PF/ESI/
Superannuation Fund etc., if same is not deposited
in the relevant fund and it is not taxable under the
head ‘Profits and Gains from Business or
Profession’.
--- Shall be treated as income of the
employer (Deduction is available
when such amount is credited to
employee’s account on or before the
due date)
Interest on Securities:
Chargeable to tax if such income is
not charged under the head “PGBP”
 Interest exempt from tax [Sec.10(15)]
i. 12-year National Savings Annuity certificates
ii. National Defence Gold Bonds,1980
iii. Special Bearer Bonds,1991
iv. Post office cash certificates (5 years)
v. Post office National Savings Certificates (12 years / 7
years)
vi. National Plan Certificates (10 years)
vii. Interest on notified bonds / debentures on Public
Sector Companies
viii. Interest on bonds issued by a local authority
ix. Post office savings bank account interest – up to
`3,500 for an individual account and `7,000 in case of
join account.
Grossing up if it is given net of TDS:
Gross amount =
 GIFT
In the following cases, any sum of money or
property received by a person from any person
(except from relatives or member of HUF or in
given circumstances) shall be taxable under the
head ‘Income from other sources’:
Gift in Cash:
a) If any sum is received without consideration in
excess of Rs. 50,000 during the previous year, the
whole amount shall be chargeable to tax.
Aggregate amount of gift > `50,000
=> Entire cash gift will be taxable
 Gift in Kind
Without consideration With consideration
Immovable Movable Immovable Movable
Property Property Property Property
If stamp duty If aggregate fair 1. SDV > sale If Aggregate Fair
value (SDV) market consideration Market Value
>50,000 value(AFMV) 2. (SDV – sale (AFMV) – 50,000
of all properties consideration) > > Sale
>50,000 Higher of (i) 50,000 consideration
and (ii) 5% of the
sale consiideration

Entire stamp Entire fair market (SDV – sale (AFMV – Sale

duty value will value of all consideration) will consideration) of
be taxable properties will be be taxable all properties will
taxable be taxable
Gifts not chargeable to tax [Sec. 56(2)(vii)]
Any sum of money or property received by any person
[on or after 01-04-2017] in the following
circumstances shall not be chargeable to tax:
a) Gifts received from relatives;
b) Gifts received by an individual on occasion of
his/her marriage;
c) Gifts received by way of Inheritance/will;
d) Gifts received in contemplation of death of the
payer;
e) Gifts received from any local authority;
f) Gifts received from any fund, foundation, university,
educational institution, hospital, medical institution,
any trust or institution referred to in Section 10(23C);
Gifts not chargeable to tax [Sec. 56(2)(vii)]
g) Gifts received from any trust or institution
registered under section 12A/12AA.
h) Share received as a consequences of demerger
or amalgamation of a company under clause (vid)
or clause (vii) of section 47, respectively.
i) Share received as a consequences of business
reorganization of a co-operative bank under
section 47(vicb)
j) from such class of persons and subject to such
conditions as may be prescribed
 ‘Relative’ shall mean
1. Spouse of the individual
2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the
individual
5. Any lineal ascendant or descendant of the
individual
6. Any lineal ascendant or descendant of spouse of
the individual
7. Spouse of the person referred in point 2-6 above
Solution:
Computation of income under the head ‘Income from other sources’ of Mr. Das
for the AY 2020-21 relating to PY 2019-20.
Particulars Reason Amount(Rs.)
(i) Gift from Grandfather Relative Nil
(ii) Laptop from employer Perquisite(Income from Nil
(iii) Purchase of building from friend salary)
SDV(9L)>SC( 2L),
SDV(9L) - SC( 2L) >50K
(Higher of 50K and 5% of SC 7,00,000
i.e. Rs.10K),
(iv) Gift of flat from elder brother of Then, SDV – SC 20,00,000
father-in-law Not Relative (20L>50,000)
(v) Gift of wrist watch from friend Nil
(vi) Purchase of work art Not a property
AFMV(18L) – 50K > SC(15L) 3,00,000
Then, AFMV(18L) – SC(15L)
(vii)Purchase of commercial property
SDV(25.5L)>SC( 25L),
SDV(25.5L) - SC( 25L) > 50K Nil
(Higher of 50K and 5% of SC
i.e. Rs.12.5K),
Income from other sources 30,00,000
 Deductions [Sec. 57]:
S.N. Nature of Income Deductions allowed
1. Dividend or Interest on Any reasonable sum paid by way of
securities commission or remuneration to banker or
any other person for purpose of realizing
dividend (other than dividends referred to
in section 115-O) or interest on securities
2. Employee’s contribution If employees’ contribution is credited to
towards Provident Fund, their account in relevant fund on or before
Superannuation Fund, the due date
ESI Fund or any other
fund setup for the welfare
of such employees
3. Rental income letting of Rent, rates, taxes, repairs, insurance and
plant, machinery, furniture depreciation etc.
or building
 Deductions [Sec. 57]:
S.N. Nature of Income Deductions allowed
4. Family Pension 1/3rd of family pension subject to
maximum of Rs. 15,000.
5. Any other income Any other expenditure (not being
capital expenditure) expended
wholly and exclusively for earning
such income
6. Interest on compensation 50% of such interest (subject to
or on enhanced certain conditions)
compensation
7. Income from activity of All expenditure relating to such
owning and maintaining activity.
race horses.
 Expenses not deductible [Section 58]:
S.N. Nature of Income

