Final Course

Study Material
(Modules 1 to 4)

Paper 4
Direct Tax Laws &
International Taxation
[Direct Tax Laws as amended by the Finance (No.2) Act, 2024]
Assessment Year 2025-26

Module – 1
(Relevant for May, 2025 and
November, 2025 examinations)

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Study Material has been prepared by the faculty of the Board of Studies. The objective of the
Study Material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarification or have any suggestion for further
improvement of the material contained herein, they may write to the Joint Director, Board of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel

Edition : November, 2024

Committee/Department : Board of Studies

E-mail : [email protected]

Website : www.icai.org

Price : ` /- (For All Modules)

ISBN No. : 978-93-48313-26-3

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)

Printed by :

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BEFORE WE BEGIN …

Direct Tax Laws & International Taxation: Dynamic Subject Area

Direct Tax Laws & International Taxation is one of the dynamic subjects of the chartered
accountancy course. The direct tax laws of the country undergo significant changes every year with
the passing of the annual Finance Act. Apart from these significant amendments ushered in every
year through the Finance Act, notifications and circulars are also issued from time to time by the
Central Board of Direct Taxes (CBDT), the statutory authority in charge with the administration of
direct taxes, to implement the provisions of the Act and clarify issues regarding the meaning and
scope of certain provisions. Further, decisions are pronounced by various Courts interpreting the
provisions of tax laws.
With increased cross border transactions and the whole world virtually becoming one market, there
is a need for chartered accountants to enhance their knowledge base in international taxation.
Countries across the globe are entering into tax treaties to avoid double taxation of a single
transaction. In a highly advanced IT enabled business scenario where an entity operates from many
establishments spread throughout the globe, chartered accountants have to be well versed with the
nuances of international taxation to be able to give an informed and correct advice and ensure
compliance with tax laws. Accordingly, international taxation has been included as an integral part
of this paper.
The contents of the syllabi of this paper is divided into three parts –
1. Chapters based on substantive law of direct taxes including tax planning and tax avoidance;
2. Chapters based on the compliance and procedural law of direct taxes; and

3. Chapters based on international taxation.

The relevant Finance Act and Assessment Year

This Study Material is based on the provisions of direct tax laws, as amended by the
Finance (No. 2) Act, 2024 and the significant notifications, circulars issued and other legislative
amendments made upto 31st October, 2024. The computational problems have been solved on the
basis of the provisions of direct tax laws applicable for A.Y.2025-26. The Study Material is, therefore,
relevant for May 2025 and November, 2025 examinations. In this Study Material, the amendments
made by the Finance (No. 2) Act, 2024 and latest notifications and circulars issued have been
indicated in italics/bold italics.

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The significant circulars and notifications issued and other legislative amendments, if any, made
upto 31st October, 2024, relevant for May, 2025 Examination, but not covered in the study material
would be webhosted as Statutory Update for May, 2025 examination in the BoS Knowledge Portal.
Likewise, the significant circulars and notifications issued and other legislative amendments, if any,
made upto 30th April, 2025, relevant for November, 2025 Examination, but not covered in the study
material would be webhosted as Statutory Update for November, 2025 examination. The Judicial
Update containing latest significant court rulings relevant for May, 2025 and November, 2025
examination would also be webhosted at the BOS Knowledge Portal.
Read the Bare Act & Rules along with Study Material

At the Final level, along with the Study Material, students are also advised to read the Income-tax
Act, 1961 and Income-tax Rules, 1962, available at the website of the income-tax department
www.incometaxindia.gov.in. This will help understand the language of law and sequence of sections
and rules. The circulars and notifications issued by CBDT, the income-tax return forms, important
provisions relating to firms, companies, trusts, FAQs etc. are also available at this website. Students
are advised to visit the income-tax department’s website and enhance their knowledge.
Framework of Chapters: Uniform Structure comprising of specific components

Efforts have been made to present the complex direct tax laws in a lucid manner. Care has been
taken to present the chapters in a logical sequence to facilitate easy understanding by the students.
The Study Material has been divided into four modules for ease of handling by students. The first
three modules are on direct tax laws and the fourth module is on international taxation.
Each chapter of the Study Material has been structured uniformly and comprises of the following
components:
Components of About the component
each Chapter
1 Learning Learning outcomes which you need to demonstrate after learning each
Outcomes topic have been detailed in the first page of each chapter. Demonstration
of these learning outcomes would help you achieve the desired level of
technical competence
2 Content The concepts and provisions of direct tax laws and international taxation
are explained in a student-friendly manner with the aid of
examples/illustrations/diagrams/flow charts. Diagrams and Flow charts
would help you understand and retain the concept/ provision learnt in a
better manner. Examples and illustrations would help you understand
the application of concepts/provisions. These value additions would,

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thus, help you develop conceptual clarity and get a good grasp of the
topic.
3 Significant The summary of recent significant select Supreme Court and High Court
Select Cases rulings have been tabulated at the end of each chapter capturing the gist
of the Court decisions interpreting the provisions of tax laws.
In addition, case laws (including recent case laws) also form part of the
discussion of topics in the content as well as in the questions and
answers in “Test Your Knowledge” component.
Questions on “Significant Select Cases” in direct tax laws have been
given at the end of Module 3 to enable you to apply the rationale of court
rulings in addressing issues.
4 Test Your The questions and answers at the end of each chapter would help you to
Knowledge analyse the provisions of direct tax laws and international taxation and
apply the same in problem solving, thus, sharpening your application
skills. In effect, these questions would test your ability to analyse and
apply the concepts/provisions learnt in solving problems and addressing
issues.

We hope that these student-friendly features in the Study Material improves your learning curve and
sharpens your analytical and interpretational skills.

Happy Reading and Best Wishes!

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PAPER – 4 : DIRECT TAX LAWS & INTERNATIONAL TAXATION

(One paper ─ Three hours –100 Marks)

Objective:

(a) To acquire the ability to analyse and interpret the provisions of direct tax laws and recommend
optimal solutions to practical problems in a tax efficient manner; and

(b) To apply the provisions of direct tax laws and the concepts, principles and provisions of
international taxation to recommend solutions to issues involved in cross border transactions.
Contents:

I. (i) Comprehensive computation of income-tax liabilities of companies and other entities

under the alternative tax regimes under the Income-tax Act, 1961 to optimise tax
liability

- General provisions under the Act for computation of total income and tax liability
for companies and other entities

- Special tax regimes under the Act for companies and other entities

- Optimisation of tax liability of companies and other entities through tax planning

(ii) Special Provisions relating to charitable and religious trust and institutions, political
parties and electoral trusts, business trusts, securitisation trusts, investment funds and
other funds/trusts

(iii) Anti-avoidance provisions under the Act

(iv) Provisions to address tax challenges on digitalization

II. Tax Administration and Appellate Mechanism

Deduction, Collection and Recovery of Tax

Income-tax Authorities

Assessment Procedures

Appeals and Revision; and Dispute Resolution

Provisions to counteract unethical tax practices

- Taxation of undisclosed income under the Income-tax Act, 1961

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- Taxation of undisclosed foreign income and assets

- Penalties and offences and prosecution

Miscellaneous Provisions

Tax Audit

III. International Taxation

(i) Taxation of cross border transactions and Non-resident taxation under the Income-tax
Act, 1961, including

- Transfer Pricing

- Non-resident Taxation

- Double Taxation Relief

- Advance Ruling

(ii) Other Aspects of International Taxation, namely,

- Significant articles of OECD and UN Model Tax Conventions

- Fundamentals of BEPS

- Application and Interpretation of Tax Treaties

- Latest developments in international taxation

Note: If any new legislation(s) are enacted in place of an existing legislation(s), the syllabus will
accordingly include the corresponding provisions of such new legislation(s) in the place of the
existing legislation(s) with effect from the date to be notified by the Institute. Similarly, if any existing
legislation(s) on direct tax laws ceases to be in force, the syllabus will accordingly exclude such
legislation(s) with effect from the date to be notified by the Institute.

Further, the specific inclusions/exclusions in any topic covered in the syllabus will be effected by
way of Study Guidelines every year, if required. Specific inclusions/exclusions in a topic may also
arise due to additions/deletions made every year by the Annual Finance Act.

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OVERVIEW OF SELECTED KEY AMENDMENTS

MADE BY THE FINANCE (NO. 2) ACT, 2024

This edition of the study material on Direct Tax Laws & International Taxation has been meticulously
updated in line with the Direct Tax Laws, as amended by the Finance (No. 2) Act, 2024 along with
significant Notifications and Circulars issued upto 31.10.2024. It is specifically designed for A.Y.
2025-26 and is applicable for May 2025 and November 2025 examinations.
The amendments made by the Finance (No.2) Act, 2024, significant Notifications and Circulars
issued upto 31.10.2024 have been incorporated in this material. Accordingly, the content including
tabular presentations, diagrams, flow charts etc have been added, deleted, modified on the basis of
provisions of direct tax laws applicable for A.Y. 2025-26. Additionally, examples, illustrations given
during the discussion, significant select cases of Supreme Court and High Court rulings forming part
of the discussion or contained in the questions and tabulated at the end of each chapter and "Test
Your Knowledge" questions have been updated, deleted or modified in accordance with these
amendments.
While the amended provisions are distinctly highlighted in italics/bold and italics throughout the
material for easy access and quick reference, the concise summary of some of the key amendments
introduced by the Finance (No. 2) Act, 2024 are given here below:
Default Tax Regime [Section 115BAC] - Significant changes have been made to the default
tax regime under section 115BAC, with the objective of making it more beneficial and
appealing for taxpayers. The tax slabs under the Default Tax Regime have been restructured
as follows:
Total income Rate of tax
Upto ` 3,00,000 Nil
From ` 3,00,001 to ` 7,00,000 5%
From ` 7,00,001 to ` 10,00,000 10%
From ` 10,00,001 to ` 12,00,000 15%
From ` 12,00,001 to ` 15,00,000 20%
Above ` 15,00,000 30%
Under the Default Tax Regime, the standard deduction available to salaried employees has
been enhanced from ₹ 50,000 to ₹ 75,000. Additionally, the maximum deduction for family

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pension has been increased from ₹ 15,000 to ₹ 25,000. For non-government employees, the
permissible deduction for employer’s contributions to the National Pension System (NPS) has
been raised from 10% to 14% of the employee’s salary, applicable exclusively under this
regime.
Reduction of tax rate applicable to foreign companies: The rate of income-tax chargeable
on total income of a foreign company (other than that chargeable at special rates) reduced
from 40% to 35%.
Increase in deduction limit in respect of remuneration to working partners of a firm:
The limit for computing the allowable deduction in respect of remuneration paid to working
partners has been increased. Accordingly, new limits are:

On the first ` 6,00,000 of the book-profit or in case Higher of ₹ 3,00,000, or 90% of the
of a loss book-profit

On the balance book profit 60%

Income from letting out of residential house property: Any income from letting out of a
residential house or part thereof by the owner would be chargeable to tax only under the head
‘Income from house property’ and not under the head ‘Profits and gains of business or
profession’.
Period of holding for classifying capital asset as long term or short term: W.e.f.
23.7.2024, there are only two period of holding for classifying a capital asset as long-term or
short-term, 12 months for all listed securities and 24 months for all other assets.
Consequently, the period of holding for units of listed business trust has been changed from
36 months to 12 months which is now at par with listed equity shares.
Increase in tax rate on STCG on specified financial assets - The tax rate on short term
capital gains on specified financial assets (STT paid equity shares, units of equity-oriented
fund and units of a business trust) under section 111A has been increased from 15% to 20%
with effect from 23.7.2024. However, there is no change in the tax rate for other short term
capital gains.
Uniform tax rate on LTCG - In respect of all long-term capital gains whether taxable under
section 112 or on specified financial assets under section 112A, a uniform tax rate of 12.5%
would be applicable (except unlisted debentures and bonds) w.e.f. 23.7.2024.

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Increased exemption limit under section 112A: The exemption limit for long term capital
gains on specified financial assets under section 112A has been increased from ₹ 1 lakh per
year to ₹ 1.25 lakh per year.
Capping of Indexation for Certain Long-Term Capital Gains: W.e.f. 23.7.2024, the
indexation benefit available on transfer of certain long term capital assets has been removed.
However, grand fathering being allowed in respect of long-term capital gain arising to resident
individual or HUF on transfer of land or building or both acquired before 23.7.2024.
Abolition of Angel Tax: Where capital is raised by closely held companies through the
issuance of shares and the consideration for issue of shares exceeds the face value of such
shares, the excess of consideration received over the fair market value of the shares, was
taxed under section 56(2)(viib). In order to boost the start-ups, the angle tax, as it is commonly
referred to, is abolished.
Tax on Buy-back of shares: The income from buy-back of shares by domestic companies
on or after 1.10.2024 is now taxable in the hands of recipient investor as dividend. Upto
30.9.2024, additional income-tax is attracted in the hands of the domestic company and
consequently, income on buyback of shares is exempt in the hands of shareholders under
section 10(34A). Accordingly, w.e.f. 1.10.2024, TDS@10% would be attracted in respect of
dividend arising on account of buy back of shares in the hands of shareholders.
No application for approval under First Regime: The Income-tax Act, 1961 puts in place
two main regimes for trusts or funds or institutions to claim exemption. The first regime is
contained in section 10(23C)(iv), (v), (vi) or (via). The second regime is contained in the
provisions of sections 11 to 13. In order to simplify the procedures for approvals or registration
of trusts or institutions and to reduce administrative burden, w.e.f. 1st October, 2024, no
application can be filed for approval under first regime.
Withdrawal of Equalisation Levy on e-commerce supply or services: Equalisation Levy
@ 2% of consideration received for e-commerce supply of goods or services from 1st August
2024 has been withdrawn. Consequently, this study material does not contain any discussion
regarding it.
Reduction in tax deducted at source (TDS) rates: The rate of TDS under section 194D,
194DA, 194G, 194H, 194-IB, 194M have been reduced from 5% to 2% from 1.10.2024 (in
case of section 194D, from 1.4.2025). Moreover, TDS rate on e-commerce operators under
section 194-O is also reduced from 1% to 0.1% on gross amount of sales or services or both.
This is in line with the objective of TDS serving as an audit trail rather than as a revenue
garnering measure.

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TCS on notified luxury goods: To enable TCS on luxury goods, the scope of section
206C(1F) has been expanded w.e.f. 1st January 2025 to levy TCS of 1% on notified goods of
value exceeding ` 10 lakhs.
Re-introduction of block assessment scheme for search and seizure cases: A scheme
of block assessment for search cases has been re-introduced w.e.f. 1st September 2024. The
block period would be six previous years preceding the previous year in which the search
was initiated, or any requisition was made and also include the period up to the date of
conclusion of search or such requisition. The applicable rate of tax would be 60%. Further,
penalty at 50% of the said tax would be leviable, unless the same is disclosed in the return
filed pursuant to search.
Revision in the time-limit for filing appeals to the ITAT: The time limit for filing appeal
before the ITAT has been amended w.e.f. 1st October 2024 from 'within sixty days of the date
on which the order sought to be appealed against is communicated to the assessee or to the
PCIT/CIT, as the case may be” to “within two months from the end of the month in which the
order sought to be appealed against is communicated to the assessee or to the PCIT/CIT, as
the case may be”.
Introduction of presumptive income scheme for cruise ship operations by non-
residents: New section 44BBC has been inserted to provide for presumptive income @20%
of the aggregate amount received/ receivable by, or paid/ payable to, the non-resident cruise-
ship operator, on account of the carriage of passengers, as profits and gains of such cruise-
ship operator from this business.
Parity in taxation between resident and non-resident assesses: To bring parity of taxation
between residents and non-residents, corresponding amendments to section 115AD, 115AB,
115AC, 115ACA and 115E have been made to align the rates of taxation in respect of long-
term capital gains taxable under section 112A and 112 and rates of short term capital gains
taxable under section 111A.

The above coverage provides only a concise overview of the significant select amendments made
by the Finance (No. 2) Act, 2024. To fully grasp the scope and application of the amendments
introduced by the Finance (No. 2) Act, 2024 along with Notification and Circulars, it is imperative to
refer to the detailed discussions including tabular presentations, flow charts, examples, illustrations,
significant select cases, test your knowledge questions provided in the respective chapters.
Therefore, students are advised to refer the chapters thoroughly for comprehensive study and
effective preparation for their examinations.

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CONTENTS

MODULE – 1
Chapter 1 : Basic Concepts
Chapter 2 : Incomes which do not form part of Total Income
Chapter 3 : Profits and Gains of Business or Profession
Chapter 4 : Capital Gains
Chapter 5 : Income from Other Sources
Chapter 6 : Income of Other Persons included in assessee’s Total Income
Chapter 7 : Aggregation of income, set-off or carry forward of Losses
Chapter 8 : Deductions from Gross Total Income

MODULE – 2
Chapter 9 : Assessment of Various Entities
Chapter 10: Assessment of Trusts and Institutions, Political Parties and Other Special Entities
Chapter 11 : Tax Planning, Tax Avoidance & Tax Evasion
Chapter 12 : Taxation of Digital Transactions
MODULE – 3
Chapter 13 : Deduction, Collection and Recovery of tax
Chapter 14 : Income-tax Authorities
Chapter 15 : Assessment Procedure
Chapter 16 : Appeals and Revision
Chapter 17 : Dispute Resolution
Chapter 18 : Miscellaneous Provisions
Chapter 19 : Provisions to Counteract Unethical Tax Practices
Chapter 20 : Tax Audit and Ethical Compliances

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MODULE – 4
Chapter 21 : Non-resident Taxation
Chapter 22 : Double Taxation Relief
Chapter 23 : Advance Rulings

Chapter 24 : Transfer Pricing

Chapter 25 : Fundamentals of BEPS
Chapter 26 : Application and Interpretation of Tax Treaties
Chapter 27 : Overview of Model Tax Conventions
Chapter 28 : Latest Developments in International Taxation

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DETAILED CONTENTS: MODULE - 1

CHAPTER 1 – BASIC CONCEPTS

Learning Outcomes ............................................................................................................................ 1.1

Contents:
1.1 Overview of Income-tax law in India ....................................................................................... 1.2
1.2 Important definitions ............................................................................................................. 1.10
1.3 Previous year and Assessment year .................................................................................... 1.33
1.4 Charge of Income-tax ........................................................................................................... 1.39
1.5 Rates of Tax, Surcharge & Cess ......................................................................................... 1.39
1.6 Rebate for resident individuals [Section 87A] ....................................................................... 1.65
Significant Select Cases ....................................................................................................... 1.68
Test Your Knowledge ............................................................................................................ 1.70

CHAPTER 2 - INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Learning Outcomes................................................................................................................. 2.1

Contents:

2.1 Introduction ................................................................................................................. 2.2

2.2 Incomes not included in total income [Section 10] ......................................................... 2.5
2.3 Restrictions on allowability of expenditure [Section 14A] ............................................. 2.40

Significant Select Cases ....................................................................................................... 2.42

Test Your Knowledge ............................................................................................................ 2.43

CHAPTER 3 – PROFITS AND GAINS OF BUSINESS OR PROFESSION

Learning Outcomes................................................................................................................. 3.1

Contents:
3.1 Meaning of ‘Business’ and ‘Profession’ ........................................................................ 3.3

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3.2 Income chargeable under this head [Section 28] ........................................................... 3.5
3.3 Speculation business ................................................................................................... 3.9
3.4 Method of Accounting ............................................................................................... 3.11

3.5 Computation of Profits and Gains from business

or profession [Section 29] .......................................................................................... 3.26
3.6 Admissible deductions ............................................................................................... 3.27
3.7 Inadmissible deductions [Section 40] ........................................................................ 3.132
3.8 Expenses or payments not deductible
in certain circumstances [Section 40A] ..................................................................... 3.144
3.9 Profits chargeable to tax [Section 41] ....................................................................... 3.152
3.10 Other provisions ...................................................................................................... 3.153
3.11 Compulsory maintenance of accounts [Section 44AA] ............................................... 3.166
3.12 Audit of accounts of certain persons
carrying on business or profession [Section 44AB].................................................... 3.170

3.13 Special provisions for computing profits and gains

of business on presumptive basis [Section 44AD/44ADA/44AE] ................................ 3.174
3.14 Method of computing deduction in the case of business
re-organization of Co-operative Banks [Section 44DB] .............................................. 3.181
3.15 Computation of business income in cases where income
is partly agricultural and partly business in nature ..................................................... 3.186

Significant Select Cases ..................................................................................................... 3.190

Test Your Knowledge .......................................................................................................... 3.199

CHAPTER 4- CAPITAL GAINS

Learning Outcomes................................................................................................................. 4.1

Contents:
4.1 Introduction ................................................................................................................. 4.2

4.2 Capital Asset ............................................................................................................... 4.2

4.3 Short-term and long-term capital assets ....................................................................... 4.7

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4.4 Transfer: What its means? [Section 2(47)] .................................................................. 4.13

4.5 Scope and year of chargeability [Section 45] .............................................................. 4.15
4.6 Capital gains on distribution of assets by companies in liquidation [Section 46] ........... 4.33
4.7 Capital gains on buyback of shares or other securities [Section 46A] .......................... 4.34
4.8 Important definitions .................................................................................................. 4.36
4.9 Transactions not regarded as transfer [Section 47] ..................................................... 4.39
4.10 Withdrawal of exemption in certain cases ................................................................... 4.58
4.11 Mode of computation of capital gains [Section 48] ...................................................... 4.59
4.12 Ascertainment of cost in specified circumstances [Section 49] .................................... 4.64
4.13 Cost of acquisition [Section 55(2)] .............................................................................. 4.76
4.14 Cost of improvement [Section 55(1)]........................................................................... 4.88
4.15 Computation of capital gains in case of depreciable assets [Section 50 & 50A]............ 4.91
4.16 Computation of capital gains in case of market linked debentures [Section 50AA] ....... 4.94
4.17 Capital gains in respect of slump sale [Section 50B] ................................................... 4.95
4.18 Deemed full value of consideration for computing capital
gains [Section 50C, 50CA & 50D] ............................................................................. 4.102
4.19 Advance money received [Section 51] ...................................................................... 4.106
4.20 Exemption of capital gains ....................................................................................... 4.109
4.21 Reference to Valuation Officer [Section 55A] ............................................................ 4.127

4.22 Tax on Short term capital gains in respect of equity

share/units of an equity oriented fund /unit of a business Trust [Section 111A] ......... 4.128
4.23 Tax on long term capital gains [Section 112] ............................................................. 4.129
4.24 Tax on long term capital gains on certain assets [Section 112A] ............................... 4.131
4.25 Surplus on sale of shares and securities - whether taxable as capital gains
or business income? [Circular No. 06/2016, dated 29-2-2016] ................................... 4.140
Significant Select Cases ..................................................................................................... 4.143
Test Your Knowledge .......................................................................................................... 4.150

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CHAPTER 5-INCOME FROM OTHER SOURCES

Learning Outcomes................................................................................................................. 5.1

Contents:

5.1 Introduction ................................................................................................................. 5.2

5.2 Method of accounting [Section 145] .............................................................................. 5.2