1. Personal expenses

2. Interest chargeable to tax which is payable outside India on which tax

has not been paid or deducted at source

3. ‘Salaries’ payable outside India on which no tax is paid or deducted

at source

4. Income tax and Wealth-tax

5. Expenditure of the nature specified in section 40A

6. Expenditure in connection with winnings from lotteries, crossword

puzzles, races, games, gambling or betting

7. Any cash payment in excess of Rs.10,000

8. Any payment to relatives in excess of requirement

Recovery of loss or expenditure
previously allowed as deduction
[Sec.59]

---The amount so received is

chargeable to tax as the
income of previous year.
 Presentation on
PROFITS AND GAINS OF
BUSINESS OR PROFESSION
Part-I
For the students
of
Semester – IV
[Link].(Hons. & General)
By
DR. ASIM KUMAR MANNA
Business includes any trade, commerce or
manufacture.
Trade: Activity of purchase and sale of
goods with an object of making profit
Commerce: Trade repeated on a large
scale
Manufacture: When as a result of certain
process(es) applied on a product, a new
and commercially different product comes
into existence which is known to the market
as different from the raw material.
Profession: An exercise of intellectual
skill or manual skill on the basis of
some special learning and qualification
gathered through past training or
experience e.g. C.A., Doctor, Lawyer
etc. and includes vocation.
Vocation implies natural ability of a
person to do some particular work e.g.
singing, dancing, etc. It must have
earning feature and it does not require
a degree or special training.
 General Principles for computation of
business income:
1. The owner of the business is chargeable (not
necessary to be carried on personally)
2. Carried on during the previous year
3. Profits of the previous year are chargeable
4. IT law is not concerned with the legality of
business.
5. Profits should be understood in a commercial
sense
 Computation of Income from Business
Particulars Amount (`)
Net Profit as per Profit and Loss Account xxx
Add: Expenses debited to Profit and Loss xxx
Account but disallowed
Less: Expenses allowable / eligible as deduction (xxx)
but not debited to Profit and Loss Account
Less: Incomes wrongly credited to the Profit (xxx)
and Loss Account but to be treated under
separate heads of income
Add: Deemed income xxx
Profits from Business xxx
 Incomes chargeable under the head
“Profits & Gains of Business or Profession”
1. Any income including income from speculative
transaction related to business
2. Any compensation or other payment relating to
business
3. Income derived by a trade, professional or similar
association from specific services performed for its
members
4. The value of any benefit or perquisite arising from
business
5. Any sum received under a Keyman Insurance Policy
including bonus on such policy
 Incomes not chargeable under the head
“Profits & Gains of Business or Profession”
1. Rental income from house property
2. Dividend income
3. Income from letting out of
commercial assets
4. Winning from lotteries, races etc.
5. Exempted income by virtue of
sec.10,10AA,11 or 13A
 Expenditures not allowed as deduction:
1. Capital expenditure
2. Expenditure of a non-assessable
business (Agricultural income)
3. Anticipated loss i.e. Provision for bad
debt
4. Income earned for himself (salary to
proprietor, interest on capital, notional
rent)
5. Expenditure for illegal transactions
 Expenditures allowed as deduction:
1. Rent, Rates, Taxes, Repairs and Insurance for
Building
2. Repairs and Insurance of Machinery, Plant and
Furniture
3. Depreciation allowance