5.3 Incomes chargeable under this head [Section 56] ......................................................... 5.2

5.4 Applicable rate of tax in respect of casual income [Section 115BB] ............................. 5.51

5.5 Applicable rate of tax in respect of winning from online games [Section 115BBJ] ......... 5.51

5.6 Deductions allowable [Section 57] .............................................................................. 5.52

5.7 Deductions not allowable [Section 58] ........................................................................ 5.54

5.8 Deemed income chargeable to tax [Section 59] .......................................................... 5.56

Significant Select Cases ....................................................................................................... 5.57

Test Your Knowledge ............................................................................................................ 5.61

CHAPTER 6 - INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL INCOME

Learning Outcomes................................................................................................................. 6.1

Contents:
6.1 Clubbing of Income - An introduction ........................................................................... 6.3
6.2 Income of other persons includible in assessee’s total income ..................................... 6.3
6.3 Income of other persons includible in an individual’s total income ................................. 6.4
6.4 Cross transfers .......................................................................................................... 6.13

6.5 Conversion of self-acquired property into the property of a HUF[Section 64(2)] ........... 6.14
6.6 Income includes loss .................................................................................................. 6.15
6.7 Distinction between section 61 and section 64 ............................................................ 6.15

6.8 Liability of person in respect of income included in the income of another person ........ 6.15
Test Your Knowledge ............................................................................................................ 6.17

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CHAPTER 7 - AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF LOSSES

Learning Outcomes................................................................................................................. 7.1

Contents:
7.1 Aggregation of Income ................................................................................................. 7.3
7.2 Concept of set-off and carry forward of losses .............................................................. 7.4

7.3 Inter-source adjustments [Section 70]........................................................................... 7.4

7.4 Inter-head adjustments [Section 71] ............................................................................. 7.5
7.5 Carry forward and set off of loss from house property [Section 71B] .............................. 7.6
7.6 Carry forward and set-off of business losses [Section 72] ............................................. 7.9
7.7 Carry forward and set-off of accumulated business losses
and unabsorbed depreciation in certain cases of amalgamation/
demerger, etc. [Section 72A] ...................................................................................... 7.12
7.8 Carry forward and set off of accumulated business losses
and unabsorbed depreciation in a scheme of amalgamation
in certain cases [Section 72AA] .................................................................................. 7.16
7.9 Carry forward and set off of accumulated loss and unabsorbed
depreciation in business reorganisation of Co-operative Banks [Section 72AB] ........... 7.18
7.10 Losses in speculation business [Section 73] ............................................................... 7.20
7.11 Carry forward & set-off of losses by specified businesses [Section 73A] ...................... 7.22
7.12 Losses under head ‘Capital Gains’ [Section 74] .......................................................... 7.23
7.13 Losses from the activity of owning and maintaining race horses [Section 74A(3)] ........ 7.24
7.14 Carry forward and set-off of losses in case of change in
constitution of firm or succession [Section 78] ............................................................ 7.26
7.15 Carry forward and set-off of losses in case of closely
held companies [Section 79] ...................................................................................... 7.26

7.16 No set off of losses against undisclosed income brought to tax

Consequent to search, requisition and survey [Section 79A] ....................................... 7.29

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7.17 Order of set-off of losses ............................................................................................ 7.30

7.18 Submission of Return of Losses [Section 80] .............................................................. 7.32
Significant Select Cases ....................................................................................................... 7.34
Test Your Knowledge ............................................................................................................ 7.36

CHAPTER 8 – DEDUCTIONS FROM GROSS TOTAL INCOME

Learning Outcomes ............................................................................................................................ 8.1

Contents:
8.1 General provisions ....................................................................................................... 8.2
8.2 Deductions in respect of payments ............................................................................... 8.6
8.3 Deductions in respect of certain incomes ................................................................... 8.57
8.4 Deductions in respect of other income ........................................................................ 8.91
8.5 Other Deductions ....................................................................................................... 8.94
8.6 Deduction under section 10AA ................................................................................... 8.95
Significant Select Cases ..................................................................................................... 8.105
Test Your Knowledge .......................................................................................................... 8.111

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© The Institute of Chartered Accountants of India
CHAPTER 1
7
BASIC CONCEPTS

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 recap the basic concepts of income-tax law, its components and the
meaning of important terms used;
 interpret the provisions of income-tax law by applying the rules of
interpretation;
 examine whether a receipt is capital or revenue in nature, in the context
of the provisions of income-tax law;
 appreciate the difference between application of income and diversion
of income by overriding title;
 examine the circumstances when income of the previous year would be
assessed to tax in the previous year itself;
 appreciate the differences in the rates of tax and surcharge applicable
to different categories of persons;
 apply the rates of tax applicable to different components of the total
income of a person and the rates of surcharge, wherever applicable, and
health and education cess for the purpose of determining the tax liability
of such person.

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CHAPTER
 OVERVIEW

Components of Income-tax Law

Rules of Interpretation

Important Definitions

Charge of Income-tax

Rates of Tax & Surcharge

1.1 OVERVIEW OF INCOME TAX LAW IN INDIA

The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except
by authority of law.” Accordingly, both the levy of tax as well as its collection shall be made under
a law framed by the government.
Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the
Central and State Government. The Parliament and State Legislatures are empowered to make
laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the
Constitution of India.
The Seventh Schedule to Article 246 contains three lists which enumerate the matters under
which the Parliament and the State Legislatures have the authority to make laws for the purpose of
levy of taxes.
The following are the lists:
(i) Union List or List I: Parliament has the exclusive power to make laws on the matters
contained in Union List.
(ii) State List or List II: The Legislatures of any State has the exclusive power to make laws
on the matters contained in the State List.
(iii) Concurrent List or List III: Both Parliament and State Legislatures have the power to
make laws on the matters contained in the Concurrent List.

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Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh
Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make
laws on taxes on income other than agricultural income.

Income-tax is a tax levied on the total income of the previous year of every person. A person
includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of
Individuals (BOI), a firm, a company etc. The income-tax law in India consists of the following
components –

COMPONENTS OF INCOME TAX LAW

INCOME ANNUAL INCOME TAX CIRCULARS/ LEGAL DECISIONS

TAX ACT FINANCE ACT RULES NOTIFICATIONS OF COURTS

The various instruments of law containing the law relating to income-tax are explained below:
Income-tax Act, 1961
The levy of income-tax in India is governed by the Income-tax Act, 1961. In this material we shall
briefly refer to this as the Act.
• It extends to the whole of India.
• It came into force on 1st April, 1962.
• It contains sections 1 to 298 and schedules I to XIV.
• It undergoes a change every year by the Annual Finance Act passed by Parliament, and
other legislations like the Taxation Laws (Amendment) Act.
The Finance Act
Every year, the Finance Minister of the Government of India introduces the Finance Bill in the
Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the
Parliament and gets the assent of the President, it becomes the Finance Act. New provisions are
inserted; existing provisions are substituted or amended every year in the Income-tax Act, 1961
and other tax laws by the Finance Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax -
 Part I of the First Schedule to the Finance Act specifies the rates of tax applicable to the
current Assessment Year. Accordingly, Part I of the First Schedule to the Finance (No. 2)
Act, 2024 specifies the rates of tax for A.Y. 2024-25 i.e., F.Y. 2023-24.

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 Part II specifies the rates at which tax is deductible at source for the current Financial Year.
Accordingly, Part II of the First Schedule to the Finance (No. 2) Act, 2024 specifies the
rates at which tax is deductible at source for F.Y. 2024-25.
 Part III gives the rates for calculating income-tax for deducting tax from income chargeable
under the head “Salaries” and computation of advance tax for F.Y. 2024-25 where the
assessee exercises the option to shift out of the default tax regime provided under section
115BAC(1A).
 Part IV contains the rules for computing net agricultural income.
Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
• The CBDT is empowered to make rules for carrying out the purposes of the Act.

• For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time
to time. These rules are collectively called Income-tax Rules, 1962.
• Rules also have sub-rules, provisos and Explanations. The proviso to a Rule/ Sub-rule
spells out the exception to the limits, conditions, guidelines, basis of valuation, as the case
may be, spelt out in the Rule/ Sub-rule. The Explanation gives clarification for the purposes
of the Rule.

• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should
also be studied.
Circulars and Notifications
Circulars
• Circulars are issued by the CBDT from time to time to deal with certain specific problems
and to clarify doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not binding on the
assessees, they can take advantage of beneficial circulars.
Notifications
• Notifications are issued by the Central Government to give effect to the provisions of the Act.

Example: Under section 10(15)(iv)(h), interest payable by any public sector company in
respect of such bonds or debentures and subject to such conditions as the Central

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 BASIC CONCEPTS 1.5

Government may, by notification in the Official Gazette, specify in this behalf would be
exempt. Therefore, the bonds and debentures, interest on which would qualify for
exemption under this section are specified by the Central Government through Notifications.
• The CBDT is also empowered to make and amend rules for the purposes of the Act by
issuing notifications which are binding on both department and assessees.

Example: Under section 35CCD, the CBDT is empowered to prescribe guidelines for
notification of skill development project. Accordingly, the CBDT has, vide Notification No.
54/2013 dated 15.7.2013, prescribed Rule 6AAF laying down the guidelines and conditions
for approval of skill development project under section 35CCD.
Case Laws
The study of case laws is an important and unavoidable part of the study of Income-tax law. It is
not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assessees and
the department and give decisions on various issues.

The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court
is the law of the land. The decisions given by various High Courts will apply in the respective
states in which such High Courts have jurisdiction.
Rules of Interpretation
Rules of Interpretation are principles that have evolved over the years, on account of interpretation
of provisions of law by various Courts. These rules help in interpretation of law. The object behind
use of these rules is to ascertain the intention of the lawmakers. These rules are not static and
keep on evolving. At times, there may be more than one rule of interpretation which appear to
applicable to a given situation. The Courts then decide the most appropriate one in the given
situation considering the facts of the case.
In the ensuing paragraphs, we have made an attempt to discuss the Rules of Interpretation, largely
in the context of income-tax law, citing appropriate instances.
I. Significant rules of interpretation used by Courts:
• Rule of literal interpretation - This rule is based on the age-old doctrine that “judges do
not legislate, they only interpret law”. It stipulates that the intention of the legislation must
be found in the words used by the legislature itself. Attention must be given to what has
been said and also what has not been said. Nothing should be added or subtracted. If the

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provision is unambiguous and if from that provision the legislative intent is clear, the other
rules of construction of statutes need not be called into aid.

• Mischief rule - The mischief rule originated in 16th century in the Heydon’s case in the
United Kingdom. It is commonly known as the Heydon’s Rule or Purposive construction.
Under this rule, the position before an amendment or enactment of an Act is examined to
find out the mischief sought to be remedied to determine the rationale for the remedy. In
order to do so, the following aspects are looked at:
- What was law before the provision was introduced or amended?

- What was the mischief or the defect for which the earlier provision of law did not
provide a remedy?
- What remedy has the Parliament effected in the provisions of law to cure the mischief or
defect?
- What is the intended effect of such remedy?
Courts then have to make a construction that suppresses the mischief and advances the
remedy.
• The Golden rule – It allows a judge to depart from a word's normal meaning in order to
avoid an absurd result. It is a compromise between the literal rule and the mischief rule.
Like the literal rule, it gives the words of a statute their plain, ordinary meaning. However, if
this leads to an irrational result which is unlikely to be the legislature's intention, the court
can depart from this meaning.
In such a case, the Court would also look at the context in which a provision appears. The
same words may mean one thing in one context and another in a different context. While
ascertaining the true intention of the Legislature, the court must not only look at the words
used by the Legislature but also have regard to the context and the setting in which they
occur. The meaning of words in an enactment is not to be ascertained by reading them in
isolation.

• Rule of Harmonious construction - The entire statute must be read as a whole. Further,
all parts of a section should be read harmoniously. Construction should be such that it
provides meaning to all parts of a statute. A construction which creates inconsistency or
repugnancy between the various sections or parts of the statute should be avoided.

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• Principle of beneficial construction - If the court finds that two views are possible
construction which is most beneficial to the taxpayer should be adopted. This principle is
also widely used in case of interpretation of fiscal laws.
Apart from these rules, there are several other rules such as ejusdem generis, nocitur a sociius
and stare decisis which are often used by Courts.

• Rule of ejusdem generis is used when particular words pertaining to a class, category or
genus are followed by general words. In that case general words are construed as limited to
things of the same kind.
• The principle of nocitur a sociius implies that meaning of a word may be ascertained by
reference to words associated with it. Words derive colour from the surrounding words.
• The principle of stare decisis stipulates that a view which is operating for long and is
accepted and acted upon should not be easily departed from.
II. Interpretation of different provisions of the Income-tax Act, 1961
In context of the Income-tax Act, 1961, the ensuing table summarizes how different types of
provisions are typically construed by Courts.
Type of provision Interpretation
Charging provisions Tax is levied by a charging section i.e., it imposes a charge or liability
to pay tax. If a person has been brought to tax within the ambit of the
charging section by clear words, he has to be taxed, subject to
specific exemption/ deduction, if any, available under the provisions of
the Act. Charging sections should be strictly construed.
Machinery Machinery provisions provide machinery for assessment and
provisions collection of charge created by the charging section. Machinery and
charging provisions constitute an integrated code. The machinery
provisions should be construed in a way that makes the machinery
workable.
Penal provisions Penal provisions are required to be construed in a strict manner. In
case of ambiguity, the taxpayer should be entitled to the benefit of
doubt.
Deeming provisions Deeming provision is intended to enlarge the scope of chargeability of
income under a particular head or scope of coverage of a certain
provision. It includes matters which otherwise may or may not fall
within the provision. Deeming provision should be strictly construed. It
should be given its full effect and carried to its logical conclusion.

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Appeal and refund The taxpayer has a right to appeal only if there is a statutory provision
provisions for the same. It cannot be implied. Appeal provision should be liberally
construed in a reasonable and practical manner. Similarly, provisions
granting refund must also be read liberally, in favor of the taxpayer.
Provisions giving Provisions giving deduction, exemption or relief should be interpreted
exemptions and liberally and in favor of taxpayers. They should be construed to
reliefs effectuate the object of legislature and not to defeat it.

III. Aids to interpretation

An aid is a device that helps or assists Courts in interpretation of statues. They can be broadly
classified as:
• Internal Aids
• External Aids
Internal aids to construction
Internal aids of construction refer to aids present within the statue itself, such as the long title, the
preamble, heading, marginal notes, punctuations, definition sections, provisos and explanations.
Let us now examine some of these:
• Explanations – Explanation is generally meant to explain or clarify the meaning of certain
words and expressions contained in the main provision. Explanation appended to a section
is an integral part of the section. It does not have independent existence apart from the
section. In exceptional cases an explanation may widen the scope of the main section by
introducing a legal fiction.
• Provisos – Generally the function of a proviso is to carve out an exception/ condition to
qualify a provision. A proviso cannot control the enactment. A proviso is not applicable
unless the main provision is applicable to the facts of the case. It must be construed
harmoniously with the main provision.
Example: Sections 80GGB and 80GGC provides for deduction from gross total income in
respect of contributions made by companies and other persons, respectively, to political
parties or an electoral trust.
The proviso to sections 80GGB and 80GGC provide that no deduction shall be allowed
under those sections in respect of any sum contributed by cash to political parties or an
electoral trust. Thus, the provisos to these sections spell out the circumstance when
deduction would not be available thereunder in respect of contributions made.

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The Explanation below section 80GGC provides that for the purposes of sections 80GGB
and 80GGC, “political party” means a political party registered under section 29A of the
Representation of the People Act, 1951. Thus, the Explanation clarifies that the political
party has to be a registered political party.

• Non-obstante clause – Non-obstante clause is a clause which begins with the phrase
“notwithstanding anything contained in any other provision of the Act” or “notwithstanding
anything contained in a particular provision(s) of the Act”. Use of this phrase shows that the
intent of lawmakers is to give it an overriding effect, in case of a conflict, over the other
provisions of the statute mentioned in the provision.
Example: Section 43B provides deduction of certain specified sums for computing of
income under the head “Profits and gains from business or profession” on actual payment
basis. It begins with the phrase “notwithstanding anything contrary in any other provision of
this Act”. Thus, it overrides the other provisions of the Act and provides deduction of
payments or expenditures specified therein only on the basis of actual payment.

• Marginal notes and headings - Headings may be prefixed to a section or a group of

sections. Marginal notes are the notes which are inserted at the side of the sections in a
statute and express the effect of the sections stated. Headings and marginal notes cannot
control the plain words of the provisions. Only in the case of ambiguity they may be referred
to throw light on intention of legislature.
• Definition clauses and undefined words –The object of a definition clause is to avoid the
necessity of frequent repetitions in describing the subject matter in the statute. When the
statute defines a particular word, the same should be used, unless the context otherwise
requires. A word occurring more than once in a statute should be generally given the same
meaning, unless the context requires otherwise. Words not specifically defined must be
taken in their legal sense, dictionary meaning, commercial or common meaning. Definition
from any other statute cannot be borrowed and used ignoring the definition contained in the
statute itself.

In the Income-tax Act, 1961, definitions contained in section 2 are for the purposes of the
Income-tax Act, 1961. However, definitions contained in a particular Chapter of the Income-
tax Act, 1961 are generally relevant only in the context of the provisions relating to that
Chapter, unless reference to such definition(s) has been made in any other provision(s)/
Chapter of the Act.

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External aids to construction

External aids refer to aids which are external to the statue such as legislative history, dictionaries,
foreign decisions, reference to other statues. Let us examine some of them:
• Legislative history - Historical setting cannot be used as an aid if the words are plain and
clear. If the wordings are ambiguous, one can look at the historical facts and circumstances
that prevailed at the time when the law was passed for determining the object and purpose.
Reports of Commissions including Law Commission or Committees including Parliamentary
Committees preceding the introduction of a bill can also be referred to as evidence of
historical facts, surrounding circumstances or mischief intended to be remedied.
• Circulars - CBDT Circulars issued under section 119 of the Income-tax Act, 1961 are
binding on the tax officers and persons employed in the execution of the Income-tax Act
1961. They express the views of CBDT on any issue. They are, however, not binding on the
Appellate Authorities, Tribunal, Courts or the taxpayer. Taxpayers can however take benefit
of the beneficial circulars.
• Speech - The speech made by the mover of the Bill can also be used to ascertain the
mischief sought to be remedied, the object and purpose of the legislation. However,
speeches made by the Members of the Parliament at the time of consideration of a Bill, are
not admissible as an aid.
• Explanatory Memorandum - Notes on clauses and memorandum explaining the provisions
of the Finance Bill can also aid in construction, in case of ambiguity.
• Dictionary meaning - The dictionary meaning of a word should not be looked at where the
word has been statutorily defined or judicially interpreted. However, when there is no such
interpretation or definition, the Court may take aid of dictionaries to ascertain a meaning of
the word.

1.2 IMPORTANT DEFINITIONS

In order to understand the provisions of the Act, one must have a thorough knowledge of the
meanings of certain key terms like ‘assessment year’, ‘person’, ‘assessee’, ‘income’, etc. To
understand the meanings of these terms we have to first check whether they are defined in the Act.
Terms defined in the Act: Section 2 gives definitions of the various terms and expressions used
therein. If a particular definition is given in the Act itself, we have to be guided by that definition. For
e.g. the term ‘perquisite’ has been defined under section 17(2) for the purpose of taxation of salaries.

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Terms not defined under the Act: If a particular definition is not given in the Act, reference can
be made to the General Clauses Act or dictionaries.

Students should note this point carefully because certain terms like “dividend”, “transfer”, etc. have
been given a wider meaning in the Income-tax Act, 1961 than they are commonly understood.
Some of the important terms defined under section 2 are given below:
Assessee [Section 2(7)]
“Assessee” means a person by whom any tax or any other sum of money is payable under this
Act. In addition, it includes –
• Every person in respect of whom any proceeding under this Act has been taken for the
assessment of -
 his income; or

 the income of any other person in respect of which he is assessable; or

 the loss sustained by him or by such other person; or
 the amount of refund due to him or to such other person.

• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee-in-default under any provision of this Act.
• Every assessee is a ‘person’, but every ‘person’ need not be an assessee.
Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the Assessing Officer.
It may be by way of a normal assessment or by way of reassessment of an income previously
assessed.
Types of income-tax assessment:
1. Self-assessment under section 140A
2. Summary assessment under section 143(1)
3. Scrutiny assessment under section 143(3)
4. Best judgment assessment under section 144
5. Re-assessment or income escaping assessment under section 147

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Person [Section 2(31)]

The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely connected
with the latter. The term ‘person’ is important from another point of view also viz., the charge of
income-tax is on every ‘person’. The definition of the term ‘person’ is inclusive and not exhaustive.
The different types of persons recognized under the Act are provided in the diagram below:

Individual

Artificial
juridical HUF
person

Person
Local Company
Authority

AOPs/
Firm
BOIs

We may briefly consider some of the above seven categories of assessees each of which
constitute a separate unit of assessment or a separate tax entity.
(i) Individual
The term ‘individual’ means only a natural person, i.e., a human being.
• It includes both males and females.
• It also includes a minor or a person of unsound mind. But the assessment in such a case
may be made under section 161(1) on the guardian or manager of the minor or lunatic who
is entitled to receive his income. In the case of deceased person, assessment would be
made on the legal representative.
(ii) HUF
Under the Income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity for
the purpose of assessment. It is included in the definition of the term “person” under section 2(31).

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The levy of income-tax is on “every person”. Therefore, income-tax is payable by a HUF.

"Hindu undivided family" has not been defined under the Income-tax Act, 1961. The expression is,
however, defined under the Hindu Law as a family, which consists of all males lineally descended
from a common ancestor and includes their wives and daughters.
[Refer Chapter 9: Assessment of various entities in Module 2 for detail discussion of HUF]

(iii) Company [Section 2(17)]

For all purposes of the Act, the term ‘Company’, has a much wider connotation than that under the
Companies Act, 2013. Under the Act, the expression ‘Company’ means:
(a) any Indian company as defined in section 2(26); or
(b) any body corporate incorporated by or under the laws of a country outside India, i.e., any
foreign company; or
(c) any institution, association or body which is assessable or was assessed as a company for
any assessment year under the Indian Income-tax Act, 1922 or for any assessment year
commencing on or before 1.4.1970 under the present Act; or
(d) any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by a general or special order of the CBDT to be a company for
such assessment years as may be specified in the CBDT’s order.
Classes of Companies
(1) Domestic company and Foreign Company: Companies can be classified into two
categories, viz. (1) Domestic company and (2) Foreign company.
Domestic company [Section 2(22A)] - It means an "Indian company" or any other
company that has made the necessary arrangements to declare and pay dividends
(including those on preference shares) within India from its income that is subject to income
tax.
Indian company [Section 2(26)] - A company is considered an "Indian company" under
section 2(26) of the Income-tax Act, 1961 if it meets two key conditions:
1. Formation and Registration: The company should have been formed and
registered under the Companies Act, 1956 1.
2. Office Location: The company's registered or principal office should be in India.

1
Now Companies Act, 2013

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Additionally, the term "Indian company" also includes the following provided their registered
or principal office in India:
• Corporation established by or under a Central, State, or Provincial Act, such as
Financial Corporation or State Road Transport Corporation.
• Institution, association, or body declared by the Board to be a company under
section 2(17)(iv).
• Company formed and registered under any law in force in any part of India,
excluding Jammu and Kashmir and specific Union territories.
• Company formed and registered under any law in force in Jammu and Kashmir.

• Company formed and registered under any law in force in Union territories like Dadra
and Nagar Haveli, Daman and Diu, Pondicherry, or the State of Goa.
Foreign company [Section 2(23A)] - Foreign company means a company which is not a
domestic company

Classes of companies

Domestic company Foreign company

Indian A company which is

company Company which has made not a domestic
arrangement for declaring and paying company
dividend within India out of the income
chargeable to tax in India.

(2) A company is further classified into two primary categories based on public interest:
Widely Held Company (Company in which public are substantially interested): A
company is considered to have substantial public interest if it meets any of the following
criteria as outlined in section 2(18) of the Income-tax Act, 1961:
(a) Government or RBI Ownership or participation: A company owned by the Central
or State Government or the Reserve Bank of India (RBI), or where at least 40% of
the shares are held (whether singly or taken together) by the Government or the RBI
or a corporation owned by the RBI.

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(b) Company registered under section 25 of the Companies Act, 1956: A company
registered under section 25 of the Companies Act, 1956 2, which is formed to
promote commerce, art, science, education, research, social welfare, charity,
environmental protection, etc., and does not distribute dividends to their members.
(c) Companies with No Share Capital and declared by the CBDT: A company which
does not have share capital and is declared by the CBDT to be a company in which
the public are substantially interested for specified assessment years.
(d) Mutual Benefit Finance Company (Nidhi or Mutual Benefit Society): A company
that primarily accept deposits from its members and is declared by the Central
Government under Section 620A of the Companies Act, 1956 3, to be a Nidhi or
Mutual Benefit Society.
(e) Cooperative Society ownership: A company whose equity shares carrying at least
50% of the voting power are unconditionally allotted or acquired by one or more
cooperative societies and held throughout the relevant previous year.
(f) Public Limited Company: A company which is not a private company as defined in
the Companies Act, 1956 4 and which fulfills any of the following conditions:
- its equity shares were listed in a recognized stock exchange in India as on the
last day of the relevant previous year; or
- its equity shares carrying at least 50% (40% in case of an Indian company in
ship construction business or in the manufacture or processing of goods or in
mining or in generation or distribution of electricity or any other form of power)
voting power have been unconditionally allotted to or acquired by and should
have been beneficially held throughout the relevant previous year by
(a) Government or
(b) a Statutory Corporation or
(c) a company in which public are substantially interested or

(d) any wholly owned subsidiary of company mentioned in (c).

Closely Held Company (Company in which public are not substantially interested):
Any company that does not meet the criteria for being classified as widely held company is
2 Section 8 of the Companies Act, 2013
3 Section 406 of the Companies Act, 2013

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considered closely held company. Thus, all private limited companies will be treated as
companies in which public are not substantially interested.

[Refer Chapter 9: Assessment of various entities in Module 2 for detail discussion of

companies]
(iv) Firm [Section 2(23)]

The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assigned to them in
the Indian Partnership Act, 1932. In addition, the definitions also include the terms limited
liability partnership, a partner of limited liability partnership as they have been defined in the
Limited Liability Partnership Act, 2008.
In an LLP, since liability of the partners is limited to their agreed contribution therein, it
contains elements of both a corporate structure as well as a partnership firm structure.
However, for income-tax purposes a minor admitted to the benefits of an existing
partnership would also be treated as partner.

Firm

As defined under the

As defined under the
Limited Liability
Partnership Act, 1932
Partnership Act, 2008

A partnership is the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all. The persons who have entered into
partnership with one another are called individually ‘partners’ and collectively a ‘firm’.

(v) Association of Persons (AOP)

When persons combine together for promotion of joint enterprise they are assessable as an
AOP, when they do not in law constitute a partnership. In order to constitute an association,
persons must join for a common purpose or action and their object must be to produce
income; it is not enough that the persons receive the income jointly. Co-heirs, co-legatees or
co-donees joining together for a common purpose or action would be chargeable as an AOP.
For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. Join together to carry on construction
activity otherwise than as a partnership firm, such an association will be recognized as an
association of persons.

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(vi) Body of Individuals (BOI)

Body of individuals refers to a conglomeration of individuals who carry on some activity with
or without the object of producing income. It denotes the status of persons like executors or
trustees who merely receive the income jointly and who may be assessable in like manner
and to the same extent as the beneficiaries individually. Thus, co-executors or co-trustees
are assessable as a BOI as their title and interest are indivisible. Income-tax shall not be
payable by an assessee in respect of the receipt of share of income by him from BOI and
on which the tax has already been paid by such BOI. For e.g., mutual trade associations,
members club, etc.
Section 2(31) further explains that an association of persons/body of individuals or a local
authority or an artificial juridical person shall be treated as a person, whether or not it is
formed with the object of deriving income, profits or gains. Accordingly, even if such entities
have been formed not for earning any income/ profit still they are "person" for the purpose
of the Act and are covered by the provisions of the Act.
Difference between AOP and BOI: In case of a BOI, only individuals can be the members,
whereas in case of AOP, any person can be its member i.e., entities like company, firm etc.
can be the member of AOP but not of BOI.
In case of an AOP, members voluntarily come together with a common will for a common
intention or purpose, whereas in case of BOI, such common will may or may not be present.
(vii) Local Authority

The term means a municipal committee, district board, body of port commissioners or other
authority legally entitled to or entrusted by the Government with the control or management
of a municipal or local fund.
Note: A local authority is taxable in respect of that part of its income which arises from any
business carried on by it in so far as that income does not arise from the supply of a
commodity or service within its own jurisdictional area. However, income arising from the
supply of water and electricity even outside the local authority’s own jurisdictional areas is
exempt from tax.
(viii) Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are separate
entities in the eyes of law. This is a residual category could cover all artificial persons with a

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juristic personality not falling under any other category of persons. Deities, Bar Council,
Universities are some important examples of Artificial Juridical Persons.
Income [Section 2(24)]
(i) Definition of Income
The definition of income as per the Income-tax Act, 1961 begins with the words “Income
includes”. Therefore, it is an inclusive definition and not an exhaustive one. Such a
definition does not confine the scope of income but leaves room for more inclusions within
the ambit of the term.
Section 2(24) of the Act gives a statutory definition of income. At present, the following
items of receipts are specifically included in income:—
(1) Profits and gains;
(2) Dividends;
(3) Voluntary contributions received by a trust/ institution created wholly or partly for
charitable or religious purposes or by an association or institution referred to in
section 10(21) or by a fund or institution referred to in section 10(23C) (iiiad)/ (iiiae)/
(iv)/(v)/(vi)/(via) or an electoral trust;
Research association approved under section 35(1)(ii)/(iii) 10(21)
Universities and other educational institutions 10(23C)(iiiad)/(vi)
Hospitals and other institutions 10(23C)(iiiae)/(via)
Notified funds or institutions established for charitable 10(23C)(iv)
purposes
Notified trusts or institutions established wholly for public 10(23C)(v)
religious purposes or wholly for public religious and charitable
purposes
Electoral trust 13B

(4) The value of any perquisite or profit in lieu of salary taxable under section 17(2)
and (3), respectively;
(5) Any special allowance or benefit, other than the perquisite included above,
specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment of profit;
(6) Any allowance granted to the assessee to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily performed

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by him or at a place where he ordinarily resides or to compensate him for the

increased cost of living;

(7) The value of any benefit or perquisite, whether convertible into money or not,
obtained from a company either by a director or by a person who has a substantial
interest in the company, or by a relative of the director or such person, and any sum
paid by any such company in respect of any obligation which, but for such payment,
would have been payable by the director or other person aforesaid;
(8) The value of any benefit or perquisite, whether convertible into money or not,
which is obtained by any representative assessee mentioned under section
160(1)(iii) and (iv), or by any beneficiary or any amount paid by the representative
assessee for the benefit of the beneficiary which the beneficiary would have
ordinarily been required to pay;
(9) Deemed profits chargeable to tax under section 41 or section 59;
(10) Profits and gains of business or profession chargeable to tax under section
28(ii)/(iii)/(iiia)/(iiib)/(iiic)/(v)/(va); or The value of any benefit or perquisite taxable
under section 28(iv);
(11) Any capital gains chargeable under section 45;

(12) The profits and gains of any insurance business carried on by Mutual
Insurance Company or by a cooperative society, computed in accordance with
section 44 or any surplus taken to be such profits and gains by virtue of the
provisions contained in the first Schedule to the Act;
(13) The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
(14) Any winnings from lotteries, cross-word puzzles, races including horse races,
card games and other games of any sort or from gambling, or betting of any
form or nature whatsoever. For this purpose,

i. “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;
ii. “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.

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(15) Any sum received by the assessee from his employees as contributions to any
provident fund (PF) or superannuation fund or Employees State Insurance
Fund (ESI) or any other fund for the welfare of such employees;
(16) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will constitute income;

“Keyman insurance policy” means a life insurance policy taken by a person on the
life of another person where the latter is or was an employee or is or was connected
in any manner whatsoever with the former’s business. It also includes such policy
which has been assigned to a person with or without any consideration, at any time
during the term of the policy.
(17) Any sum referred to in section 28(va). Any sum, whether received or receivable in
cash or kind, under an agreement for not carrying out any activity in relation to any
business or profession; or not sharing any know-how, patent, copy right, trade-mark,
licence, franchise, or any other business or commercial right of a similar nature, or
information or technique likely to assist in the manufacture or processing of goods or
provision of services, shall be chargeable to income tax under the head “profits and
gains of business or profession”;
(18) Fair market value of inventory as on the date on which it is converted into, or
treated as, a capital asset, determined in the prescribed manner [Section 28(via)];
(19) Any sum of money received as advance, if such sum is forfeited consequent to
failure of negotiation for transfer of a capital asset [Section 56(2)(ix)];
(20) Any sum of money or value of property received without consideration or for
inadequate consideration by any person [Section 56(2)(x)];
(21) Any compensation or other payment, due to or received by any person, by
whatever named called, in connection with termination of his employment or the
modification of the term and conditions relating thereto [Section 56(2)(xi)];
(22) Any specified sum received by a unit holder from a business trust during the
previous year, with respect to a unit held by him at any time during the previous year
[Section 56(2)(xii)];

(23) Sum received, including the amount allocated by way of bonus, under a LIP other
than under a ULIP and keyman insurance policy, which is not exempt u/s
10(10D), to the extent the same exceeds the aggregate of the premium paid during

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the term of the policy, and not claimed as deduction under any other provision of the
Act [Section 56(2)(xiii)];
[For details, refer to Chapter 5 “Income from Other Sources”].
(24) Assistance in the form of a subsidy or grant or cash incentive or duty drawback
or waiver or concession or reimbursement, by whatever name called, by the
Central Government or a State Government or any authority or body or agency in
cash or kind to the assessee is included in the definition of income.

Subsidy or Grant which are not included in the definition of income u/s 2(24)

Subsidy or grant or reimbursement taken into account for determination

of actual cost of depreciable asset in accordance with Explanation 10 to
section 43(1)

Subsidy or grant by the Central Government for the purpose of the corpus
of a trust or institution established by a Central Govt. or State Govt., as
the case may be.

(ii) Concept of Income under the Income-tax Act, 1961

 Regular receipt vis-à-vis casual receipt: Income, in general, means a periodic
monetary return which accrues or is expected to accrue regularly from definite
sources. However, under the Income-tax Act, 1961, even certain casual receipts
which do not arise regularly are treated as income for tax purposes e.g., Winnings
from lotteries, crossword puzzles.
 Revenue receipt vis-a-vis Capital receipt: Income normally refers to revenue
receipts. Capital receipts are generally not included within the scope of income in
general parlance. However, the Income-tax Act, 1961 has specifically included
certain capital receipts within the definition of income e.g., Capital gains i.e., gains
on sale of a capital assets like land, jewellery.
 Net receipt vis-a-vis Gross receipt: Income means net receipts and not gross
receipts. Net receipts are arrived at after deducting the expenditure incurred in
connection with earning such receipts. The expenditure which can be deducted while
computing income under each head is prescribed under the Income-tax Act, 1961.

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Income from certain eligible businesses/ professions is also determined on

presumptive basis i.e., as a certain percentage of gross receipts.
 Due basis vis-a-vis receipt basis: Income is taxable either on due basis or receipt
basis. For computing income under the heads “Profits and gains of business or
profession” and “Income from other sources”, the method of accounting regularly
employed by the assessee should be considered, which can be either cash system
or mercantile system. Some receipts are taxable only on receipt basis, like, income
by way of interest received on compensation or enhanced compensation.
 Application of Income vis-a-vis Diversion of Income: Application of income
means to discharge an obligation (which is gratuitous or self-imposed) after such
income reaches the assessee. Where by virtue of an obligation by overriding title,
income is diverted before it reaches the assessee, it is known as diversion of
income. In case of the former, the income would be taxable in the hands of the
person who applies it, whereas in the case of the latter, it is not taxable (i.e., even if
the assessee were to collect the income he does so on behalf of the person to whom
it is payable).
(iii) Concept of revenue and capital receipts
Students should carefully study the various items of receipts included in the definition of
income. Some of them like capital gains are not revenue receipts. However, since they have
been included in the definition, they are chargeable as income under the Act. The concept
of revenue and capital receipts is discussed hereunder –
The Act contemplates a levy of tax on income and not on capital and hence it is very
essential to distinguish between capital and revenue receipts. Capital receipts cannot be
taxed, unless they fall within the scope of the definition of “income” and so the distinction
between capital and revenue receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as decisive,
final and universal in application to determine whether a particular receipt is capital or
revenue in nature. Hence, the capital or revenue nature of the receipt must be determined
with reference to the facts and circumstances of each case.

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Criteria for determining whether a receipt is capital or revenue in nature

The following are some of the important criteria which may be applied to distinguish
between capital and revenue receipts.
Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital
receipt whereas a receipt referable to circulating capital would be a revenue receipt. The
former is not taxable while the latter is taxable. Tangible and intangible assets which the
owner keeps in his possession for making profits are in the nature of fixed capital. The
circulating capital is one which is turned over and yields income or loss in the process.

Income from transfer of capital asset or trading asset: Profits arising from the sale of a
capital asset are chargeable to tax as capital gains under section 45 whereas profits arising
from the sale of a trading asset being of revenue nature are taxable as income from
business under section 28 provided that the sale is in the regular course of assessee’s
business or the transaction constitutes an adventure in the nature of trade.
Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied
(a) Transaction entered into the course of business: Profits arising from transactions
which are entered into in the course of the business regularly carried on by the
assessee, or are incidental to, or associated with the business of the assessee
would be revenue receipts chargeable to tax.
Example: A banker’s or financier’s dealings in foreign exchange or sale of shares
and securities, a shipbroker’s purchases of ship in his own name, a share broker’s
purchase of shares on his own account would constitute transactions entered and
yielding income in the ordinary course of their business. Whereas building and land
would constitute capital assets in the hands of a trader in shares, the same would
constitute stock-in-trade in the hands of a property dealer.
(b) Profit arising from sale of shares and securities: In the case of profit arising from
the sale of shares and securities the nature of the profit has to be ascertained from
the motive, intention or purpose with which they were bought. If the shares were
acquired as an investor or with a view to acquiring a controlling interest or for
obtaining a managing or selling agency or a directorship the profit or loss on their
sale would be of a capital nature; but if the shares were acquired in the ordinary
course of business as a dealer in shares, it would constitute his stock-in-trade. If the
shares were acquired with speculative motive the profit or loss (although of a
revenue nature) would have to be dealt with separately from other business.

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Note: However, securities held by Foreign Institutional Investor which has invested
in such securities in accordance with the regulations made under the SEBI Act, 1992
would be treated as a capital asset. Even if the nature of such security in the hands
of the Foreign Portfolio Investor is stock in trade, the same would be treated as a
capital asset and the profit on transfer would be taxable as capital gains.

(c) A single transaction - Can it constitute business? Even a single transaction may
constitute a business or an adventure in the nature of trade even if it is outside the
normal course of the assessee’s business. Repetition of such transactions is not
necessary. Thus, a bulk purchase followed by a bulk sale or a series of retail sales or
bulk sale followed by a series of retail purchases would constitute an adventure in the
nature of trade and consequently the income arising therefrom would be taxable.
Purchase of any article with no intention to resell it, but resold under changed
circumstances would be a transaction of a capital nature and capital gains arise.
However, where an asset is purchased with the intention to resell it, the question
whether the profit on sale is capital or revenue in nature depends upon (i) the conduct
of the assessee, (ii) the nature and quantity of the article purchased, (iii) the nature of
the operations involved, (iv) whether the venture is on capital or revenue account, and
(v) other related circumstances of the case.
(d) Liquidated damages: Receipt of liquidated damages directly and intimately linked
with the procurement of a capital asset, which lead to delay in coming into existence of
the profit-making apparatus, is a capital receipt. The amount received by the assessee
towards compensation for sterilization of the profit earning source is not in the ordinary
course of business. Hence, it is a capital receipt in the hands of the assessee.

(e) Compensation on termination of agency/ service contract: Where an assessee

receives compensation on termination of the agency business being the only source of
income, the receipt is a capital nature, but taxable under section 28(ii)(c). However,
where the assessee has a number of agencies and one of them is terminated and
compensation is received therefor, the receipt would be of a revenue nature since
taking agencies and exploiting the same for earning income is the ordinary course of
business. The loss of one agency would be made good profit from another agency.
Compensation received from the employer or from any person for premature
termination of the service contract is a capital receipt, but is taxable as profit in lieu of
salary under section 17(3) or as income from other sources under section 56(2)(xi),
respectively. Compensation received or receivable in connection with the termination

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or the modification of the terms and conditions of any contract relating to its business
shall be taxable as business income.

(f) Gifts: Normally, gifts constitute capital receipts in the hands of the recipient. However,
certain gifts are brought within the purview of income-tax, for example, receipt of
property without consideration is brought to tax under section 56(2)(x).

For example, any sum of money or value of property received without consideration or
for inadequate consideration by any person, other than a relative, is chargeable under
the head “Income from Other Sources” [For details, refer to Chapter 5 on “Income from
Other Sources”].
(iv) Diversion of income by overriding title and application of income
The concept of ‘diversion of income by overriding title’ signifies diversion of income at source
by an overriding title before it reaches an assessee. Such a diversion can take place either
under a legal compulsion or under a contractual obligation or otherwise. An obligation to apply
the income in a particular way before it has accrued or arisen to the assessee results in the
diversion of the income. On the other hand, an obligation to apply income which has accrued
or arisen or has been received amounts merely to the apportionment or application of the
income and not to its diversion. Sometimes the dividing line between diversion by overriding
title and the application of income after it has accrued is somewhat thin.
When income or a portion of income is diverted at the source by an overriding title before it
started flowing into the channel which was to reach the assessee concerned it could be
excluded from his assessable income. Wherever there is such diversion of income, such
diverted income, cannot be included in the total income of the assessee who claims that
there has been a diversion. On the other hand, where income has accrued or arisen in the
hands of the assessee, its subsequent application in any way will not affect the tax liability.
In order to decide whether a particular disbursement amounts to diversion or application of
income, the true test is to probe into and decide whether the amount sought to be deducted,
in truth, did not reach the assessee as his own income. It is the nature of the obligation that
is the decisive fact. There is a difference between an amount which a person is obliged to
apply out of his income and an amount which by the nature of the obligation cannot be said
to be a part of his income. It is the nature of the obligation that is the decisive fact. Where,
by obligation, income is diverted before it reaches the assessee, it is deductible; but where
the income is required to be applied to discharge an obligation after such income reaches
the assessee, the same consequence, in law, does not follow. In order that there is

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diversion at source of the income, the obligation is to attach to the source which yields
income and not to the income only. This was so held in CIT vs. Sitaldas Tirathdas [1961] 41
ITR 367 (SC), M.K. Brothers Pvt. Ltd. vs. CIT [1972] 86 ITR 38 (SC). In many cases, it
would really be a matter of proper drafting of the document creating the obligation, though,
in substance, the result in both the situations may appear similar.
For the purpose of tax planning, the concept of ‘diversion by overriding title’ would have
better scope for exploitation than the concept of ‘application of income’. This is because, as
pointed out above, where income is diverted by overriding title such diverted income is not
taxed in the hands of the person who claims such diversion. On the other hand, the concept
of application of income envisages first the accruing or arising of income and when once it
has come within the grasp of the Income-tax Act, 1961 it is liable to income-tax whatever
may be its destination or whomever it may be applied for. Therefore, if an overriding charge
is created by the assessee either voluntarily or in pursuance of an obligation, whether pre-
existing or not, the assessee may be able to invoke the principle of diversion of income by
overriding charge. This is, of course, subject to the clubbing provisions contained in
sections 60 to 64 (dealt with in Chapter 6: Income of other persons included in assessee’s
total income), which have the effect of getting over this principle in some situations.
Example on Application of Income
Mr. A is liable to pay ` 10,000 per month to Ms. B (his ex-wife) as alimony. Mr. A, being an
employee of ABC Pvt. Ltd., instructs the HR department to pay ` 10,000 per month out of
his salary to Ms. B directly and remit the remaining salary in his account.
In this case, the amount of ` 10,000 per month is an obligation of Mr. A to pay to Ms. B out
of his income and not an income in which Ms. B had over riding entitlement.
In other words, this is the income of Mr. A, which is applied by him to fulfill an obligation and
hence, includible in his total income and a mere arrangement to pay a sum directly to Ms. B
would not make it a case of diversion of income.
Example on Diversion of Income
M/s ABC is a partnership firm in which Mr. A and his two sons, Mr. B & Mr. C are partners.
The partnership deed provides that after the death of Mr. A, Mr. B & Mr. C shall continue
the business of the firm subject to a condition that 20% of profit of the firm shall be given to
Mrs. D (wife of Mr. A).
In the instant case, after the death of Mr. A, 20% of profits of the firm payable to Mrs. D
gets diverted at source by the charge created in her favour as per the terms of the
partnership deed. Such income does not reach the assessee-firm. Rather, such income

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stands diverted to the other person as such other person has a better title on such
income than the title of the assessee. The firm might have received the said amount,
but it so received for and on behalf of Mrs. D, who possesses the overriding title.
Therefore, the amount payable to Mrs. D after the death of Mr. A would be excluded
from the income of M/s ABC
(v) Classification of income under five heads of income
Under the Income-tax Act, 1961, for computation of total income, all income of a taxpayer
are classified into five different heads of income. These are shown below –

HEADS OF INCOME

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

The provisions relating to “Profits and gains of business or profession”, “Capital Gains” and
"Income from other sources” are discussed in Chapter 3: Profits and gains of business or
profession, Chapter 4: Capital Gains and Chapter 5: Income from Other Sources,
respectively, in this Module. The provisions relating to “Salaries” and “Income from house
property” had been dealt with in detail at Intermediate level itself. The ensuing paragraphs
contain an overview of Income under the head “Salaries” and “Income from house property”.
Income under the head “Salaries”
Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier. However, where any salary, paid in advance, is assessed in
the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed
again when it is paid.
The terms “Salary”, “Perquisite” and “Profit in lieu of salary” are defined under section 17(1).
Salary includes monetary as well as non-monetary items. The following deductions are allowable
to an individual from the gross salary:

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Deductions allowable from Gross Salary

(i) Standard deduction u/s 16(ia)
A standard deduction of ` 50,000 or the amount of salary, whichever is lower, is to be
provided to the employee if the assesse exercises the option of shifting out of the default
tax regime provided under section 115BAC(1A).
However, if the assessee is paying tax under default tax regime provided under section
115BAC(1A), standard deduction of ` 75,000 or the amount of salary, whichever is
lower, is provided to the employee.
(ii) Entertainment allowance u/s 16(ii) (only for Govt. employees)
Least of the following is allowable as deduction:
(a) ` 5,000
(b) 1/5th of basic salary
(c) Actual entertainment allowance received
[Deduction in respect of entertainment allowance would be available to an assessee only
if he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A). The deduction would not be available under the default tax regime i.e.,
under section 115BAC(1A)].
(iii) Professional Tax/Tax on employment (paid by employer/ employee) u/s 16(iii): If
professional tax is reimbursed or directly paid by the employer on behalf of the
employee, the amount so paid is first included as salary income and then allowed as a
deduction u/s 16.
[Deduction in respect of professional tax would be available to an assessee only if he
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A). The deduction would not be available under the default tax regime i.e.,
under section 115BAC(1A)].