Classification:
 Normal Depreciation
 Addiitional Depreciation
 Terminal Depreciation
 Unabsorbed Depreciation
 Presentation on
PROFITS AND GAINS OF
BUSINESS OR PROFESSION
Part-II
For the students
of
Semester – IV
[Link].(Hons. & General)
By
DR. ASIM KUMAR MANNA
 Presentation on
PROFITS AND GAINS OF
BUSINESS OR PROFESSION
Part-III
For the students
of
Semester – IV
[Link].(Hons. & General)
By
DR. ASIM KUMAR MANNA
 Expenditure on Scientific Research
(Section 35)
Any activity for the extension of knowledge
in the fields of natural or applied sciences.
Scientific Research may be carried on:
1. by the assessee, relating to his business
(i.e. In House research)
2. by making payment to outside agencies
engaged in scientific research work
1. Carried on by the Assessee relating to his business
(i.e. In House research)
Nature of After commencement Before commencement of
Assessee Expenditure of business business
Revenue (Salary to 100% deduction All expenses (100%) during 3
employees, purchase (to the extent certified by years immediately preceding the
Non-
of material etc) the prescribed authority, commencement of business shall
Corporate
excluding perquisites) be allowed as deduction.

Capital (Building, 100% deduction All expenses (100%) during 3

Plant, Equipment and (excluding cost of Land) years immediately preceding the
other assets) commencement of business shall
be allowed as deduction.

Revenue (Salary to 150% deduction All expenses (100%) during 3

employees, purchase (to the extent certified by years immediately preceding the
Corporate
of material etc) the prescribed authority, commencement of business shall
excluding perquisites) be allowed as deduction.

Capital (Building, Building (100%), Others All expenses (100%) during 3

Plant, Equipment and (150%) years immediately preceding the
other assets) (excluding cost of Land) commencement of business shall
be allowed as deduction.
2. Carried on by making payment to outside
agencies engaged in scientific research work
(may be related/unrelated with business)
Approved scientific research
association, university, colleges:
For Natural Science Research 150%
For Social/ Statistical Research 100%

National Laboratory 150%

Indian Scientific Research Company 100%
 Presentation on
PROFITS AND GAINS OF
BUSINESS OR PROFESSION
Part-IV
For the students
of
Semester – IV
[Link].(Hons. & General)
By
DR. ASIM KUMAR MANNA
Qualifying Expenditure:
Corporate Least of the following:
Assessee (i) Actual preliminary expenses incurred
(ii) Higher of:
(a) 5% of cost of project
(b) 5% of capital employed
Non- Least of the following:
Corporate (i) Actual preliminary expenses incurred
Assessee (ii) 5% of cost of project
Amount of deduction: Qualifying expenditure
shall be allowed in 5 equal installments from the
year in which the business is commenced or the
extension work is completed.
Bad Debts [Sec.36(1)(vii)]:
Any debt or part thereof, which becomes
bad shall be allowed as deduction.
Conditions:
1. Debt must be incidental to the business
or profession of the assessee.
2. The debt has been considered as income
of the assessee of that previous year or of
earlier previous years.
3. It must have been written off in the
accounts of the assessee.
 Recovery of Bad Debts [Sec.41(4)]
Particulars ` `
Amount recovered ***

Less: Bad Debt claimed ***

Less: Bad Debt allowed as *** ***
deduction
Taxable Bad Debt Recovery ***
Problem.
Bad debt claimed by the assessee was `1,00,000 in
the A.Y. 2014-15, deduction allowed by the A.O. in
that year was `85,000. In the P.Y. 2019-20, `60,000 is
recovered. Discuss.
Solution:
Particulars ` `
Amount recovered 60,000

Less: Bad Debt claimed 1,00,000

Less: Bad Debt allowed as deduction 85,000 15,000

Taxable Bad Debt Recovery 45,000

Consequences of payment exceeding `10,000
otherwise than by account payee cheque or
demand draft or use of electronic modes
[Sec.40A(3)]
100% of such payment shall be disallowed

Advertisement Expenditure [Sec.37(2B)]

Any expenditure incurred by an assessee an
advertisement in any souvenir, brochure,
pamphlet, published by a political party will not
avail any deduction but other remaining expenses
on advertisement are deductible as per section
37(1).
 Overvaluation and undervaluation of
opening and closing stock
Particulars Over- Under-
Valuation Valuation

Opening Stock + -
Closing Stock - +
 Goods withdrawn by the Proprietor
generally valued at cost price as per
Kikabhai Premchand vs. CIT
Particulars `
Cost price ***
Less: Charged out price ***
Balance ***
If the balance is a positive one add the difference and
if If the balance is negative one less the difference
 Presentation on
SET-OFF AND CARRY
FORWARD OF LOSSES
For the students
of
Semester – IV
[Link].(Hons. & General)