Income from house property

(I) Annual Value - The process of computation of income under the head “Income from house
property” starts with the determination of annual value of the property. The concept of
annual value and the method of determination is laid down in section 23.
The annual value of any property comprising of buildings or lands appurtenant thereto of
which the assessee is the owner is chargeable to tax under the head “Income from house
property”.

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Exceptions: Annual value of the following properties are chargeable under the head
“Profits and gains of business or profession” -

(i) Portions of property occupied by the assessee for the purpose of any business or
profession carried on by him.
(ii) Commercial Properties of an assessee engaged in the business of letting out of
properties.
It is pertinent to note that that any income from letting out of a residential house or part
thereof by the assessee, being owner shall always be chargeable under the head “Income
from house property.

Determination of Annual Value

Municipal tax
paid by the
Gross Annual Net Annual
owner during
Value (GAV) Value (NAV)
the previous
year

GAV would be higher of expected rent and actual rent received or receivable during the
previous year. The Expected Rent (ER) is the higher of fair rent (FR) and municipal value
(MV) but restricted to standard rent (SR). In the absence of any information relating to
Municipal value, fair rent and standard rent, actual rent would be considered as GAV.
(II) Annual value of self-occupied property: Where the property is self-occupied for own
residence or unoccupied throughout the previous year, its Annual Value will be Nil,
provided no other benefit is derived by the owner from such property.

The expression “Unoccupied property” refers to a property which cannot be occupied

by the owner by reason of his employment, business or profession at a different place
and he resides at such other place in a building not belonging to him.

The benefit of “Nil” Annual Value is available only for upto two self-occupied or unoccupied
house properties i.e. for either one house property or two house properties owned by the
assessee. The benefit of “Nil” Annual Value in respect of upto two self-occupied house
properties is available only to an individual/ HUF.

No deduction for municipal taxes is allowed in respect of such property/properties as annual

value means value determined after deduction of municipal taxes.

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(III) Annual value of property held as stock-in-trade: In some cases, property consisting of
any building or land appurtenant thereto may be held as stock-in-trade, and the whole or
any part of the property may not be let out during the whole or any part of the previous year.
In such cases, the annual value of such property or part of the property shall be NIL.
This benefit would be available for the period upto two years from the end of the financial
year in which certificate of completion of construction of the property is obtained from the
competent authority.
(IV) Deductions from Net Annual Value under optional tax regime (normal provisions of the Act)

Deductions allowed from NAV

Let out/ deemed let Self occupied property/

out property properties

Interest on borrowed
Standard Interest on capital u/s 24(b)
deduction borrowed capital
u/s 24(a) u/s 24(b)
where loan is taken where loan is taken for
for repair, renewal or acquisition or construction of
30% of Fully reconstruction of house property
NAV Allowed house property

Acquisition or construction
Maximum completed within 5 years from
` 30,000 in toto the end of the FY in which the
for one or two capital was borrowed
self occupied +
properties Certificate from lender
specifying interest payable

No Yes

Maximum Maximum
` 30,000 in toto ` 2,00,000 in toto
for one or two for one or two self
self occupied occupied
properties properties

(V) Taxability of arrears of rent & unrealised rent: As per section 25A(1), the amount of rent
received in arrears from a tenant or the amount of unrealised rent realised subsequently from

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a tenant by an assessee shall be deemed to be income from house property in the financial
year in which such rent is received or realised, and shall be included in the total income of the
assessee under the head “Income from house property”, whether the assessee is the owner
of the property or not in that financial year. Section 25A(2) provides a deduction of 30% of
arrears of rent or unrealised rent realised subsequently by the assessee.
(VI) Annual value of co-owned property: Where the house property owned by co-owners is
self occupied by each of the co-owners, the annual value of the property of each co-owner
will be Nil and each co-owner shall be entitled to a deduction of ` 30,000 / ` 2,00,000, as
the case may be, under section 24(b) on account of interest on borrowed capital if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A).
However, the aggregate deduction of interest to each co-owner in respect of interest
payable on loan taken for co-owned house property and interest, if any, payable on loan
taken for another self-occupied property owned by him cannot exceed ` 30,000/
` 2,00,000, as the case may be.
Where the house property owned by co-owners is let out, the income from such property
shall be computed as if the property is owned by one owner and thereafter the income so
computed shall be apportioned amongst each co-owner as per their specific share.
(VII) Deemed ownership: As per section 27, the following persons, though not legal owners of a
property, are deemed to be the owners for the purposes of sections 22 to 26.
- In case of transfer of house property by an individual to his or her spouse otherwise
than for adequate consideration or in connection with an agreement to live apart, the
transferor is deemed to be the owner of the transferred property.

- In case of transfer of house property by an individual to his or her minor child (other
than a minor married daughter) otherwise than for adequate consideration, the
transferor would be deemed to be owner of the house property transferred.
Exception – In case of transfer to a minor married daughter, the transferor is not
deemed to be the owner.
Note – Where cash is transferred to spouse/minor child and the transferee acquires
property out of such cash, then the transferor shall not be treated as deemed owner
of the house property. However, clubbing provisions will be attracted.

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- The holder of an impartible estate shall be deemed to be the individual owner of all
properties comprised in the estate.

- A member of a co-operative society, company or other association of persons to

whom a building or part thereof is allotted or leased under a House Building Scheme
of a society/ company/ association, shall be deemed to be owner of that building or
part thereof allotted to him although the co-operative society/company/ association is
the legal owner of that building.
- A person who is allowed to take or retain the possession of any building or part
thereof in part performance of a contract of the nature referred to in section 53A of
the Transfer of Property Act shall be the deemed owner of that house property.
- A person who acquires any rights in or with respect to any building or part thereof, by
virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of
lease for not less than 12 years, shall be deemed to be the owner of that building or
part thereof.
Exception – In case the person acquiring any rights by way of lease from month to
month or for a period not exceeding one year, such person will not be deemed to be
the owner.
India [Section 2(25A)]
The term 'India' means –
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.
Maximum marginal rate and Average Rate of tax
As per section 2(10), "Average Rate of tax" means the rate arrived at by dividing the amount of
income-tax calculated on the total income, by such total income.

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Example: Total Income of Mr. A, who has exercised option of shifting out of default regime under
section 115BAC, is ` 6,00,000 and tax payable on it including cess is ` 33,800, the average rate
of tax works out to be 5.63%.
Section 2(29C) defines “Maximum marginal rate" to mean the rate of income-tax (including
surcharge on the income-tax, if any) applicable in relation to the highest slab of income in the case
of an individual, AOP or BOI, as the case may be, as specified in Finance Act of the relevant year.

1.3 PREVIOUS YEAR AND ASSESSMENT YEAR

The concepts have been dealt with at the Intermediate level. Let us have a quick recap of these
concepts -

Previous Year Assessment Year

2024-25 2025-26

Assessment year [Section 2(9)]

The term has been defined under section 2(9). This means a period of 12 months commencing on
1st April every year. The year in which income is earned is the previous year and such income is
taxable in the immediately following year which is the assessment year. Income earned in the
previous year 2024-25 is taxable in the assessment year 2025-26.
Assessment year always starts from 1st April and it is always a period of 12 months.
Previous year [Section 3]
It means the financial year immediately preceding the assessment year. As mentioned earlier, the
income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous
year shall be the period beginning on the date of setting up of the business or profession and
ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence and will end
with 31st March of the financial year.

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Examples: A is running a business from 1993 onwards. Determine the previous year for the
assessment year 2025-26.
Ans. The previous year will be 1.4.2024 to 31.3.2025.
A chartered accountant sets up his profession on 1st July, 2024. Determine the previous year for
the assessment year 2025-26.
Ans. The previous year will be from 1.7.2024 to 31.3.2025.

Certain cases when income of a previous year will be assessed in the previous year
itself

General Rule
Income of a previous year is assessed in the assessment year following the previous year

Exceptions to this rule

Cases where income of a previous year is assessed in the previous year itself

Shipping Persons likely to

Persons AOP/ BOI/ Artificial Discontinued
business of transfer
leaving Juridical Person business
non-resident property to
India formed for a particular avoid tax
event or purpose

The income of an assessee for a previous year is charged to income-tax in the assessment year
following the previous year. For instance, income of previous year 2024-25 is assessed during
2025-26. Therefore, 2025-26 is the assessment year for assessment of income of the previous
year 2024-25.
However, in a few cases, this rule does not apply and the income is taxed in the previous year in
which it is earned. These exceptions have been made to protect the interests of revenue. The
exceptions are as follows:
(a) Shipping business of non-resident [Section 172]

Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock,

mail or goods shipped at a port in India, the ship is allowed to leave the port only when the
tax has been paid or satisfactory arrangement has been made for payment thereof. 7.5% of

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the freight paid or payable to the owner or the charterer or to any person on his behalf,
whether in India or outside India on account of such carriage is deemed to be his income
which is charged to tax in the same year in which it is earned.
(b) Persons leaving India [Section 174]
Where it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and he has no present intention of
returning to India, the total income of such individual for the period from the expiry of the
respective previous year up to the probable date of his departure from India is chargeable
to tax in that assessment year.

Example: Suppose Mr. X is leaving India for USA on 10.6.2024 and it appears to the
Assessing Officer that he has no intention to return. Before leaving India, Mr. X may be
asked to pay income-tax on the income earned during the P.Y. 2023-24 as well as the total
income earned during the period 1.4.2024 to 10.06.2024.

(c) AOP/ BOI/ Artificial Juridical Person formed for a particular event or purpose [Section 174A]
If an AOP/ BOI etc. is formed or established for a particular event or purpose and the
Assessing Officer apprehends that the AOP/ BOI is likely to be dissolved in the same year
or in the next year, he can make assessment of the income of such previous years up to the
date of dissolution as income of the relevant assessment year.

Example: Red Flakes is an AOP formed on 14.11.2024 by X and Y for a limited purpose of
organizing a musical concert of a British band “Music Zone” on 14.06.2025. The AOP is
likely to be dissolved after the concert. In such a case, the Assessing Officer can make the
assessment for the income earned from 14.11.2024 to 31.03.2025 and 01.04.2025 to
14.06.2025 during the A.Y. 2025-26 itself.

(d) Persons likely to transfer property to avoid tax [Section 175]

During the current assessment year, if it appears to the Assessing Officer that a person is
likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid
payment of any liability under this Act, the total income of such person for the period from
the expiry of the previous year to the date, when the Assessing Officer commences
proceedings under this section is chargeable to tax in that assessment year.

Example: The Assessing Officer is informed that Mr. X, a defaulter of a leading bank, is
likely to sell all his luxury cars on 02.10.2024 with a view to avoid payment of Income-tax. In
such case, the Assessing Officer can commence proceedings to tax the income of the year
commencing from 01.04.2024 to 02.10.2024 during A.Y. 2024-25 itself.

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(e) Discontinued business [Section 176]

Where any business or profession is discontinued in any assessment year, the income of
the period from the expiry of the previous year up to the date of such discontinuance may,
at the discretion of the Assessing Officer, be charged to tax in that assessment year.

Example: The Assessing Officer is informed during the course of assessment by X Pvt. Ltd.
that they have discontinued their business from 31.05.2024. In such a case, the Assessing
Officer may exercise his discretion and tax the income of the company from 01.04.2024 to
31.05.2024 during the A.Y. 2024-25. It may be noted that the income of the P.Y. 2024-25
will also be taxed in A.Y. 2024-25. However, as the Assessing Officer has discretion under
section 176, he could alternatively wait till the completion of the assessment year and tax
the income of the period commencing from 01.04.2024 to 31.05.2024 in the
A.Y. 2025-26.

Undisclosed sources of income

Amount
borrowed or
repaid on hundi
[Section 69D]
Cash Credits Unexplained
[Section 68] expenditure
[Section 69C]
Undisclosed
sources of
Unexplained income
Investment etc.
Investments not fully
[Section 69] disclosed
Unexplained [Section 69B]
money
[Section 69A]

There are many occasions when the Assessing Officer detects cash credits, unexplained
investments, unexplained expenditure etc., the source for which is not satisfactorily explained by
the assessee to the Assessing Officer. The Act contains a series of provisions to provide for these
contingencies:

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(a) Cash Credits [Section 68]

Where any sum is found credited in the books of the assessee and the assessee offers no
explanation about the nature and source or the explanation offered is not satisfactory in the
opinion of the Assessing Officer, the sum so credited may be charged as income of the
assessee of that previous year.
Unexplained loan or borrowing - Where the sum so credited consists of loan or borrowing
or any such amount, by whatever name called, any explanation offered by the assessee in
whose books such sum is credited would not be deemed to be satisfactory, unless
- the person in whose name such credit is recorded in the books of such assessee
also offers an explanation about the nature and source of such sum so credited and
- in the opinion of the Assessing Officer, such explanation has been found to be
satisfactory.
Unexplained Share Capital/ Premium - Any explanation offered by a closely held
company in respect of any sum credited as share application money, share capital, share
premium or any such amount, by whatever name called, in the accounts of such company
would not be deemed to be satisfactory, unless
- the person, being a resident, in whose name such credit is recorded in the books of
such company also explains about the nature and the source of such sum so
credited and
- in the opinion of the Assessing Officer, such explanation has been found to be
satisfactory.
Non-applicability to Venture Capital Fund or Venture Capital Company 5 – The
abovementioned additional conditions would not apply if the person, in whose name the
sum is recorded, is a Venture Capital Fund or Venture Capital Company registered with
SEBI.
(b) Unexplained Investments [Section 69]
Where in the financial year immediately preceding the assessment year, the assessee has
made investments which are not recorded in the books of account and the assessee offers
no explanation about the nature and the source of investments or the explanation offered is
not satisfactory in the opinion of the Assessing Officer, the value of the investments are
taxed as deemed income of the assessee of such financial year.
5
defined under section 10(23FB)

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(c) Unexplained money etc. [Section 69A]

Where in any financial year the assessee is found to be the owner of any money, bullion,
jewellery or other valuable article and the same is not recorded in the books of account and
the assessee offers no explanation about the nature and source of acquisition of such
money, bullion etc. or the explanation offered is not satisfactory in the opinion of the
Assessing Officer, the money and the value of bullion etc. may be deemed to be the income
of the assessee for such financial year. Ownership is important and mere possession is not
enough.

(d) Amount of investments etc., not fully disclosed in the books of account [Section 69B]
Where in any financial year the assessee has made investments or is found to be the owner
of any bullion, jewellery or other valuable article and the Assessing Officer finds that the
amount spent on making such investments or in acquiring such articles exceeds the amount
recorded in the books of account maintained by the assessee and he offers no explanation
for the difference or the explanation offered is unsatisfactory in the opinion of the Assessing
Officer, such excess may be deemed to be the income of the assessee for such financial
year.

Example: If the assessee is found to be the owner of say 300 gms of gold (market value of
which is ` 25,000) during the financial year ending 31.3.2025 but he has recorded having
spent ` 15,000 in acquiring it, the Assessing Officer can add ` 10,000 (i.e., the difference of
the market value of such gold and ` 15,000) as the income of the assessee, if the assessee
offers no satisfactory explanation thereof.

(e) Unexplained expenditure [Section 69C]

Where in any financial year an assessee has incurred any expenditure and he offers no
explanation about the source of such expenditure or the explanation is unsatisfactory in the
opinion of the Assessing Officer, Assessing Officer can treat such unexplained expenditure
as the income of the assessee for such financial year. Such unexplained expenditure which
is deemed to be the income of the assessee shall not be allowed as deduction under any
head of income.
(f) Amount borrowed or repaid on hundi [Section 69D]
Where any amount is borrowed on a hundi or any amount due thereon is repaid other than
through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall

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be deemed to be the income of the person borrowing or repaying for the previous year in
which the amount was borrowed or repaid, as the case may be.

However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of
such amount. The amount repaid shall include interest paid on the amount borrowed.

Section 115BBE provides the rate at which such cash credits, undisclosed income, undisclosed
expenditure etc. deemed as income under section 68 or section 69 or section 69A or section 69B
or section 69C or section 69D would be subject to tax. See Special rates of tax in page 1.45 of this
Chapter.

1.4 CHARGE OF INCOME TAX

Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
(1) Tax shall be charged at the rates prescribed for the year by the annual Finance Act or the
Income-tax Act, 1961 or both.
(2) The charge is on every person specified under section 2(31);
(3) Tax is chargeable on the total income earned during the previous year and not the
assessment year. (There are certain exceptions provided by sections 172, 174, 174A, 175
and 176 discussed above);
(4) Tax shall be levied in accordance with and subject to the various provisions contained in
the Act.

This section is the backbone of the law of income-tax in so far as it serves as the most operative
provision of the Act. The tax liability of a person springs from this section.

1.5 RATES OF TAX, SURCHARGE & CESS

Income-tax

Income-tax is to be charged on every person at the rates prescribed for the year by the Annual
Finance Act or the Income-tax Act, 1961 or both.
Section 2 of the Finance (No. 2) Act, 2024 read with Part I of the First Schedule to the Finance
(No. 2) Act, 2024, seeks to specify the rates at which income-tax is to be levied on income
chargeable to tax for the assessment year 2024-25.

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Part II lays down the rate at which tax is to be deducted at source during the financial year
2024-25 from income subject to such deduction under the Income-tax Act, 1961;

Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-
tax from income chargeable under the head "Salaries" and the rates for computing advance tax for
the financial year 2024-25 where the assessee exercises the option to shift out of the default tax
regime.
Part III of the First Schedule to the Finance (No. 2) Act, 2024 will become Part I of the First
Schedule to the Finance Act, 2025 and so on.
Surcharge
Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a
percentage of income-tax. Surcharge is presently being levied beyond a particular threshold of
income for different persons. Also, higher rates of surcharge are prescribed for higher thresholds
of income. However, under the special tax regimes for domestic companies and co-operative
societies, a uniform surcharge is prescribed irrespective of the level of total income.
“Health and Education cess” on Income-tax
The amount of income-tax as increased by the union surcharge, if applicable, should be further
increased by an additional surcharge called the “Health and Education cess on income-tax”,
calculated at the rate of 4% of such income-tax and surcharge, if applicable. Health and education
cess is leviable in the case of all assessees i.e. individuals, HUF, AOPs/BOIs, Artificial Juridical
Persons, firms, local authorities, co-operative societies and companies.

It is leviable to fulfill the commitment of the Government to provide and finance quality health
services and universalised quality basic education and secondary and higher education.
Individual/ Hindu Undivided Family (HUF)/ Association of Persons (AOP)/ Body of
Individuals (BOI)/ Artificial Juridical Person
(i) Income-tax:

Individual/HUF/AoP/BoI and Artificial Juridical Persons can pay tax at concessional rates under the
default tax regime under section 115BAC. However, such person has to forego certain exemptions
and deductions under this regime. Alternatively, he/it can exercise the option to shift out of the
default tax regime and pay tax under the optional tax regime as per the regular provisions of the
Act at the tax rates prescribed by the Annual Finance Act of that year.

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Concessional tax rates under the default tax regime under section 115BAC(1A)
Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who exercise the option
to opt out this regime under section 115BAC(6), have to pay tax in respect of their total income
(other than income chargeable to tax at special rates under Chapter XII such as section 111A,
112, 112A, 115BB, 115BBJ etc.) at the following concessional rates, subject to certain conditions
specified under section 115BAC(2) like non-availability of deduction in respect of Leave Travel
Concession, interest on housing loan on self-occupied property, deductions under Chapter VI-A
[other than section 80CCD(2), 80CCH(2) or section 80JJAA] etc. –

(i) Upto ` 3,00,000 NIL

(ii) From ` 3,00,001 to ` 7,00,000 5%
(iii) From ` 7,00,001 to ` 10,00,000 10%
(iv) From ` 10,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vii) Above ` 15,00,000 30%

For detailed discussion on section 115BAC, refer to Chapter 9 in Module 2 of the Study
Material.
Tax rates prescribed by the Annual Finance Act for optional tax regime

The slab rates for A.Y. 2025-26 applicable to an Individual/HUF/AOP/BOI/ Artificial Juridical
Person, which has exercised the option of shifting out of the default tax regime, are as follows:

(i) where the total income does not exceed NIL

` 2,50,000
(ii) where the total income exceeds ` 2,50,000 5% of the amount by which the total income
but does not exceed ` 5,00,000 exceeds ` 2,50,000
(iii) where the total income exceeds ` 5,00,000 ` 12,500 plus 20% of the amount by which
but does not exceed ` 10,00,000; the total income exceeds ` 5,00,000
(iv) where the total income exceeds ` 1,12,500 plus 30% of the amount by
` 10,00,000 which the total income exceeds ` 10,00,000

For a senior citizen (being a resident individual who is of the age of 60 years but not more than 80
years at any time during the previous year), the basic exemption limit is ` 3,00,000. Further,
resident individuals of the age of 80 years or more at any time during the previous year, being very
senior citizens, would be eligible for a higher basic exemption limit of ` 5,00,000. Therefore, the
tax slabs for these assessees would be as follows –

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For senior citizens (being resident individuals of the age of 60 years or more but less than
80 years)
(i) where the total income does not exceed NIL
` 3,00,000
(ii) where the total income exceeds 5% of the amount by which the total income
` 3,00,000 but does not exceed exceeds ` 3,00,000
` 5,00,000
(iii) where the total income exceeds ` 10,000 plus 20% of the amount by which
` 5,00,000 but does not exceed the total income exceeds ` 5,00,000
` 10,00,000;
(iv) where the total income exceeds ` 1,10,000 plus 30% of the amount by which
` 10,00,000 the total income exceeds ` 10,00,000

For resident individuals of the age of 80 years or more at any time during the previous year
(i) where the total income does not exceed NIL
` 5,00,000
(ii) where the total income exceeds ` 5,00,000 20% of the amount by which the total
but does not exceed ` 10,00,000; income exceeds ` 5,00,000
(iii) where the total income exceeds ` 10,00,000 ` 1,00,000 plus 30% of the amount by
which the total income exceeds
` 10,00,000

Clarification regarding attaining prescribed age of 60 years/ 80 years on 31st March itself, in
case of senior/very senior citizens whose date of birth falls on 1st April [Circular No.
28/2016, dated 27.07.2016]
An individual who is resident in India and of the age of 60 years or more (senior citizen) and 80
years or more (very senior citizen) is eligible for a higher basic exemption limit of ` 3,00,000 and
` 5,00,000, respectively.
The contentious issue is regarding the attainment of the aforesaid qualifying ages for availing
higher basic exemption limit in cases of the persons whose date of birth falls on 1st April of
calendar year. In other words, the broader question under consideration is whether a person born
on 1st April of a particular year can be said to have completed a particular age on 31st March, on
the preceding day of his/her birthday, or on 1st April itself of that year.
The Supreme Court had an occasion to consider a similar issue in the case of Prabhu Dayal
Sesma vs. State of Rajasthan &, another 1986, AIR, 1948 wherein it has dealt with on the general
rules to be followed for calculating the age of the person. The Apex Court observed that while
counting the age of the person, whole of the day should be reckoned and it starts from 12 o’clock
in the midnight and he attains the specified age on the day preceding, the anniversary of his

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birthday. In the absence of any express provision, it is well settled that any specified age in law is
to be computed as having been attained on the day preceding the anniversary of the birthday.
The CBDT has, vide this Circular, clarified that a person born on 1st April would be considered to
have attained a particular age on 31st March, the day preceding the anniversary of his birthday. In
particular, the question of attainment of age of eligibility for being considered a senior/very senior
citizen would be decided on the basis of above criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2025, would be treated as
having attained the age of 60 years in the P.Y.2024-25, and would be eligible for higher basic
exemption limit of ` 3 lakh in computing his tax liability for A.Y.2025-26 under the optional tax
regime as per normal provisions of the Act. Likewise, a resident individual whose 80th birthday falls
on 1st April, 2025, would be treated as having attained the age of 80 years in the P.Y.2024-25, and
would be eligible for higher basic exemption limit of ` 5 lakh in computing his tax liability for
A.Y.2025-26 under the optional tax regime as per normal provisions of the Act.