By
DR. ASIM KUMAR
MANNA
 Set-off and carry forward of losses
According to the Income Tax Act, a person can opt for
‘setting off and carrying forward of losses’ for the
losses that have been incurred. This provides some
relief to the person who has incurred the losses.
“Set-off” means adjustments of losses against the
profit from another source/head of income in the same
assessment year.
If losses cannot be set-off in the same year due to
inadequacy of eligible profit, then such losses are
carrying forward to next assessment year for
adjustment against the eligible profit of that year.
The maximum period for which different losses can be
carried forward for set-off has been provided in the
Act.
Provisions pertaining to Set-Off and carry
forward of losses
Provisions pertaining to Set-Off and carry forward of
losses are divided in 3 parts:
Part 1 deals with Set off of loss from one source against
income from another source under the same head of
income i.e., intra-head adjustment (Section 70)
Part 2 deals with Set off of loss from one head against
income from another head i.e., inter-head adjustment
(Section 71)
Part 3 deals with Carry forward of losses to
subsequent years (Section 71B, 72, 73, 73A, 74, 74A)
Part 1 : Set off of loss from one source against income from
another source under the same head of income
Loss from one source of Income can be set off against
Income from another source of Income under same
head subject to few exceptions as under:
Loss from speculation business can be set off only
against profit from speculation business
Long term capital loss can be set off only
against Long term capital gain
Loss from activity of owning and maintaining race
horses can be set off only against same income.
Loss from specified business referred u/s 35AD can
be set off only against another specified business.
Loss cannot be set off against winnings from
lotteries, crossword puzzles, races, card games, and
other games.
Part 2 : Set off of loss from one head against income
from another head
Loss under one head of Income can be set off against Income under
another head of Income subject to few exceptions as under:
Loss from speculation business cannot be set off against any other
head of Income.
Loss under the head “Capital gains” cannot be set off against any
other head of Income.
Loss from activity of owning and maintaining race horses cannot be
set off against any other head of Income.
Loss from specified business referred u/s 35AD cannot be set off
against any other head of Income.
Loss cannot be set off against winnings from lotteries, crossword
puzzles, races, card games, and other games.
Normal business loss cannot be set off against Income under the
head “Salaries”
Loss under the head “ Income from House property” can be set
off against any other head of income subject to maximum of Rs.2 lacs
for particular assessment year.
 Part 3 : Carry forward of losses to
subsequent years

Loss which could not be set off as

per Part 1 i.e., under the same head
or as per Part 2 i.e., under different
head in the same year can be set off
against income of subsequent year.
 Order of set-off of losses
As per provisions of section 72(2), brought forward
business loss is to be set-off before setting off
unabsorbed deprecation. In case where profits are
insufficient to absorb brought forward losses, current
depreciation and current business losses, the same
should be deducted in the following order :
i) Current year depreciation/ current year capital
expenditure on scientific research and current year
expenditure on family planning, to the extent allowed.
ii) Brought forward loss from business/profession.
iii) Unabsorbed expenditure on family planning
iv) Unabsorbed depreciation
v) Unabsorbed capital expenditure on scientific research
 Table of Set off and Carry Forward Losses
Set-off against income
Carry
in the same Mandato
forward Time
assessment year ry filing
S. Secti losses limit to
Type of loss Intra- of return
N. on to be carried
head Inter-head of
set-off forward
Adjust Adjustment income
against
ment
(1) (2) (3) (4) (5) (6) (7) (8)
1. 71B House Property: Income Any other Income 8 years No
a. Let out from head* up to from
property
b. Self- House Maximum of House
occupied property Rs. 2,00,000 property.
Property (On head from AY 2018-
account of
interest on 19.
borrowed
capital)
 Table of Set off and Carry Forward Losses
Set-off against income
Carry Mandat
in the same
forward Time ory
assessment year
S. Secti losses to limit to filing of
Type of loss Intra-
N. on be set- carried return
head Inter-head
off forward of
Adjustm Adjustment
against income
ent
(1) (2) (3) (4) (5) (6) (7) (8)
2. Business Loss:
2.1 73 Business Speculation Not allowed Speculation 4 years Yes
(Speculation) Profit Profit
2.2 72 Business or Business Any other head* Business 8 years Yes
Profession (Non- Income except salaries Income
Speculation other Head [Sec. 71(2A)] Head
than Depreciation)
2.3. 32 Unabsorbed Business Any other head* Any head Indefinitely No
Depreciation, capital Income except salaries except
expenditure on Head [Sec. 71(2A)] salaries
scientific research [Sec.
and family planning 71(2A)]
2.4. 73A Losses by specified Only against Not allowed Business Indefinitely Yes
Businesses under Specified income of
section 35AD business specified
income business
 Table of Set off and Carry Forward Losses
Set-off against income
Carry Mandat
in the same assessment
forward Time ory
year
S. Secti losses to limit to filing of
Type of loss Inter-
N. on be set- carried return
Intra-head head
off forward of
Adjustment Adjustm
against income
ent
(1) (2) (3) (4) (5) (6) (7) (8)
3. Capital Loss:
3.1 70/74 Short-term Capital Not Capital 8 years Yes
. capital loss gains(both short allowed gains(both
and long term) short and
long term)
3.2 70/74 Long-term Long-term Not Long-term 8 years Yes
capital loss capital gain allowed capital
gain only
4. 74A Running and Such income Not Such 4 years Yes
Maintaining only allowed income
Race Horses only
5 71 Other sources Other sources Any other No carry N. A.
head forward
 Notes
*Loss cannot be set off against winnings from
lotteries, crossword puzzles, races including
horse races, card games or any other games
or from gambling or betting of any form.
Loss from a source can be set off only if its
profit is taxable. If profits from a source are
exempt then its loss cannot be set off.
Loss from lotteries, gambling, crossword
puzzles etc. cannot be set off or carry forward.
 Master Problem
From the following information compute gross total income of Mr. A for the AY 2020-21.