In respect of certain types of income, as mentioned below, the Income-tax Act, 1961 has
prescribed specific rates. The special rates of tax have to be applied on the respective component
of total income irrespective of the tax regime and the slab rates have to be applied on the balance
of total income after adjusting the basic exemption limit.
S. Section Income Rate of Tax
No.
(a) 112 (I) Long term capital gains (other than LTCG
taxable as per section 112A and mentioned in (II)
below) arising -
(a) from transfer of capital asset which takes 20% with indexation
place before 23.7.2024
(b) from transfer of capital asset which takes
place on or after 23.7.2024
- from transfer of any land or building or Lower of 20% with
both by an individual or a HUF, being a indexation or 12.5%
resident acquired before 23.7.2024 without indexation
- from transfer of other capital asset 12.5% without indexation
(II) Long-term capital gains arising from transfer
of unlisted securities or shares of company in
which public are not substantially interested by
non-resident assessee
- If transfer takes place before 23.7.2024 10% without indexation
and foreign currency
fluctuations

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- If transfer takes place on or after 23.7.2024 12.5% without indexation

and foreign currency
fluctuations
(b) 112A Long term capital gains on transfer of –
• Equity share in a company 10% on LTCG >` 1.25
• Unit of an equity oriented fund lakhs if transfer takes
place before 23.7.2024
• Unit of business trust
Condition for availing the benefit of this
concessional rate is that securities transaction 12.5% on LTCG > ` 1.25
tax should have been paid – lakhs if transfer takes
place on or after
In case of Time of payment of 23.7.2024
STT

Equity shares both at the time of Note: Total exemption in

acquisition and transfer P.Y. cannot exceed
` 1.25 lakhs.
Unit of equity at the time of transfer
oriented fund or unit
of business trust
(c) 111A Short-term capital gains on transfer of –
• Equity shares in a company 15% if transfer takes
• Unit of an equity oriented fund place before 23.7.2024
• Unit of business trust
The conditions for availing the benefit of this 20% if transfer takes
concessional rate are – place on or after
23.7.2024
(i) the transaction of sale of such equity share
or unit should be entered into on or after
1.10.2004; and
(ii) such transaction should be chargeable to
securities transaction tax.
(d) 115BB Winnings from 30%
• Lotteries;
• Crossword puzzles;
• Races including horse races;
• Card games and other games of any sort;
• Gambling or betting of any form or nature
(other than winning from any online game)

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 BASIC CONCEPTS 1.45

(e) 115BBJ Net winnings from online games 30%

(f) 115BBE Unexplained money, investment, expenditure, etc. 60%
deemed as income under section 68 or section 69
or section 69A or section 69B or section 69C or
section 69D [See discussion below]

Unexplained money, investments etc. to attract tax@60% [Section 115BBE]

(i) In order to control laundering of unaccounted money by availing the benefit of basic
exemption limit, the unexplained money, investment, expenditure, etc. deemed as income
under section 68 or section 69 or section 69A or section 69B or section 69C or section 69D
would be taxed at the rate of 60% plus surcharge @25% of tax. Thus, the effective rate of
tax (including surcharge@25% of tax and cess@4% of tax and surcharge) is 78%.
(ii) No basic exemption or allowance or expenditure shall be allowed to the assessee under
any provision of the Income-tax Act, 1961 in computing such deemed income.
(iii) Further, no set off of any loss shall be allowable against income brought to tax under
sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D.
ILLUSTRATION 1
Mr. Arjun has a total income of ` 16,00,000 for P.Y.2024-25, comprising of income from house property
and interest on fixed deposits. Compute his tax liability for A.Y.2025-26 assuming his age is –
(a) 52 years

(b) 64 years
(c) 83 years
Assume that Mr. Arjun has exercised the option to shift out/ opt out of the default tax regime.

SOLUTION
(a) Computation of Tax liability of Mr. Arjun (aged 52 years)
Tax liability:
First ` 2,50,000 - Nil -
Next ` 2,50,001 – ` 5,00,000- @5% of ` 2,50,000 ` 12,500
Next ` 5,00,001 – ` 10,00,000- @20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000 - @30% of ` 6,00,000 ` 1,80,000
` 2,92,500

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 1.46 DIRECT TAX LAWS

Add: Health and Education cess@4% ` 11,700

` 3,04,200

(b) Computation of Tax liability of Mr. Arjun (aged 64 years)

Tax liability:
First ` 3,00,000 - Nil
Next ` 3,00,001 – ` 5,00,000 - @5% of ` 2,00,000 ` 10,000
Next ` 5,00,001 – ` 10,00,000- @20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000- @30% of ` 6,00,000 ` 1,80,000
` 2,90,000
Add: Health and Education cess@4% ` 11,600
` 3,01,600

(c) Computation of Tax liability of Mr. Arjun (aged 83 years)

Tax liability:
First ` 5,00,000 - Nil
Next ` 5,00,001 – ` 10,00,000 - @ 20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000 - @ 30% of ` 6,00,000 ` 1,80,000
` 2,80,000
Add: Health and Education cess@4% ` 11,200
` 2,91,200
Surcharge
In case the Individual/HUF/AoP 6/BoI and Artificial Juridical Person pays tax under default
tax regime under section 115BAC
Income-tax computed in accordance with the provisions of section 115BAC and/ or section 111A
or section 112 or section 112A or 115BBE or section 115BBJ would be increased by surcharge
given under the following table:
Particulars Rate of Examples
surcharge on Components of total Applicable rate of
income-tax income surcharge
(i) Where the total 10% Example
income (including • Dividend ` 15 lakhs; Surcharge would be
dividend income and
6 (other than an AOP consisting of only companies as members)

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 BASIC CONCEPTS 1.47

capital gains • STCG u/s 111A levied @10% on income-

chargeable to tax u/s ` 15 lakhs; tax computed on total
111A, 112 and 112A) • LTCG u/s 112 income of ` 1 crore.
> ` 50 lakhs but ≤ ` 25 lakhs;
` 1 crore
• LTCG u/s 112A
` 20 lakhs; and
• Other income
` 25 lakhs
(ii) Where total income 15% Example
(including dividend • Dividend income Surcharge would be
income and capital ` 10 lakhs; levied @15% on income-
gains chargeable to tax computed on total
tax u/s 111A, 112 • STCG u/s 111A
` 35 lakhs; income of ` 1.85 crores.
and 112A) > ` 1
crore but ≤ ` 2 crore • LTCG u/s 112
` 50 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 55 lakhs
(iii) Where total income 25% Example
(excluding dividend • Dividend income Surcharge@15% would
income and capital ` 51 lakhs; be levied on income-tax
gains chargeable to on:
tax u/s 111A, 112 • STCG u/s 111A
` 44 lakh; • Dividend income of
and 112A) > ` 2
crore • LTCG u/s 112 ` 51 lakhs;
` 42 lakhs; • STCG of ` 44 lakhs
The rate of Not chargeable to tax u/s
surcharge on the exceeding • LTCG u/s 112A
` 55 lakh; and 111A;
income-tax payable 15%
on the portion of • Other income • LTCG of ` 42 lakhs
dividend income and ` 6 crores chargeable to tax u/s
capital gains 112; and
chargeable to tax u/s • LTCG of ` 55 lakhs
111A, 112 and 112A chargeable to tax u/s
112A.
Surcharge@25% would
be leviable on income-
tax computed on other
income of
` 6 crores included in
total income

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 1.48 DIRECT TAX LAWS

(iv) Where total income 15% Example

(including dividend • Dividend income Surcharge would be
income and capital ` 40 lakhs; levied@15% on income-
gains chargeable to tax computed on total
tax u/s 111A, 112 • STCG u/s 111A
` 35 lakhs; income of
and 112A) > ` 2 ` 2.77 crore.
crore in cases not • LTCG u/s 112
covered under (iii) ` 42 lakhs;
above • LTCG u/s 112A
` 50 lakhs; and
Other income
` 1.10 crore

Marginal relief
The purpose of marginal relief is to ensure that the increase in amount of tax payable (including
surcharge) due to increase in total income of an assessee beyond the prescribed limit should not
exceed the amount of increase in total income.
Marginal relief is available in case of such persons paying tax under default tax regime u/s
115BAC referred to in above i.e., -

Particulars Marginal relief

(i) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 50 lakhs surcharge@10% on such income-tax (A)
but ≤ ` 1 crore Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3 (B)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., A) or Step 4 (i.e., B). Consequently, if A>B, the marginal
relief would be A – B.
(ii) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 1 crore surcharge@15% on income-tax (C)
but ≤ ` 2 crores Step 2 - Compute income-tax on total income of ` 1 crore +
surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (D)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., C) or Step 4 (i.e., D). Consequently, if C>D, the marginal
relief would be C – D.

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 BASIC CONCEPTS 1.49

(iii) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 2 crores surcharge@25% on income-tax (E)
Step 2 - Compute income-tax on total income of ` 2 crore +
surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (F)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., E) or Step 4 (i.e., F). Consequently, if E>F, the marginal
relief would be E – F.
Note – It is presumed that the total income referred to above does not include dividend income,
long term capital gains taxable under section 112/ 112A and short-term capital gains taxable under
section 111A.
In case the total income includes dividend income, long term capital gains taxable under section
112/112A or short term capital gains taxable under section 111A, surcharge on income-tax
computed on such dividend income and capital gains cannot exceed 15%. This must be kept in
mind while computing marginal relief in cases referred to in (iii) above.
In case the Individual/HUF/AoP 7/BoI and Artificial Juridical Person exercises the option to
shift out of the default tax regime
Income-tax computed in accordance with normal provisions of the Act or section 111A or section
112 or section 112A or 115BBE or section 115BBJ would be increased by surcharge given under
the following table:
Rate of Example
Particulars surcharge on Components of total Applicable rate of
income-tax
income surcharge
(i) Where the total 10% Example
income (including Surcharge would be
• Dividend ` 10 lakhs;
dividend income levied@10% on
and capital gains • STCG u/s 111A
` 20 lakhs; income-tax computed
chargeable to tax on total income of
u/s 111A, 112 and • LTCG u/s 112 ` 15 ` 90 lakhs.
112A) > ` 50 lakhs lakhs;
but ≤ ` 1 crore • LTCG u/s 112A ` 20
lakhs; and
• Other income ` 25 lakhs

7 (other than an AOP consisting of only companies as members)

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 1.50 DIRECT TAX LAWS

(ii) Where total income 15% Example

(including dividend
• Dividend income Surcharge would be
income and capital levied@15% on
` 10 lakhs;
gains chargeable to
• STCG u/s 111A income-tax computed
tax u/s 111A, 112
` 40 lakhs; on total income of
and 112A) > ` 1 ` 1.90 crores.
crore but ≤ ` 2 • LTCG u/s 112
crore ` 55 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 50 lakhs
(iii) Where total income 25% Example
(excluding dividend
• Dividend income Surcharge@15%
income and capital
` 51 lakhs; would be levied on
gains chargeable to
tax u/s 111A, 112 and • STCG u/s 111A income-tax on:
112A) > ` 2 crore but ` 44 lakh; • Dividend income of
≤ ` 5 crore • LTCG u/s 112 ` 51 lakhs;
The rate of Not ` 42 lakhs; • STCG of ` 44
surcharge on the exceeding • LTCG u/s 112A lakhs chargeable to
income-tax payable 15% ` 55 lakh; and tax u/s 111A;
on the portion of • Other income • LTCG of ` 42 lakhs
dividend income ` 3 crores chargeable to tax
and capital gains u/s 112; and
chargeable to tax • LTCG of ` 55 lakhs
u/s 111A, 112 and chargeable to tax
112A u/s 112A.
Surcharge@25%
would be leviable on
income-tax computed
on other income of ` 3
crores included in total
income
(iv) Where total income 37% Example
(excluding dividend
• Dividend income Surcharge@15%
income and capital would be levied on
` 60 lakhs;
gains chargeable to
tax u/s 111A, 112 • STCG u/s 111A income-tax on:
and 112A) > ` 5 ` 50 lakhs; • Dividend income of
crore • LTCG u/s 112 ` 60 lakhs;
` 42 lakhs;

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 BASIC CONCEPTS 1.51

Rate of surcharge Not • LTCG u/s 112A • STCG of ` 50

on the income-tax exceeding ` 25 lakhs; and lakhs chargeable to
payable on the 15% tax u/s 111A;
• Other income
portion of dividend
` 6 crore • LTCG of ` 42 lakhs
income and capital
chargeable to tax
gains chargeable to
u/s 112; and
tax u/s 111A, 112
and 112A • LTCG of ` 25 lakhs
chargeable to tax
u/s 112A.
Surcharge@37% would
be leviable on the
income-tax computed
on other income of ` 6
crores included in total
income.
(v) Where total income 15% Example
(including dividend
• Dividend income Surcharge would be
income and capital levied@15% on
` 55 lakhs;
gains chargeable to income-tax computed
tax u/s 111A, 112 • STCG u/s 111A
` 60 lakhs; on total income of
and 112A) > ` 2 ` 3.02 crore.
crore in cases not • LTCG u/s 112
covered under (iii) ` 42 lakhs;
and (iv) above • LTCG u/s 112A
` 35 lakhs; and
• Other income
` 1.10 crore

Marginal relief
Marginal relief in case of such persons referred to in above under the optional tax regime (as per
the normal provisions of the Act).

Particulars Marginal relief

(i) Where the total income > Step 1 - Compute income-tax on total income; and add
` 50 lakhs but ≤ ` 1 crore surcharge@10% on such income-tax (A)
Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3
(B)
Step 5 – Income-tax liability on total income (along with

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 1.52 DIRECT TAX LAWS

surcharge) would be the lower of the amount arrived at in

Step 1 (i.e., A) or Step 4 (i.e., B). Consequently, if A>B, the
marginal relief would be A – B.
(ii) Where the total income > Step 1 - Compute income-tax on total income; and add
` 1 crore but ≤ ` 2 crores surcharge@15% on income-tax (C)
Step 2 - Compute income-tax on total income of ` 1 crore +
surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(D)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., C) or Step 4 (i.e., D). Consequently, if C>D, the
marginal relief would be C – D.
(iii) Where the total income > Step 1 - Compute income-tax on total income; and add
` 2 crores but ≤ ` 5 crores surcharge@25% on income-tax (E)
Step 2 - Compute income-tax on total income of ` 2 crore +
surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(F)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., E) or Step 4 (i.e., F). Consequently, if E>F, the
marginal relief would be E – F.
(iv) Where the total income > Step 1 - Compute income-tax on total income; and add
` 5 crores surcharge@37% on income-tax (G)
Step 2 - Compute income-tax on total income of ` 5 crore +
surcharge on such income-tax@25%
Step 3 - Total income (-) ` 5 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(H)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., G) or Step 4 (i.e., H). Consequently, if G>H,
the marginal relief would be G – H.

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 BASIC CONCEPTS 1.53

Note – It is presumed that the total income referred to above does not include dividend income,
long term capital gains taxable under section 112/ 112A and short-term capital gains taxable under
section 111A.
In case the total income includes dividend income, long term capital gains taxable under section
112/ 112A or short term capital gains taxable under section 111A, surcharge on income-tax
computed on such dividend income and capital gains cannot exceed 15%. This must be kept in
mind while computing marginal relief in cases referred to in (iii) and (iv) above.
ILLUSTRATION 2
Compute the tax liability of Mr. Arpit (aged 42), having total income of ` 51 lakhs for the
Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from
house property and interest on fixed deposit. Assume that Mr. Arpit has exercised the option to
shift out of section 115BAC.
SOLUTION
Computation of tax liability of Mr. Arpit for the A.Y.2025-26
(A) Income-tax (including surcharge) computed on total income of ` 51,00,000
` 2,50,000 – ` 5,00,000 @5% ` 12,500
` 5,00,001 – ` 10,00,000 @20% ` 1,00,000
` 10,00,001 – ` 51,00,000 @30% ` 12,30,000
Total ` 13,42,500
Add: Surcharge @ 10% ` 1,34,250 ` 14,76,750
(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Total Income Less ` 50 lakhs ` 1,00,000
(D) Income-tax computed on total income of ` 50 lakhs plus the
excess of total income over ` 50 lakhs (B +C) ` 14,12,500
(E) Tax liability: lower of (A) and (D) ` 14,12,500
Add: Health and education cess @4% ` 56,500
Tax liability ` 14,69,000
(F) Marginal Relief (A – D) ` 64,250

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 1.54 DIRECT TAX LAWS

Alternative method -
(A) Income-tax (including surcharge) computed on total income of ` 51,00,000
` 2,50,000 – ` 5,00,000@5% ` 12,500

` 5,00,001 – ` 10,00,000@20% ` 1,00,000

` 10,00,001 – ` 51,00,000@30% ` 12,30,000
Total ` 13,42,500
Add: Surcharge@10% ` 1,34,250 ` 14,76,750
(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500

(C) Excess tax payable (A)-(B) ` 1,64,250

(D) Marginal Relief (` 1,64,250 – ` 1,00,000, being the amount
of income in excess of ` 50,00,000) ` 64,250

(E) Tax liability (A)-(D) ` 14,12,500

Add: Health and education cess @4% ` 56,500
Tax liability ` 14,69,000

ILLUSTRATION 3
Compute the tax liability of Mr. Veer (aged 51) under the default tax regime, having total income of
` 1,01,00,000 for the Assessment Year 2025-26. Assume that his total income comprises of salary
income, Income from house property and interest on fixed deposit.
SOLUTION
Computation of tax liability of Mr. Veer for the A.Y. 2025-26

(A) Income-tax (including surcharge) computed on total income of ` 1,01,00,000

` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000

` 10,00,001 – ` 12,00,000@15% ` 30,000

` 12,00,001 – ` 15,00,000@20% ` 60,000

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 BASIC CONCEPTS 1.55

` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000

Total ` 27,20,000
Add: Surcharge@15% ` 4,08,000
Tax liability without marginal relief ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
(` 1,40,000 plus ` 25,50,000) ` 26,90,000
Add: Surcharge@10% ` 2,69,000
` 29,59,000
(C) Total Income Less ` 1 crore ` 1,00,000
(D) Income-tax computed on total income of ` 1 crore plus the
excess of total income over ` 1 crore (B +C) ` 30,59,000
(E) Tax liability: lower of (A) & (D) ` 30,59,000
Add: Health and education cess @4% ` 1,22,360
Tax liability ` 31,81,360
(F) Marginal relief (A-D) ` 69,000
Alternative method:
(A) Income-tax (including surcharge) computed on total income of ` 1,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000
` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000
Total ` 27,20,000
Add: Surcharge @ 15% ` 4,08,000 ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
[(` 1,40,000 plus ` 25,50,000) plus surcharge@10%] ` 29,59,000
(C) Excess tax payable (A)-(B) ` 1,69,000

© The Institute of Chartered Accountants of India

 1.56 DIRECT TAX LAWS

(D) Marginal Relief (` 1,69,000 – ` 1,00,000, being the amount

of income in excess of ` 1,00,00,000) ` 69,000

(E) Tax liability (A) - (D) ` 30,59,000

Add: Health and education cess @4% ` 1,22,360

Tax liability ` 31,81,360

ILLUSTRATION 4

Compute the tax liability of Mr. Varun (aged 58), having total income of ` 2,01,00,000 for the
Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from
house property and interest on fixed deposit. Assume that Mr. Varun has exercised the option to
shift out of section 115BAC.