`
Income from salaries 3,60,000
Income from house property: Let out 60,000
Self occupied (1,40,000)
Profit from speculative business I 35,000
Loss from speculative business II 20,000
Brought forward loss from speculative business I for the AY 2018-19 5,000
Paper business: Profit for the current year 31,000
Brought forward loss for the AY 2016-17 15,000
Unabsorbed depreciation for the AY 2016-17 20,000
Jute business: Loss for the year (before depreciation) 18,000
Current year depreciation 20,000
Brought forward loss for the AY 2017-18 (before depreciation) 13,000
For the year 2018-19 (loss of return not submitted) 20,000
Business in dealing shares – profit for the year 35,000
LTCG 75,000
LTCL 25,000
Brought forward LTCL for the AY 2016-17 20,000
STCG 25,000
STCL 15,000
Brought forward STCL for the AY 2017-18 30,000
Profit from owning and maintaining race horses 80,000
Loss from owning and maintaining race horses 50,000
Brought forward loss from owning and maintaining race horses for the AY 2017-18 40,000
Dividend from foreign co. 70,000
 Solution:
Computation of Gross Total Income of Mr. A, a resident individual
for the AY 2020-21 relating to the PY 2019-20.

Particulars Rs. Rs. Rs.

Income from salaries 3,60,000
Income from House Property:
Let out 60,000
Self occupied (1,40,000)
Less: set off loss of S.O. property from (80,000) (80,000) 2,80,000
salary
 Particulars Rs. Rs. Rs.
Profit and gains of business or profession:
Profit from speculative business I 35,000
Less: Set off loss from speculative business II (20,000)
15,000
Less: B/F loss from speculative business I for the 5,000
AY 2018-19 10,000
Profit from business in dealing shares 35,000
Profit from paper business 31,000
76,000
Less: Set off loss from jute business (18,000)
58,000
Less: Set off of current years depreciation of jute (20,000)
business 38,000
Less: Set off B/F loss of paper business (2016-17) (15,000)

Less: Set off B/F loss of jute business (2017-18) (13,000)

Less: Unabsorbed depreciation of paper business (10,000)
Unabsorbed depreciation can be set off through any
heads of income except income from salaries and (10,000)
casual incomes.
 Particulars Rs. Rs. Rs.
Capital Gains:
LTCG 75,000
Less: Set off of LTCL (25,000)
50,000
Less: Set off B/F LTCL 20,000
30,000
Add: STCG 25,000
55,000
Less: Set off of STCL 15,000
40,000
Less: Set off of B/F STCL 30,000 10,000
 Particulars Rs. Rs. Rs.
Income from other sources:
Profit from owning and 80,000
maintaining race horses
Less: Set off loss from owning
and maintaining race horses 50,000
30,000
Less: Set off B/F loss from
owning and maintaining race
horses 30,000
(Rs.10,000 to be carried forward) Nil 70,000
70,000
Dividend from foreign Co. 70,000
Gross Total Income 3,50,000
Notes:
1. Unabsorbed B/F loss of Rs.10,000 from
owning and maintaining race horses will be
C/F
2. Unabsorbed depreciation can be set off
through any heads of income except
income from salaries and casual incomes.
3. B/F loss from jute business (2018-19) of
Rs.20,000 cannot be set off as the loss of
return not submitted by the assessee.
18