SOLUTION

Computation of tax liability of Mr. Varun for the A.Y. 2025-26

(A) Income-tax (including surcharge) computed on total income of ` 2,01,00,000

` 2,50,000 – ` 5,00,000 @ 5% ` 12,500

` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000

` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000

Total ` 58,42,500

Add: Surcharge @ 25% ` 14,60,625 ` 73,03,125

(B) Income-tax computed on total income of ` 2 crore

(` 12,500 plus ` 1,00,000 plus ` 57,00,000) ` 58,12,500

Add: Surcharge@15% ` 8,71,875

` 66,84,375

(C) Total Income Less ` 2 crore ` 1,00,000

(D) Income-tax computed on total income of ` 2 crore plus the

excess of total income over ` 2 crore (B +C) ` 67,84,375

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 BASIC CONCEPTS 1.57

(E) Tax liability (A) or (D), whichever is lower ` 67,84,375

Add: Health and education cess @4% ` 2,71,375
Tax liability ` 70,55,750
(F) Marginal relief (A-D) ` 5,18,750
Alternative method
(A) Income-tax (including surcharge) computed on total income of ` 2,01,00,000
` 2,50,000 – ` 5,00,000 @ 5% ` 12,500
` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000
Total ` 58,42,500
Add: Surcharge@25% ` 14,60,625 ` 73,03,125
(B) Income-tax computed on total income of ` 2 crore
[(` 12,500 plus ` 1,00,000 plus ` 57,00,000) plus surcharge@15%] ` 66,84,375
(C) Excess tax payable (A)-(B) ` 6,18,750
(D) Marginal Relief (` 6,18,750 – ` 1,00,000, being the amount
of income in excess of ` 2,00,00,000) ` 5,18,750
(E) Tax liability (A) - (D) ` 67,84,375
Add: Health and education cess@4% ` 2,71,375
Tax liability ` 70,55,750
ILLUSTRATION 5
Compute the tax liability of Mr. Akhil (aged 65) in a most beneficial manner. He is having total
income of ` 5,01,00,000 for the Assessment Year 2025-26. Assume that his total income
comprises of salary income, Income from house property and interest on fixed deposit and is the
same under both tax regimes.
SOLUTION
Computation of tax liability of Mr. Akhil under default tax regime
for the A.Y. 2025-26
Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000

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 1.58 DIRECT TAX LAWS

` 7,00,001 – ` 10,00,000@10% ` 30,000

` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 5,01,00,000@30% ` 1,45,80,000
Total ` 1,47,20,000
Add: Surcharge@25% ` 36,80,000
` 1,84,00,000
Add: Health and education cess @4% ` 7,36,000
Tax liability ` 1,91,36,000
Computation of tax liability of Mr. Akhil under optional tax regime
for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 5,00,000 @ 5% ` 10,000
` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800
(B) Income-tax computed on total income of ` 5 crore
(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000) ` 1,48,10,000
Add: Surcharge@25% ` 37,02,500
` 1,85,12,500
(C) Total Income Less ` 5 crore ` 1,00,000
(D) Income-tax computed on total income of ` 5 crore plus the
excess of total income over ` 5 crore (B +C) ` 1,86,12,500
(E) Tax liability (A) or (D), whichever is lower ` 1,86,12,500
Add: Health and education cess@4% ` 7,44,500
Tax liability ` 1,93,57,000
(F) Marginal Relief (A – D) ` 17,18,300

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 BASIC CONCEPTS 1.59

Alternative method
(A) Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 5,00,000@5% ` 10,000
` 5,00,001 – ` 10,00,000@20% ` 1,00,000
` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800
(B) Income-tax computed on total income of ` 5 crore
[(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000) plus surcharge@25%] ` 1,85,12,500
(C) Excess tax payable (A)-(B) ` 18,18,300
(D) Marginal Relief (` 18,18,300 – ` 1,00,000, being the
amount of income in excess of ` 5,00,00,000) ` 17,18,300
(E) Tax liability (A) - (D) ` 1,86,12,500
Add: Health and education cess @4% ` 7,44,500
Tax liability ` 1,93,57,000
It is beneficial for Mr. Akhil to pay tax under default tax regime under section 115BAC, since his
tax liability would be lower by ` 2,21,000 (` 1,93,57,000 - ` 1,91,36,000).
Firm/ LLP/ Local Authority
Income-tax
On the whole of the total income 30%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to Firm/
LLP/ local authority also.
Surcharge
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 12% of income-tax
computed as above.
Marginal Relief
Marginal relief is available in case of such persons having a total income exceeding ` 1 crore i.e.,
the total amount of income-tax (together with surcharge) computed on such income should not

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exceed the amount of income-tax computed on total income of ` 1 crore by more than the amount
of income that exceeds ` 1 crore.
Co-operative Society
Income-tax rates as per the normal provisions of the Act
(i) Where the total income does not 10% of the total income
exceed ` 10,000
(ii) Where the total income exceeds ` 1,000 plus 20% of the amount by which the
` 10,000 but does not exceed ` total income exceeds ` 10,000
20,000
(iii) Where the total income exceeds ` 3,000 plus 30% of the amount by which the
20,000 total income exceeds ` 20,000

Note – A manufacturing co-operative society, resident in India, can opt for concessional rates of
tax under section 115BAE and other co-operative societies, resident in India, can opt for
concessional rates of tax under section 115BAD.
Tax rate in case of a manufacturing co-operative society, resident in India (set up and
registered on or after 1.4.2023 and commences manufacture of article or thing before
31.3.2024) opting for concessional tax regime u/s 115BAE
15% of income derived from or incidental to manufacturing or production of an article or thing

Tax rate in case of other resident co-operative society opting for concessional tax regime
u/s 115BAD: 22% of total income
Note - Co-operative society, resident in India, can opt for concessional rate of tax u/s 115BAD or
115BAE, as the case may be, subject to certain conditions. The total income of such co-operative
societies would be computed without giving effect to deduction under section 10AA, 33AB, 33ABA,
35(1)(ii)/(iia)/(iii), 35(2AA), 35AD, 35CCC, additional depreciation under section 32(1)(iia),
deductions under Chapter VI-A (other than section 80JJAA) etc. and set off of loss and
depreciation brought forward from earlier years relating to the above deductions. The provisions of
alternate minimum tax under section 115JC would not be applicable to a co-operative society
opting for section 115BAD or 115BAE.
For detailed discussion on sections 115BAD and 115BAE, please refer Chapter 9 in Module 2 of
the Study Material.
Special rates for capital gains under sections 112, 112A and 111A would be applicable to
Co-operative society also.

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Surcharge
(a) In case of a co-operative society (other than a co-operative society opting for section
115BAD or section 115BAE), whose total income > ` 1 crore but is ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is
payable at the rate of 7% of income-tax computed in accordance with the slab rates given
above and/ or section 111A or section 112 or section 112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not exceed the
amount of income-tax computed on total income of ` 1 crore by more than the amount of
income that exceeds ` 1 crore.
(b) In case of a co-operative society (other than a co-operative society opting for section
115BAD or section 115BAE), whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12% of
income-tax computed in accordance with the slab rates given above and/ or section 111A or
section 112 or section 112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i. e., the total amount of
income-tax (together with surcharge) computed on such income should not exceed the
amount of income-tax and surcharge computed on total income of ` 10 crore by more than
the amount of income that exceeds ` 10 crore.
(c) In case of a co-operative society opting for section 115BAD or section 115BAE
Surcharge @10% of income-tax computed under section 115BAD or section 115BAE would
be leviable. Since there is no threshold limit for applicability of surcharge, consequently, there
would be no marginal relief.

Domestic Company
Income-tax
If the total turnover or gross receipt in the P.Y.2022-23 25% of the total income
≤ ` 400 crore
In any other case 30% of the total income

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Notes –
• In case of a domestic manufacturing company (set up and registered on or after
1.10.2019 and commences manufacture of article or thing 8 before 31.3.2024)
exercising option u/s 115BAB: 15% of income derived from or incidental to
manufacturing or production of an article or thing
• In case of a domestic company exercising option u/s 115BAA: 22% of total income
Domestic company can opt for section 115BAA or section 115BAB, as the case may be,
subject to certain conditions. The total income of such companies would be computed without
giving effect to deductions under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA),
35(2AB), 35AD, 35CCC, 35CCD, Chapter VI-A (except section 80JJAA or section 80M),
additional depreciation under section 32(1)(iia) etc. and without set-off of brought forward loss
and unabsorbed depreciation attributable to such deductions.
For detailed discussion on sections 115BAA and 115BAB, please refer Chapter 9 in Module 2
of the Study Material.

Special rates for capital gains under sections 112, 112A and 111A would be applicable to
domestic company also.
Surcharge
(a) In case of a domestic company (other than a domestic company opting for section
115BAA or section 115BAB), whose total income > ` 1 crore but is ≤ ` 10 crore

Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable
at the rate of 7% of income-tax computed in accordance with the rates given above.
Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax computed on total income of ` 1 crore by more than the amount of income that
exceeds ` 1 crore.
ILLUSTRATION 6
Compute the marginal relief available to X Ltd., a domestic company, assuming that the
total income of X Ltd. is ` 1,01,00,000 for A.Y.2025-26 and the total income does not
include any income in the nature of capital gains. Assume that the company has not
exercised option under section 115BAA or 115BAB.
[Note - The gross receipts of X Ltd. for the P.Y.2022-23 is ` 402 crore]

8Including business of generation of electricity

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SOLUTION
The tax payable on total income of ` 1,01,00,000 of X Ltd. computed @32.1% (including
surcharge @7%) is ` 32,42,100. However, the tax cannot exceed ` 31,00,000 (i.e., the tax
of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of
total income exceeding ` 1 crore). The marginal relief is ` 1,42,100 (i.e., ` 32,42,100 -
` 31,00,000). Therefore, the tax payable on ` 1,01,00,000 would be ` 32,24,000
(` 31,00,000 plus health and education cess @4% of ` 1,24,000).
(b) In case of a domestic company (other than a domestic company opting for section
115BAA or section 115BAB), whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12% of
income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax and surcharge computed on total income of ` 10 crore by more than the amount
of income that exceeds ` 10 crore.
ILLUSTRATION 7
Compute the marginal relief available to Y Ltd., a domestic company, assuming that the
total income of Y Ltd. for A.Y.2025-26 is ` 10,01,00,000 and the total income does not
include any income in the nature of capital gains. Assume that the company has not
exercised option under section 115BAA or 115BAB.
[Note - The gross receipts of Y Ltd. for the P.Y.2022-23 is ` 410 crore]
SOLUTION

The tax payable on total income of ` 10,01,00,000 of Y Ltd. computed@ 33.6% (including
surcharge@12%) is ` 3,36,33,600. However, the tax cannot exceed ` 3,22,00,000 [i.e., the
tax of ` 3,21,00,000 (32.1% of ` 10 crore) payable on total income of ` 10 crore plus
` 1,00,000, being the amount of total income exceeding ` 10 crore]. The marginal relief is
` 14,33,600 (i.e., ` 3,36,33,600 - ` 3,22,00,000). Therefore, the tax payable on
` 10,01,00,000 would be ` 3,34,88,000 (i.e., ` 3,22,00,000 plus health and education cess
@4% of ` 12,88,000).

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(c) In case of a domestic company opting for section 115BAA or section 115BAB
Surcharge @10% of income-tax computed under section 115BAA or section 115BAB would
be leviable. Since there is no threshold limit for applicability of surcharge, consequently,
there would be no marginal relief.
Foreign Company
Income-tax

Royalties and fees for rendering technical services (FTS) received from 50%
Government or an Indian concern in pursuance of an agreement, approved by
the Central Government, made by the company with the Government or Indian
concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between
1.3.1964 and 31.3.1976 (in case of FTS)

Other income 35%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to
foreign company also.
Surcharge
(a) In case of a foreign company, whose total income > ` 1 crore but is ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable
at the rate of 2% of income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax computed on total income of ` 1 crore by more than the amount of income that
exceeds ` 1 crore.
(b) In case of a foreign company, whose total income is > ` 10 crore

Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5% of
income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of

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income-tax and surcharge computed on total income of ` 10 crore by more than the amount
of income that exceeds ` 10 crore.

1.6 REBATE FOR RESIDENT INDIVIDUALS [SECTION 87A]

In order to provide tax relief to the individual tax payers, section 87A provides a rebate from the
tax payable by an assessee, being an individual resident in India.
Rebate to resident individual paying tax under default tax regime u/s 115BAC

(1) If the total income of the resident individual is chargeable to tax under section 115BAC and
the total income of such individual does not exceed ` 7,00,000, the rebate shall be equal
to the amount of income-tax payable on his total income for any assessment year or an
amount of ` 25,000, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as
computed before allowing such rebate) on the total income of the assessee with which he is
chargeable for any assessment year.
ILLUSTRATION 8
Mr. Mahesh aged 32 years and a resident in India, has a total income of ` 6,50,000,
comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.
SOLUTION
Computation of tax liability of Mr. Mahesh for A.Y. 2025-26

Particulars `
Tax on total income of ` 6,50,000
Tax @5% of ` 3,50,000 17,500
Less: Rebate u/s 87A (Lower of tax payable or ` 25,000) 17,500
Tax Liability Nil

(2) If the total income of the resident individual is chargeable to tax under section 115BAC and
the total income of such individual exceeds ` 7,00,000 and income-tax payable on such
total income exceeds the amount by which the total income is in excess of ` 7,00,000, the
rebate would be as follows.

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Step 1 – Total income (-) ` 7 lakhs (A)

Step 2 - Compute income-tax liability on total income (B)
Step 3 - If B>A, rebate under section 87A would be a B – A.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as
computed before allowing such rebate) on the total income of the assessee.
ILLUSTRATION 9
Mr. Nitin aged 42 years and a resident in India, has a total income of ` 7,15,000,
comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.
SOLUTION
Computation of tax liability of Mr. Nitin for A.Y. 2025-26

Particulars `
Step 1: Total Income of ` 7,15,000 - ` 7,00,000 15,000 (A)
Step 2: Tax on total income of ` 7,15,000
Tax @10%of ` 15,000 + ` 20,000 21,500 (B)
Step 3: Since B > A, rebate u/s 87A would be B-A
[` 21,500 - ` 15,000] 6,500

15,000
Add: HEC@4% 600
Tax Liability 15,600

Rebate to a resident individual paying tax under optional tax regime (normal provisions of
the Act)
If total income of such individual does not exceed ` 5,00,000, the rebate shall be equal to the
amount of income-tax payable on his total income for any assessment year or an amount of
` 12,500, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as computed
before allowing such rebate) on the total income of the assessee with which he is chargeable for
any assessment year.

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ILLUSTRATION 10
Mr. Manish, aged 47 years and a resident in India, has a total income of ` 4,15,000, comprising
his salary income and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 if he
exercises the option to shift out of the default tax regime.
SOLUTION
Computation of tax liability of Mr. Manish for A.Y. 2025-26
Particulars `
Tax on total income of ` 4,15,000
Tax@5%of ` 1,65,000 8,250
Less: Rebate u/s 87A (Lower of tax payable or ` 12,500) 8,250
Tax Liability Nil

• Rebate under section 87A is allowed from income-tax computed before adding Health and
education cess on income-tax.
• Rebate under section 87A is, however, not available in respect of tax payable @10% on long-
term capital gains taxable u/s 112A.

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SIGNIFICANT SELECT CASES

Sl. No. Case Law

1. Mahle Anand Filter Systems Pvt. Ltd. v. ACIT [2023] 456 ITR 29 (SC)

Issue Analysis & Decision

Can foregoing a security deposit When the assessee sought to vacate certain leased
to settle a dispute be considered premises, disputes arose, and to end the dispute
a revenue expenditure? with the lessor, the assessee agreed not to claim the
security deposit of ` 5.8 crores. The Apex Court
affirmed the decision of the High Court which held
that the amount of ` 5.8 crores could not be treated
as revenue expenditure merely because it was paid
in the course of a dispute. It is evident that the
character of the amount was of a capital nature and
remained so although assessee decided to forgo
` 5.8 crores (the security deposit).

2. CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)

Issue Analysis & Decision

What is the nature of liquidated The damages are directly and intimately linked with the
damages received by a procurement of a capital asset i.e., the cement plant,
company from the supplier of which lead to delay in coming into existence of the
plant for failure to supply profit-making apparatus. It was not a receipt in the
machinery to the company course of profit earning process.
within the stipulated time – a
Therefore, the amount received by the assessee
capital receipt or a revenue
towards compensation for sterilization of the profit
receipt?
earning source, is not in the ordinary course of
business, hence it is a capital receipt in the hands
of the assessee.

3. Honda Siel Cars India Ltd. v. CIT(2017) 395 ITR 713(SC)

Issue Analysis & Decision

Whether technical fee paid If a limited right to use technical know-how is obtained
under a technical collaboration for a limited period for improvising existing business,

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 BASIC CONCEPTS 1.69

agreement for setting up a joint the expenditure is revenue in nature. However, if

venture company in India is to technical know-how is obtained for setting up a new
be treated as revenue or capital business, the position may be different.
expenditure, where, upon
The very purpose of the technical collaboration
termination of the agreement,
agreement, in this case, was to set up the Joint
the joint venture would come to
Venture. The collaboration included not only transfer of
an end?
technical information, but, complete assistance, actual,
factual and on the spot, for establishment of plant,
machinery, etc. so as to set up a manufacturing unit.
Upon termination of technical collaboration agreement,
the joint venture itself would come to an end. Therefore,
in this case, technical fee is capital in nature since
upon termination of technical collaboration
agreement, the joint venture itself would come to an
end.

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TEST YOUR KNOWLEDGE

Questions
1. Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to
accept briefs only for paying his taxes and making charities with the fees received on such
briefs. In a particular case, he agreed to appear to defend one company in the Supreme
Court on the condition that he would be provided with ` 5 lakhs for a public charitable trust
that he would create. He defended the company and was paid the sum by the company. He
created a trust of that sum by executing a trust deed. Decide whether the amount received
by Mr. Bhargava is assessable in his hands as income from profession.
2. XYZ Ltd. took over the running business of a sole-proprietor by a sale deed. As per the sale
deed, XYZ Ltd. undertook to pay overriding charges of ` 15,000 p.a. to the wife of the sole-
proprietor in addition to the sale consideration. The sale deed also specifically mentioned
that the amount was charged on the net profits of XYZ Ltd., who had accepted that
obligation as a condition of purchase of the going concern. Is the payment of overriding
charges by XYZ Ltd. to the wife of the sole-proprietor in the nature of diversion of income or
application of income? Discuss.
3. MKG Agency is a partnership firm consisting of Mr. Mohan and his three major sons. The
partnership deed provided that after the death of Mr. Mohan, the business shall be
continued by the sons, subject to the condition that the firm shall pay 20% of the profits to
their mother, Lakshmi. Mr. Mohan died in March, 2024. In the previous year 2024-25, the
reconstituted firm paid ` 1 lakh (equivalent to 20% of the profits) to Lakshmi and claimed
the amount as deduction from its income. Examine the correctness of the claim of the firm.
4. Anand was the Karta of HUF. He died leaving behind his major son Prem, his widow, his
grandmother and brother’s wife. Can the HUF retain its status as such or the surviving
persons would become co-owners?
5. Mr. C borrowed on Hundi, a sum of ` 25,000 by way of bearer cheque on 11-09-2024 and
repaid the same with interest amounting to ` 30,000 by account payee cheque on 12-10-
2024.

The Assessing Officer (AO) wants to treat the amount borrowed as income during the
previous year. Is the action of the Assessing Officer valid?

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6. The Assessing Officer found, during the course of assessment of a firm, that it had paid rent
in respect of its business premises amounting to ` 60,000, which was not debited in the
books of account for the year ending 31.3.2025. The firm did not explain the source for
payment of rent. The Assessing Officer proposes to make an addition of ` 60,000 in the
hands of the firm for the assessment year 2025-26. The firm claims that even if the addition
is made, the sum of ` 60,000 should be allowed as deduction while computing its business
income since it has been expended for purposes of its business. Examine the claim of the
firm.

Answers
1. In the instant case, the trust was created by Mr. Bhargava himself out of his professional
income. The client did not create the trust. The client did not impose any obligation in the
nature of a trust binding on Mr. Bhargava. Thus, there is no diversion of the money to the
trust before it became professional income in the hands of Mr. Bhargava. This case is one
of application of professional income and not of diversion of income by overriding title.
Therefore, the amount received by Mr. Bhargava is chargeable to tax under the head
“Profits and gains of business or profession”.
2. This issue came up for consideration before the Allahabad High Court in Jit & Pal X-Rays
(P.) Ltd. v. CIT (2004) 267 ITR 370 (All). The Allahabad High Court observed that the
overriding charge which had been created in favour of the wife of the sole-proprietor was an
integral part of the sale deed by which the going concern was transferred to the assessee.
The obligation, therefore, was attached to the very source of income i.e., the going concern
transferred to the assessee by the sale deed. The sale deed also specifically mentioned
that the amount in question was charged on the net profits of the assessee-company and
the assessee-company had accepted that obligation as a condition of purchase of the going
concern. Hence, it is clearly a case of diversion of income by an overriding charge and not
a mere application of income.
3. The issue raised in the problem is based on the concept of diversion of income by
overriding title, which is well recognised in the income-tax law. In the instant case, the
amount of ` 1 lakh, being 20% of profits of the firm, paid to Lakshmi gets diverted at source
by the charge created in her favour as per the terms of the partnership deed. Such income
does not reach the assessee-firm.

Rather, such income stands diverted to the other person as such other person has a better
title on such income than the title of the assessee. The firm might have received the said

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amount but it so received for and on behalf of Lakshmi, who possesses the overriding title.
Therefore, the amount paid to Lakshmi should be excluded from the income of the firm. This
view has been confirmed in CIT vs. Nariman B. Bharucha & Sons (1981) 130 ITR 863
(Bom).
4. In the case of Gowli Buddanna v. CIT (1966) 60 ITR 293, the Supreme Court has made it
clear that there need not be more than one male member to form a HUF as a taxable entity
under the Income-tax Act, 1961. The expression “Hindu Undivided Family” in the Act is
used in the sense in which it is understood under the personal law of the Hindus.

Under the Hindu system of law, a joint family may consist of a single male member and the
widows of the deceased male members and the Income-tax Act, 1961 does not mandate
that it should consist of at least two male members. Therefore, the property of a joint Hindu
family does not cease to belong to the family merely because the family is represented by a
single co-parcener who possesses the right which an owner of property may possess.
Therefore, the HUF would retain its status as such.

5. Section 69D provides that where any amount is borrowed on a hundi or any amount due
thereon is repaid otherwise than by way of an account-payee cheque drawn on a bank, the
amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying the amount for the previous year in which the amount was so borrowed or repaid,
as the case may be.
In this case, Mr. C has borrowed ` 25,000 on Hundi by way of bearer cheque. Therefore, it
shall be deemed to be income of Mr. C for the previous year 2024-25. Since the repayment
of the same along with interest was made by way of account payee cheque, the same
would not be hit by the provisions of section 69D. Therefore, the action of the Assessing
Officer treating the amount borrowed as income during the previous year is valid in law.
6. The claim of the firm for deduction of the sum of ` 60,000 in computing its business income
is not tenable. The action of the Assessing Officer in making the addition of ` 60,000, being
the payment of rent not debited in the books of account (for which the firm failed to explain
the source of payment) is correct in law since the same is an unexplained expenditure
under section 69C. The proviso to section 69C states that such unexplained expenditure,
which is deemed to be the income of the assessee, shall not be allowed as a deduction
under any head of income. Therefore, the claim of the firm is not tenable.

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CHAPTER 2
7
INCOMES WHICH DO NOT
FORM PART OF TOTAL
INCOME

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 appreciate whether a particular income would constitute agricultural
income or non-agricultural income;
 compute the tax on non-agricultural income by applying the concept of
partial integration of agricultural income with non-agricultural income;
 examine the provisions of different clauses of section 10;
 analyse and apply such provisions to determine whether a particular
income would form/ would not form part of total income;
 analyse and apply the provisions of section 14A to determine the
expenditure incurred in relation to income not includible in total income.

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 2.2 DIRECT TAX LAWS

2.1 INTRODUCTION
(1) Exemption under section 10 vis-a-vis Deduction under Chapter VI-A
The various items of income referred to in the different clauses of section 10 are excluded from the
total income of an assessee. These incomes are known as exempted incomes. Consequently,
such income shall not enter into the computation of taxable income.
Moreover, there are certain other incomes which are included in gross total income but are wholly
or partly allowed as deductions under Chapter VI-A in computation of total income. Students
should note a very important difference between exemption under section 10 and the deduction
under Chapter VI-A.

EXEMPTION UNDER SECTION 10

The incomes which are exempt
under section 10 will not be DEDUCTION UNDER CHAPTER VI-A
included for computing total Incomes from which deductions are
income. allowable under chapter VI-A will first
be included in the gross total income
(GTI) and then the deductions will be
allowed from gross total income (GTI).

(2) Exemptions which are discussed under the relevant chapters:

In this chapter, we are going to study the provisions of section 10 which enumerate the
various categories of income that are exempt from tax.
Students may note that, in this chapter, only some of the exemptions are discussed. The
remaining exemptions are being discussed in the respective chapters as shown hereunder 1:

1 The exemptions under section 10 in relation to Salaries have been dealt with in detail at the Intermediate
level itself. The remaining exemptions are discussed in other chapters of this Study Material.

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.
INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.3

LIST OF EXEMPTIONS BEING DISCUSSED IN RESPECTIVE CHAPTERS

• Capital gain on transfer of a unit of Unit Scheme [Section 10(33)]
• Income received on buy-back of shares of domestic company [Section
10(34A)] [Exempted upto 1st October 2024]
Capital Gains • Capital gain on compulsory acquisition of agricultural land within
specified urban limits [Section 10(37)]
• Transfer of specified capital asset under Land Pooling Scheme [Section
10(37A)]
• Income received in transaction of reverse mortgage [Section 10(43)]

• Receipts from LIC [Section 10(10D)]

Income from • Interest income arising to certain persons [Section 10(15)]
Other Sources • Family pension received by widow/ children/ nominated heirs of armed
forces members [Section 10(19)]
Income of other
Persons • Exemption in respect of minor's income included in the hands of parent
Included in [Section 10(32)]
Assessee's
Total Income

• Payment from Sukanya Samriddhi Account [Section 10(11A)]

Gross Total • Payment from NPS Trust to an assessee on closure of his account or on
Income his opting out of the pension scheme [Section 10(12A)]
• Payment from NPS Trust to an employee on partial withdrawal [Section
10(12B)]
• Payment from Agnipath Corpus Fund to a person enrolled under the
Agnipath Scheme or to his nominee [Section 10(12C)]

Assessment of • Income of certain funds or institutions [Section 10(23C)]

Trusts and • Income of Securitisation trusts [Section 10(23DA)]
Institutions, • Income of Investment Fund [Section 10(23FBA)]
Political Parties • Income of Unit holders of Investment Fund [Section 10(23FBB)]
and other • Income of business trusts [Sections 10(23FC), 10(23FCA) and
special entities 10(23FD)]

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Taxation of • Any income arising from providing any specified service chargeable
Digital to equalisation levy [Section 10(50)]
transactions

• Interest on moneys standing to the credit of individual in his NRE account

[Section 10(4)(ii)]
• Interest income of a non-corporate non-resident or foreign company on
specified off-shore Rupee Denominated Bonds issued by an Indian company or
business trust [Section 10(4C)]
• Income of a specified fund on transfer of certain specified asset [Section 10(4D)]
• Income of a non-resident as a result of transfer of non-deliverable forward
contracts/ offshore derivative instruments/ over the counter derivatives entered
into with an offshore banking unit of an IFSC [Section 10(4E)]
• Income of a non-resident by way of royalty or interest, on account of lease of an
aircraft or a ship in a previous year, paid by a unit of an IFSC [Section 10(4F)]
• Income of a non-resident from portfolio of securities etc. in an account
maintained with an offshore banking unit in any IFSC [Section 10(4G)]
• Income received by a non-resident or a Unit of an IFSC [Section 10(4H)]
• Remuneration received by individuals, who are not citizens of India [Section
10(6)]
• Tax paid on behalf of foreign state or foreign enterprise on amount paid as
consideration of acquiring aircraft, etc. on lease [Section 10(6BB)]
• Income arising to foreign companies from projects connected with the security
of India [Section 10(6C)]
• Royalty income or fees for technical services arising to non-resident fom
National Technical Research Organisation (NTRO) [Section 10(6D)]
Non-
resident • Interest income arising to certain persons [Section 10(15)]
Taxation • Income arising to foreign state or foreign enterprise by way of consideration of
acquiring aircraft, etc. on lease [Section 10(15A)]
• Income of a foreign company from lease rentals of cruise ships [Section
10(15B)]
• Income of European Economic Community (EEC) [Section 10(23BBB)]
• Income derived by the SAARC Fund for Regional Projects [Section 10(23BBC)]
• Income accruing or arisiing to or received by a unit holder from a specified fund
or on transfer of units in a specified fund [Section 10(23FBC)]
• Certain incomes of wholly owned subsidiary of Abu Dhabi Investment Authority,
Sovereign Wealth Fund and specified pension fund [Section 10(23FE)]
• Capital Gains arising or received by a non-resident or a specified fund on
account of transfer of share of a company resident in india [Section10(23FF)]
• Any income of a unit of IFSC primarily engaged in the business of leasing of an
aircraft, by way of dividends from a company being a unit of any IFSC primarily
engaged in the business of leasing of an aircraft [Section 10(34B)]
• Income received by certain foreign companies in India in Indian currency from
sale of crude oil to any person in India [Section 10(48)]
• Income accruing or arising to a foreign company on account of storage of crude
oil in a facility in India and sale of crude oil therefrom to any person resident in
India [Section 10(48A)]
• Income accruing or arising to a foreign company on account of sale of leftover
stock of crude oil, if any, from the facility in India after the expiry of the
agreement or the arrangement [Section 10(48B)]

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.5

2.2 INCOMES NOT INCLUDED IN TOTAL INCOME

[SECTION 10]
Let us now have a look at the various incomes which are exempt from tax and the conditions to be
satisfied in order to be eligible for exemption.

(1) Agricultural income [Section 10(1)]

Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee. The reason for total exemption of agricultural income from the scope of central income-
tax is that under the Constitution, the Central Government has no power to levy a tax on
agricultural income.

Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the land holders
who might have rented out the lands. Agricultural income may be received in cash or in kind.
Agricultural income may arise in any one of the following three ways:-
(i) It may be rent or revenue derived from land situated in India and used for agricultural
purposes.

(ii) It may be income derived from such land by

(a) agriculture or
(b) the performance of a process ordinarily employed by a cultivator or receiver of
rent in kind to render the produce fit to be taken to the market or
(c) the sale, by a cultivator or receiver of rent in kind, of such agricultural produce
raised or received by him, in respect of which no process has been performed
other than a process of the nature mentioned in point (b) above.
(iii) Lastly, agricultural income may be derived from any farm building required for agricultural
operations.
Now let us take a critical look at the following aspects:
(i) Rent or revenue derived from land situated in India and used for agricultural
purposes: The following three conditions have to be satisfied for income to be treated as
agricultural income:
(a) Rent or revenue should be derived from land;

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(b) Land has to be situated in India (If agricultural land is situated in a foreign country,
the entire income would be taxable); and

(c) land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land
is termed as Rent. The rent can either be received by the owner of the land or by the
original tenant from the sub-tenant. It implies that ownership of land is not necessary. Thus,
the rent received by the original tenant from sub-tenant would also be agricultural income
subject to the other conditions mentioned above.
The scope of the term “Revenue” is much broader than rent. It includes income other than
rent. For example, fees received for renewal for grant of land on lease would be revenue
derived from land.
(ii) Income derived from such land by
(a) Agriculture: The term “Agriculture” has not been defined in the Act. However,
cultivation of a field involving human skill and labour on the land can be broadly
termed as agriculture.
“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It
involves basic operations and subsequent operations.

Basic Subsequent Operations to be

Operations Operations performed after the
Those operations produce of sprouts
by agriculturists from the land (e.g.,
which are weeding, digging etc.)
absolutely are subsequent
necessary for the operations. These
purpose of subsequent operations
effectively raising would be agricultural
produce from the operations only when
land are the basic taken in conjunction
operations. with and as a
continuation of the
basic operations.

“Agriculture” comprises within its scope the basic as well as the subsidiary
operations regardless of the nature of the produce raised on the land. These produce
may be grain, fruits or vegetables necessary for sustenance of human beings
including plantation and groves or grass or pasture for consumption of beasts or

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.7

articles of luxury such as betel, coffee, tea, spices, tobacco or commercial crops like
cotton flax, jute hemp and indigo. The term comprises of products of land having
some utility either for consumption or for trade and commerce and would include
forest products such as sal, tendu leaves etc.

Note: The term ‘agriculture’ cannot be extended to all activities which have some
distant relation to land like dairy farming, breeding and rearing of live stock, butter
and cheese making and poultry farming. This aspect is discussed in detail later on in
this chapter.

Whether income from nursery constitutes agricultural income?

In the past, there have been court rulings that only if a nursery is maintained by
carrying out the basic operations on land and subsequent operations in continuation
thereof, income from such nursery would be treated as agricultural income and
would qualify for exemption under section 10(1).
The Supreme Court has, in CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466,
held that the basic operations must be performed before any income can be called
as agricultural income. The basic operations involve cultivation of the ground, in the
sense of tilling of the land, sowing of the seeds, planting and other similar operations
on the land. Such basic operations demand the expenditure of human labour and
skill upon the land itself and further, they are directed to make the crop sprout from
the land. Therefore, income derived from sale of plants grown directly in pots would
not be treated as agricultural income.
However, the Madras High Court, in CIT v. Soundarya Nursery (2000) 241 ITR 530,
observed that nursing activity involves carrying out of several operations on land
before the saplings were transplanted in suitable containers including pots and
thereafter kept in shade or green house for further operation and growth. Therefore,
income arising from nursery should be considered as agricultural income.
Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or
not the basic operations were carried out on land. This Explanation ratifies the view
taken by the Madras High Court in favour of the taxpayer.

(b) Process ordinarily employed to render the produce fit to be taken to the
market: Sometimes, to make the agricultural produce a saleable commodity, it
becomes necessary to perform some kind of process on the produce. The income

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from the process employed to render the produce fit to be taken to the market would
be agricultural income. However, it must be a process ordinarily employed by the
cultivator or receiver of rent in kind and the process must be applied to make the
produce fit to be taken to the market.
The ordinary process employed to render the produce fit to be taken to the market
includes thrashing, winnowing, cleaning, drying, crushing etc. For example, the
process ordinarily employed by the cultivator to obtain the rice from paddy is to first
remove the hay from the basic grain, and thereafter to remove the chaff from the
grain. The grain has to be properly filtered to remove stones etc. and finally the rice
has to be packed in gunny bags for sale in the market.
After such process, the rice can be taken to the market for sale. This process of
making the rice ready for the market may involve manual operations or mechanical
operations. All these operations constitute the process ordinarily employed to make
the product fit for the market. The produce must retain its original character in spite
of the processing unless there is no market for selling it in that condition.
However, if marketing process is performed on a produce which can be sold in its raw
form, income derived therefrom is partly agricultural income and partly business income.
(c) Sale of such agricultural produce in the market: Any income from the sale of any
produce to the cultivator or receiver of rent-in kind is agricultural income provided it
is from the land situated in India and used for agricultural purposes. However, if the
produce is subjected to any process other than process ordinarily employed to make
the produce fit for market, the income arising on sale of such produce would be
partly agricultural income and partly non-agricultural income.
Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are
subjected to manufacturing process and the manufactured product is sold, the profit
on such sale will consist of agricultural income as well as business income. That
portion of the profit representing agricultural income will be exempted.
Apportionment of Income between business income and agriculture income: Rules 7,
7A, 7B & 8 of Income-tax Rules, 1962 provides the basis of apportionment of income
between agricultural income and business income.
I. Rule 7 - Income from growing and manufacturing of any product
Where income is partially agricultural income and partially income chargeable to income-tax
as business income, the market value of any agricultural produce which has been raised by

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.9

the assessee or received by him as rent in kind and which has been utilised as raw material
in such business or the sale receipts of which are included in the accounts of the business
shall be deducted. No further deduction shall be made in respect of any expenditure
incurred by the assessee as a cultivator or receiver of rent in kind.
Determination of market value - There are two possibilities here:

(i) The agricultural produce is capable of being sold in the market either in its raw stage
or after application of any ordinary process to make it fit to be taken to the market. In
such a case, the value calculated at the average price at which it has been so sold
during the relevant previous year will be the market value.
(ii) It is possible that the agricultural produce is not capable of being ordinarily sold in
the market in its raw form or after application of any ordinary process. In such case
the market value will be the total of the following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the
circumstances in each case to represent at reasonable profit.
ILLUSTRATION 1
Mr. Amar grows sugarcane and uses the same for the purpose of manufacturing sugar in
his factory. 40% of sugarcane produce is sold for ` 12 lakhs, and the cost of cultivation of
such sugarcane is ` 6 lakhs. The cost of cultivation of the balance sugarcane (60%) is ` 15
lakhs and the market value of the same is ` 25 lakhs. After incurring ` 1.5 lakhs in the
manufacturing process on the balance sugarcane, the sugar was sold for ` 30 lakhs.
Compute Amar’s business income and agricultural income.
SOLUTION
Computation of Business Income and Agriculture Income of Mr. Amar
Particulars Business Agricultural Income
Income
(`) (`) (`)
Sale of Sugar
Business income
Sale Proceeds of sugar 30,00,000
Less: Market value of sugar (60%) 25,00,000

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 2.10 DIRECT TAX LAWS

Less: Manufacturing exp. 1,50,000

3,50,000
Agricultural income
Market value of sugar (60%) 25,00,000
Less: Cost of cultivation 15,00,000
10,00,000
Sale of sugarcane
Agricultural Income
Sale proceeds of sugarcane (40%) 12,00,000
Less: Cost of cultivation 6,00,000
6,00,000
16,00,000

II. Rule 7A – Income from growing and manufacturing of rubber

This rule is applicable when income derived from the sale of centrifuged latex or cenex or
latex based crepes or brown crepes or technically specified block rubbers manufactured or
processed from field latex or coagulum obtained from rubber plants grown by the seller in
India. In such cases 35% profits on sale is taxable as business income under the head
“Profits and gains from business or profession”, and the balance 65% is agricultural income
and is exempt.
ILLUSTRATION 2
Mr. Nilesh manufactures latex from the rubber plants grown by him in India. These are then
sold in the market for ` 36 lakhs. The cost of growing rubber plants is ` 16 lakhs and that of
manufacturing latex is ` 12 lakhs. Compute his total income.
SOLUTION
The total income of Mr. Nilesh comprises of agricultural income and business income.
Total profits from the sale of latex = ` 36 lakhs – ` 16 lakhs – ` 12 lakhs = ` 8 lakhs.
Agricultural income = 65% of ` 8 lakhs = ` 5.2 lakhs
Business income = 35% of ` 8 lakhs = ` 2.8 lakhs
III. Rule 7B – Income from growing and manufacturing of coffee

(i) In case of income derived from the sale of coffee grown and cured by the seller in
India, 25% profits on sale is taxable as business income under the head “Profits and

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.11

gains from business or profession”, and the balance 75% is agricultural income and
is exempt.

(ii) In case of income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, with or without mixing chicory or other flavoring
ingredients, 40% profits on sale is taxable as business income under the head
“Profits and gains from business or profession”, and the balance 60% is agricultural
income and is exempt.
IV. Rule 8 - Income from growing and manufacturing of tea

This rule applies only in cases where the assessee himself grows tea leaves and
manufactures tea in India. In such cases 40% profits on sale is taxable as business income
under the head “Profits and gains from business or profession”, and the balance 60% is
agricultural income and is exempt.
Rule Apportionment of income in certain cases Agricultural Business
Income Income
7A Income from sale of rubber products derived 65% 35%
from rubber plant grown by the seller in India
7B Income from sale of coffee
- grown and cured by the seller in India 75% 25%
- grown, cured, roasted and grounded by the 60% 40%
seller in India
8 Income from sale of tea grown and manufactured 60% 40%
by the seller in India

(iii) Income from farm building – Income from the farm building which is owned and occupied
by the receiver of the rent or revenue of any such land or occupied by the cultivator or the
receiver of the rent in kind, of any land with respect to which, or the produce of which, any
process discussed above is carried on, would be treated as agricultural income.
However, the income arising from the use of such farm building for any purpose (including
letting for residential purpose or for the purpose of business or profession) other than
agriculture referred in (b) & (c) of (ii) of para (1) in page 2.5 would not be agricultural income.
Further, the income from such farm building would be agricultural income only if the
following conditions are satisfied:

(a) The building should be on or in the immediate vicinity of the land; and
(b) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind

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should, by reason of his connection with such land require it as a dwelling house or
as a store house.

In addition to the above conditions any one of the following two conditions should also be
satisfied:
(i) The land should either be assessed to land revenue in India or be subject to a local
rate assessed and collected by the officers of the Government as such or;
(ii) Where the land is not so assessed to land revenue in India or is not subject to local rate:-
a. It should not be situated in any area as comprised within the jurisdiction of a
municipality or a cantonment board and which has a population not less than
10,000.
b. It should not be situated in any area within such distance, measured aerially,
in relation to the range of population as shown hereunder –
Shortest aerial distance Population according to the last
from the local limits of a preceding census of which the
municipality or relevant figures have been
cantonment board referred published before the first day of
to in item a. the previous year.
(i) ≤ 2 kms > 10,000
(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000

Example:
Area Shortest aerial Population according Would income
distance from the to the last preceding derived from farm
local limits of a census of which the building situated
municipality or relevant figures have in this area be
cantonment been published treated as
board referred to before the first day of agricultural
in item a. the previous year income?
(i) A 1 km 9,000 Yes
(ii) B 1.5 kms 12,000 No
(iii) C 2 kms 11,00,000 No
(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.13

(vi) G 6 kms 8,000 Yes

(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No
(ix) J 9 kms 15,00,000 Yes

Would income arising from transfer of agricultural land situated in urban area be
agricultural income?

No, as per Explanation 1 to section 2(1A), the capital gains arising from the transfer of such
urban agricultural land would not be treated as agricultural income under section 10 but will
be taxable under section 45.

Example: Suppose Bittoo sells agricultural land situated in New Delhi for ` 10 lakhs and
makes a surplus of ` 8 lakhs over its cost of acquisition. This surplus will not constitute
agricultural income exempt under section 10(1) and will be taxable under section 45.

Indirect connection with land

We have seen above that agricultural income is exempt, whether it is received by the tiller or the
landlord. However, non-agricultural income does not become agricultural merely on account of its
indirect connection with the land. The following examples will illustrate the above point.
Example: A rural society has as its principal business the selling on behalf of its member
societies, butter made by these societies from cream sold to them by farmers. The making of
butter was a factory process separated from the farm.
The butter resulting from the factory operations separated from the farm was not an agricultural
product and the society was, therefore, not entitled to exemption under section 10(1) in respect of
such income.
Example: X was the managing agent of a company. He was entitled for a commission at the rate
of 10% p.a. on the annual net profits of the company. A part of the company’s income was agricul-
tural income. X claimed that since his remuneration was calculated with reference to the income of
the company, part of which was agricultural income, such part of the commission as was
proportionate to the agricultural income was exempt from income tax.

Since, X received remuneration under a contract for personal service calculated on the amount of
profits earned by the company, such remuneration does not constitute agricultural income.
Example: Y owned 100 acres of agricultural land, a part of which was used as pasture for cows.
The lands were purely maintained for manuring and other purposes connected with agriculture and

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only the surplus milk after satisfying the assessee’s needs was sold. The question arose whether
income from such sale of milk was agricultural income.

The regularity with which the sales of milk were effected and quantity of milk sold showed that the
assessee carried on regular business of producing milk and selling it as a commercial proposition.
Hence, it was not agricultural income.

Example: In regard to forest trees of spontaneous growth which grow on the soil unaided by
any human skill and labour there is no cultivation of the soil at all. Even though operations in the
nature of forestry operations performed by the assessee may have the effect of nursing and
fostering the growth of such forest trees, it cannot constitute agricultural operations.
Income from the sale of such forest trees of spontaneous growth does not, therefore, constitute
agricultural income.
Examples of Agricultural income and non-agricultural income:
For better understanding of the concept, certain examples of agricultural income and non-
agricultural income are given below:
Example: Agricultural income
• Income derived from sampling or seedlings grown in a nursery.
• Income from growing of flowers and creepers.
• Rent received from land used for grazing of cattle required for agricultural activities.
• Income from growing of bamboo.
Example: Non-agricultural income
• Income from breeding of livestock.
• Income from poultry farming.
• Income from fisheries.
• Income from dairy farming.
ILLUSTRATION 3
Ankur, the owner of a land situated in Kerala used for growing thereon different types of fruits,
paddy, vegetables and flowers, received from Yahoo Movies Ltd., Chennai, ` 5 lakhs as rent
towards the use of this land for shooting of a film. The amount so received was accounted by him
in the books as revenue derived from land and claimed to be exempt under section 10(1). He now

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.15

wants to confirm from you whether the amount has been correctly treated by him as agricultural
income.
SOLUTION
The income received by Mr. Ankur from a filmmaker for allowing them to shoot a film in the
agricultural land owned by him is not in the nature of agricultural income because it was neither
received by him against the sale of agricultural produce obtained nor for carrying out the normal
agricultural operations on the land. The amount paid was only for the purpose of shooting of a film
on such land.

To claim exemption in respect of agricultural income under section 10(1), the conditions contained in
section 2(1A)(a) to (c) have to be first complied with/ fulfilled by the assessee. The Madras High Court
in the case of B. Nagi Reddi v. CIT (2002) 258 ITR 719, following the judgment of Apex Court in the
case of CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, has held, on identical facts, that the
income derived for allowing a shooting of film in the agricultural land cannot be treated as agricultural
income, as it has no nexus with the land, except that it was carried out on agricultural land.
Partial integration of agricultural income with non-agricultural income
As in the above discussion, we have seen that agricultural income is exempt subject to conditions
mentioned in the definition clause of section 2(1A). However, a method has been laid down to levy
tax on agricultural income in an indirect way. This concept is known as partial integration of
agricultural income with non-agricultural income. It is applicable to individuals, HUF, AOPs,
BOIs and artificial juridical persons. Two conditions which need to be satisfied for partial
integration are:
1. The net agricultural income should exceed ` 5,000 p.a., and

2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., If
such person is paying tax under default tax regime u/s 115BAC, then ` 3,00,000 is the
basic exemption limit irrespective of the age of the person. If such person has exercised the
option to shift out of the default tax regime, then, the basic exemption limit would be
` 5,00,000 for resident individuals of the age of 80 years or more at any time during the
previous year, ` 3,00,000 for resident individuals of the age of 60 years or more (but less
than 80 years) at any time during the previous year and ` 2,50,000 for all others). Only if
non-agricultural income exceeds this limit, partial integration would be required.
It may be noted that aggregation provisions do not apply to company, LLP, firm, co-operative
society and local authority. The object of aggregating the net agricultural income with non-
agricultural income is to tax the non-agricultural income at higher rates.

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Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
Step 2: Add net agricultural income and the basic exemption limit available to the assessee.
Compute tax on the aggregate amount.

Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in
step 1 i.e., Step 1 – Step 2.
Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be
reduced by the rebate, if any, available u/s 87A.
Step 5: Thereafter, it would be increase by health and education cess @4%.
The above concept can be clearly understood with the help of the following illustration:
ILLUSTRATION 4
Mr. X, a resident, has provided the following particulars of his income for the P.Y.2024-25.
i. Income from salary (computed) - ` 4,00,000

ii. Income from house property (computed) - ` 3,80,000

iii. Agricultural income from a land in Assam - ` 4,50,000
iv. Expenses incurred for earning agricultural income - ` 1,60,000

Compute his tax liability for A.Y. 2025-26 assuming his age is -
(a) 40 years
(b) 75 years

SOLUTION
(a) Computation of tax liability (age 40 years)
Computation of total income of Mr. X for the A.Y. 2025-26
under default tax regime under section 115BAC
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ` 3,00,000.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.17

His tax liability is computed in the following manner:

Particulars ` `
Income from salary 4,00,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -
Gross Total Income 7,80,000
Less: Deductions under Chapter VI-A -
Total Income 7,80,000

Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000

Tax on ` 10,70,000 = ` 60,500

(i.e., 5% of ` 4,00,000 plus 10% of ` 3,00,000 plus 15% of ` 70,000)

Step 2 : ` 2,90,000 + ` 3,00,000 = ` 5,90,000
Tax on ` 5,90,000 = ` 14,500
(i.e. 5% of ` 2,90,000)
Step 3 : ` 60,500 – ` 14,500 = ` 46,000
Step 4 & 5 : Total tax payable = ` 46,000 + 4% of ` 46,000 = ` 47,840
Computation of total income of Mr. X for the A.Y. 2025-26
under normal provisions of the Act
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and

2. Non-agricultural income exceeds the basic exemption limit of ` 2,50,000.

His tax liability is computed in the following manner:

Particulars ` `
Income from salary 4,00,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -

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Gross Total Income 7,80,000

Less: Deductions under Chapter VI-A -
Total Income 7,80,000

Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000

Tax on ` 10,70,000 = ` 1,33,500
(i.e., 5% of ` 2,50,000 plus 20% of ` 5,00,000 plus 30% of ` 70,000)

Step 2 : ` 2,90,000 + ` 2,50,000 = ` 5,40,000

Tax on ` 5,40,000 = ` 20,500
(i.e. 5% of ` 2,50,000 plus 20% of ` 40,000)
Step 3 : ` 1,33,500 – ` 20,500 = ` 1,13,000
Step 4 & 5 : Total tax payable = ` 1,13,000 + 4% of ` 1,13,000 = ` 1,17,520
(b) Computation of tax liability (age 75 years)
Computation of total income of Mr. X for the A.Y. 2025-26
under default tax regime under section 115BAC
Tax liability of Mr. X would be same under default tax regime whether he is of age of 40 years of
75 years i.e., ` 47,840.
Computation of total income of Mr. X for the A.Y. 2025-26
under normal provisions of the Act
His tax liability is computed in the following manner:
Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000.
Tax on ` 10,70,000 = ` 1,31,000
(i.e. 5% of ` 2,00,000 plus 20% of 5,00,000 plus 30% of 70,000)

Step 2 : ` 2,90,000 + ` 3,00,000 = ` 5,90,000.

Tax on ` 5,90,000 = ` 28,000
(i.e. 5% of ` 2,00,000 plus 20% of ` 90,000)

Step 3 : ` 1,31,000 – ` 28,000 = ` 1,03,000

Step 4 & 5: Total tax payable = ` 1,03,000 + 4% of ` 1,03,000 = ` 1,07,120.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.19

(2) Amounts received by a member from the income of the HUF [Section 10(2)]

(i) As explained in Chapter 1, a HUF is a ‘person’ and hence, a unit of assessment under the
Act. Income earned by the HUF is assessable in its own hands.
(ii) In order to prevent double taxation of one and the same income, once in the hands of the
HUF which earns it and again in the hands of a member when it is paid out to him, section
10(2) provides that members of a HUF do not have to pay tax in respect of any amounts
received by them from the family.
(iii) The exemption applies only in respect of a payment made by the HUF to its member
(a) out of the income of the family or
(b) out of the income of the impartible estate belonging to the family.

(3) Share income of a partner [Section 10(2A)]

This clause exempts from tax a partner’s share in the total income of the firm. In other words, the
partner’s share in the total income of the firm determined in accordance with the profit-sharing
ratio will be exempt from tax.

Taxability of partner’s share, where the income of the firm is exempt under Chapter III/
deductible under Chapter VI-A [Circular No. 8/2014 dated 31.03.2014]
Section 10(2A) provides that a partner’s share in the total income of a firm which is separately
assessed as such shall not be included in computing the total income of the partner. In effect, a
partner’s share of profits in such firm is exempt from tax in his hands.
Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from 1.4.1993
consequent to change in the scheme of taxation of partnership firms. Since A.Y.1993-94, a firm is
assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to
tax once again on his share in the said total income.
An issue has arisen as to the amount which would be exempt in the hands of the partners of a
partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or
Chapter VI-A.
The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and
the same can under no circumstances be taxed in the hands of its partners. Therefore, the entire
profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such
partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of
any exemption or deduction available under the provisions of the Act.

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(4) Payments to Bhopal Gas Victims [Section 10(10BB)]

Any payment made to a person under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985
and any scheme framed thereunder will be fully exempt.
However, payments made to any assessee in connection with Bhopal Gas Leak Disaster to the
extent he has been allowed a deduction under the Act on account of any loss or damage caused to
him by such disaster will not be exempted.

(5) Compensation received on account of disaster [Section 10(10BC)]

(i) This clause exempts any amount received or receivable as compensation by an individual
or his legal heir on account of any disaster.
(ii) Such compensation should be granted by the Central Government or a State Government
or a local authority.

(iii) However, exemption would not be available in respect of compensation for alleviating any
damage or loss, which has already been allowed as deduction under the Act.

(iv) "Disaster" means a catastrophe, mishap, calamity or grave occurrence in any area, arising
from natural or manmade causes, or by accident or negligence. It should have the effect of
causing -

(a) substantial loss of life or human suffering; or

(b) damage to, and destruction of, property; or

(c) damage to, or degradation of, environment.

It should be of such a nature or magnitude as to be beyond the coping capacity of the

community of the affected area.
ILLUSTRATION 5

An amount of ` 5 lakhs was paid on 17.3.2025 to the parents of Amit by the Government of
Chattisgarh as compensation to the aggrieved family, whose only son Amit lost his life in Maoist
local bus bomb blast in Dantewada.

Examine with reasons, whether the amount of compensation received is chargeable to tax in
A.Y. 2025-26.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.21

SOLUTION
As per section 10(10BC), the meaning of “disaster” shall be derived from Disaster Management
Act, 2005 which defines disaster to mean a catastrophe, mishap, calamity or grave occurrence in
any area, arising from natural or manmade causes, or by accident or negligence. It should have
the effect of causing substantial loss of life or human suffering or damage to, and destruction of
property, or damage to, or degradation of environment. It should be of such a nature or magnitude
to be beyond the coping capacity of the community of the affected area.
If, for this reason, any compensation is paid by the Central Government or by a State Government
or by a local authority, then, the same will be exempt from tax. Accordingly, the amount of ` 5
lakhs received by the parents of deceased Amit from the Government of Chattisgarh for the
disaster because of Dantewada bus bomb blast is exempt under section 10(10BC).

(6) Educational scholarships [Section 10(16)]

The value of scholarship granted to meet the cost of education would be exempt from tax in the
hands of the recipient irrespective of the amount or source of scholarship.

(7) Payments to MPs & MLAs [Section 10(17)]

The following incomes of Members of Parliament or State Legislatures will be exempt:

(i) Daily Allowance - Daily allowance received by any Member of Parliament or of State
Legislatures or any Committee thereof.
(ii) Constituency Allowance of MPs - In the case of a Member of Parliament, any allowance
received under Members of Parliament (Constituency Allowance) Rules, 1986; and
(iii) Constituency allowance of MLAs - Any constituency allowance received by any person by
reason of his membership of any State Legislature under any Act or rules made by that
State Legislature.
(8) Awards for literary, scientific and artistic works and other awards by the Government
[Section 10(17A)]

Any payment, whether in cash or in kind -

- in pursuance of any award instituted in the public interest by the Central/ State Government
or any body approved by the Central Government or
- as a reward by Central/ State Government for such purposes as may be approved by the
Central Government in public interest,
will enjoy exemption under this clause.

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(9) Pension received by recipient of gallantry awards [Section 10(18)]

(i) Exemption of Pension - Any income by way of pension received by an individual is exempt
from income-tax if -
(a) such individual was an employee of Central or State Government and
(b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such
other gallantry award notified by the Central Government in this behalf.
(ii) Exemption of Family Pension - In case of the death of such individual, any income by way
of family pension received by any member of the family of the individual shall also be exempt
under this clause.
(iii) Meaning of Family - Family, in relation to an individual, means –
- the spouse and children of the individual; and

- the parents, brothers and sisters of the individuals or any of them wholly or mainly
dependent on the individual.

Exemption of disability pension granted to disabled personnel of armed forces who have been
invalided on account of disability attributable to or aggravated by such service [Circular No.
13/2019, dated 24.6.2019]
The entire disability pension, i.e. “disability element” and “service element” of pension granted to
members of naval, military or air forces who have been invalided out of naval, military or air force
service on account of bodily disability attributable to or aggravated by such service would be exempt
from tax.
The CBDT has, vide this circular, clarified that exemption in respect of disability pension would be
available to all armed forces personnel (irrespective of rank) who have been invalided out of such
service on account of bodily disability attributable to or aggravated by such service. However, such
tax exemption will be available only to armed forces personnel who have been invalided out of
service on account of bodily disability attributable to or aggravated by such service and not to
personnel who have been retired on superannuation or otherwise.

(10) Annual value of palaces of former rulers [Section 10(19A)]

The annual value of any one palace in the occupation of former Ruler during the relevant previous
year would be excluded from the total income, provided the annual value was exempt before

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.23

28.12.1971 by virtue of the provisions of the prevailing orders, i.e., the Merged States (Tax
Concessions) Order, 1949 or the Part B States (Tax Concessions) Order, 1950.

The Supreme Court has, in Maharao Bhim Singh of Kota v. CIT (2017) 390 ITR 532, observed
that, in order to claim exemption from payment of income-tax on the residential palace of the Ruler
under section 10(19A), it is necessary for the Ruler to satisfy the following conditions:

(i) He should own the palace as his ancestral property;

(ii) Such palace should be in his occupation as his residence; and
(iii) The palace should be declared by the Central Government to be exempt from payment of
Income-tax under paragraph 15(iii) of the 1950 Order.
The Supreme Court, accordingly, held that where part of the residential palace is found to be in
occupation of the tenant and the remaining is in occupation of the Ruler for his residence, the
Ruler is entitled to claim exemption for the whole of his residential palace under section 10(19A).
Such exemption cannot be confined to that portion of the palace which is in his actual occupation
thereby subjecting the income derived from the portion let out to payment of income-tax in the
hands of the Ruler.

(11) Income of local authorities [Section 10(20)]

(i) Exempt income - Following income arising to a local authority would be exempt
• Income under the head house property; or
• Income from Capital gains; or
• Income from Other Sources; or
• Income from trade or business carried on by it which accrues or arises
 from the supply of commodity or service under its jurisdictional area
 from the supply of water or electricity within or outside its own jurisdictional area.
(ii) Meaning of Local Authority - For the purposes of this clause, “local authority” means the
following:
(a) Panchayat
(b) Municipality
(c) Municipal Committee and District Board legally entitled to, or entrusted by the
Government with the control or management of a Municipal or local Fund
(d) Cantonment Board

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(12) Income of research associations approved under section 35(1)(ii)/(iii) [Section 10(21)]

This clause provides for exemption in respect of any income of research associations which are
approved under section 35(1)(ii)/(iii) 2. This exemption has, however, been made subject to the
following conditions:
(i) Application and accumulation for the objects - It should apply its income or accumulate
for application wholly and exclusively to its objects and provisions of section 11(2) and (3) 3
would also apply in relation to such accumulation.
(ii) Approved modes of investment/ deposit - The association should invest or deposit its funds
in the forms or modes specified in section 11(5) 4. This condition would however not apply to -
(a) any assets held by the research association where such assets form part of the
corpus of the fund of the association as on 1-6-1973;
(b) any bonus shares allotted to the research institution, in respect of the shares
mentioned above forming part of the corpus of such fund, etc.;
(c) any voluntary contributions received and maintained in the form of jewellery, furniture
or other article as the Board may specify for any period during the previous year.
(iii) Exemption in relation voluntary contribution – Exemption would not be denied in relation
to voluntary contribution, other than voluntary contribution in cash or voluntary contribution
of the nature referred in (a) to (c) above, subject to the condition that such voluntary
contribution is not held by the association otherwise than in any one or more of the forms or
modes specified in section 11(5), after the expiry of one year from the end of the previous
year in which such asset is acquired.
(iv) Non-applicability of exemption in respect of business income - The exemption will not
apply to income of such association which are in the nature of profits and gains of business
unless the business is incidental to the attainment of its objectives and separate books of
account are maintained in respect of such business.
(v) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the research association has not applied its income in accordance with sections
11(2) and (3);

2Section 35(1)(ii)/(iii) will be discussed in Chapter 3

3Section 11(2) and (3) will be discussed in Chapter 10
4Section 11(5) will be discussed in Chapter 10

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.25

(b) the research association has not invested or deposited its funds in accordance with
point (ii) above.

(c) the activities of the research association are not genuine;

(d) the activities of the research association are not being carried out in accordance with
the conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

(13) Income of professional associations [Section 10(23A)]

(i) Exempt and Non-exempt income - All income arising to an association is exempt from
inclusion in income, except the following categories of income, provided it satisfies the
specified conditions:
(a) income under the head ‘income from house property’;
(b) income received for rendering any specific service; and
(c) income by way of interest or dividends derived from its investments.
(ii) Conditions to be satisfied - Associations or institutions must.

• established in India

• have as its object the control, supervision, regulation or encouragement

of the profession of law, medicine, accountancy, engineering or
architecture, or any other profession specified by the Central Government

• apply their income or accumulate it solely to their objects of establishment

• be approved by the Central Government by general or special order

(iii) Withdrawal of Approval - However, approval once granted may be withdrawn if, at any
time, the Government is satisfied that –
(a) the association or institution has not applied or accumulated its income in
accordance with the provisions of the section;

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(b) the activities of the association or institution are not being carried out in accordance
with the conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

(14) Income of institutions established by armed forces [Section 10(23AA)]

Any income received by any person on behalf of any regimental fund or non-public fund
established by the armed forces of the Union for the welfare of the past and present members of
such forces or their dependents is exempt from tax.
Students may note that donations to such institutions will qualify for deduction under section 80G.
(15) Income of Funds established for welfare of employees of which such employees are
members [Section 10(23AAA)]

A number of funds have been established for the welfare of employees or their dependents in
which such employees themselves are members. These funds are utilised to provide benefits to a
member on his superannuation, or in the event of his illness or illness of any member of his family,
or to the dependents of a member on his death.
The exemption will be available to the funds only if the following conditions are fulfilled:

the fund should have been established for the welfare of employees or
their dependents and for such purposes as may be notified by the Board

such employees should be the members of the fund

the fund should apply its income, or accumulate it for application, wholly
and exclusively to the objects for which it is established

the fund shall invest its fund and contributions made by the employees
and other sums received by it in any one mode specified u/s11(5)

the fund should be approved by the Principal Commissioner or

Commissioner in accordance with the prescribed rules

The approval shall have effect for such assessment year or years not exceeding three assessment
years as may be specified in the order of approval.

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(16) Income of Fund set up by Life Insurance Corporation or other insurer under pension
scheme [Section 10(23AAB)]

Any income of a fund set up by the LIC of India or any other insurer under a pension scheme to
which contribution is made by any person for receiving pensions from such fund. Such scheme
should be approved by the Controller of Insurance or the IRDA.
(17) Income of institution established for development of Khadi and Village industries
[Section 10(23B)]

(i) Institutions eligible for exemption - The exemption will be available to institutions
constituted as public charitable trusts or registered under the Societies Registration Act,
1860 or under any law corresponding to that Act in force in any part of India existing solely
for development of khadi and village industries or both and not for purpose of profit.
(ii) Income eligible for exemption - Income derived by such institutions from the production,
sale or marketing of Khadi products or village industries would be exempt from income-tax.
(iii) Conditions for availing exemption -
(a) The institution has to apply its income or accumulate it for application, solely for the
development of khadi or village industries or both.

(b) They should be approved by the Khadi and Village Industries Commission.
The approval shall have effect for such assessment year or years not exceeding three
assessment years as may be specified in the order of approval.
(iv) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the institution has not applied or accumulated its income in accordance with the
provisions of the section;
(b) the activities of the institution are not being carried out in accordance with the
conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.
(18) Income of authorities set up under State or Provincial Act for promotion of Khadi and
Village Industries [Section 10(23BB)]

Income derived by authorities similar to Khadi and Village Industries Board, set up under any State
or Provincial Act, for the development of Khadi or Village industries in the state is exempt from tax.

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(19) Income of authorities set up to administer religious or charitable trusts [Section

10(23BBA)

Income of bodies or authorities established, constituted or appointed under any enactment for the
administration of public religious or charitable trusts or endowments (including maths, temples,
gurudwaras, wakfs, churches, synagogues, agiaries or other places of public religious worship) or
societies for religious or charitable purpose is exempt from tax.
However, it is clarified that this section does not provide exemption in respect of income of any
trust, endowment or society.

(20) Income of the IRDA [Section 10(23BBE)]

Any income of the IRDA established under section 3(1) of the IRDA Act, 1999 will be exempt.

(21) Income of Central Electricity Regulatory Commission [Section 10(23BBG)]

This clause provides exemption to any income of Central Electricity Regulatory Commission
constituted under section 76(1) of the Electricity Act, 2003.

(22) Income of Prasar Bharati (Broadcasting Corporation of India) [Section 10(23BBH)]

Any income of the Prasar Bharati (Broadcasting Corporation of India) established under section
3(1) of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 is exempt.

(23) Income of certain funds or institutions [Section 10(23C)]

An exemption is available in respect of any income received by any person on behalf of the
following entities:
(i) the Prime Minister’s National Relief Fund or the Prime Minister's Citizen Assistance and
Relief in Emergency Situations Fund (PM CARES FUND) [Sub-clause (i)];
(ii) the Prime Minister’s Fund (Promotion of Folk Art) [Sub-clause (ii)];
(iii) the Prime Minister’s Aid to Students Fund [Sub-clause (iii)];
(iv) the National Foundation for Communal Harmony [Sub-clause (iiia)];
(v) the Swachh Bharat Kosh, set up by the Central Government [Sub-clause (iiiaa)];
(vi) the Clean Ganga Fund, set up by the Central Government [Sub-clause (iiiaaa)];
(vii) the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any
State or Union Territory [Sub-clause (iiiaaaa)];

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(viii) any university or other educational institution exists solely for educational purposes and not
for profit which is wholly or substantially financed by the Government [Sub-clause (iiiab)];
(ix) any hospital or other institution wholly or substantially financed by the Government,
which exists solely for philanthropic purposes and not for profit and which exists for the
reception and treatment of persons suffering from illness or mental defectiveness or
reception and treatment of convalescing persons or persons requiring medical attention or
rehabilitation [Sub-clause (iiiac)];

If the government grant to a university or other educational institution, hospital or other

institution during the relevant previous year exceeds 50% of the total receipts (including any
voluntary contributions), of such university or other educational institution, hospital or other
institution, as the case may be, then, such university or other educational institution,
hospital or other institution shall be considered as being substantially financed by the
Government for that previous year.

(x) any university or other educational institution existing solely for educational purposes and
not for profit and aggregate annual receipts of the person from such university(ies) or
educational institution(s) do not exceed ` 5 crore [Sub-clause (iiiad)];
(xi) any hospital or other institution which exists solely for philanthropic purposes and not for
profit and which exists for the reception and treatment of persons suffering from illness or
mental defectiveness or reception and treatment of convalescing persons or persons
requiring medical attention or rehabilitation if aggregate annual receipts of the person from
such hospital(s) or institution(s) do not exceed ` 5 crore [Sub-clause (iiiae)];

If the person has receipts from university or universities or educational institution or institutions as
referred to in (x) as well as from hospital or hospitals or institution or institutions as referred to in
(xi), the exemptions would not apply, if the aggregate of annual receipts of the person from such
university or universities or educational institution or institutions or hospital or hospitals or
institution or institutions, exceed ` 5 crore;

(xii) any other fund or institution for charitable purposes approved by the Principal
Commissioner or Commissioner of Income-tax, having regard to the objects of the fund or
institution and its importance throughout India or throughout any State or States [Sub-
clause (iv)];
(xiii) any trust (including any other legal obligation) or institution wholly for public religious or wholly
for public religious and charitable purposes approved by the Principal Commissioner or

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Commissioner of Income-tax [Sub-clause (v)];

(xiv) any university or other educational institutions which exists solely for educational purposes
and not for profit approved by Principal Commissioner or Commissioner of Income-tax
[Sub-clause (vi)];
(xv) any hospital or other institution which exists solely for philanthropic purposes and not for
profit and which exists for the reception and treatment of persons suffering from illness or
mental defectiveness or reception and treatment of convalescing persons or persons
requiring medical attention or rehabilitation approved by the Principal Commissioner or
Commissioner of Income-tax [Sub-clause (via)].
However, on or after 1st October 2024, no application for approval under sub-clause (iv), (v),
(vi) or (via) of section 10(23C) can be made before the Principal Commissioner or
Commissioner.
Refer to “Chapter 10: Assessment of Trusts or institutions, Political Parties and Other special
entities, wherein the provisions of section 10(23C) are discussed in detail.

(24) Income of Mutual Fund [Section 10(23D)]

(i) The income of a Mutual Fund registered under the SEBI Act and regulations made
thereunder or other Mutual Fund set up by a public sector bank/public financial
institution/RBI subject to certain conditions is exempt.

(ii) “Public sector bank” means SBI or any nationalised bank or a bank included in the category
“other public sector banks” by the RBI, for example, IDBI Bank.

Note: The income of a mutual fund registered under the SEBI will be exempt without any
conditions laid down by the Central Government. In the case of other mutual funds, the conditions
will be applicable.
(25) Income of Investor Protection Funds set up by recognised stock exchanges in India
[Section 10(23EA)]

(i) Clause (23EA) excludes any income by way of contributions received from recognized stock
exchanges and the members thereof, of an Investor Protection Fund set up by recognised
stock exchanges in India, either jointly or separately, and notified by the Central
Government in this behalf.

(ii) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part, with a recognised stock exchange, the

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.31

whole of the amount so shared shall be deemed to be the income of the previous year in
which such amount is so shared and shall accordingly be chargeable to income-tax.

(26) Specified income of Investor Protection Fund set up by commodity exchanges

[Section 10(23EC)]

(i) This clause exempts any income, by way of contributions received from commodity
exchanges and the members thereof, of such Investor Protection Fund set up by commodity
exchanges in India, either jointly or separately, as the Central Government may, by
notification in the Official Gazette, specify in this behalf.
(ii) Where any amount standing to the credit of the said Fund and not charged to income-tax
during any previous year is shared, either wholly or in part, with a commodity exchange, the
entire amount so shared shall be deemed to be the income of the previous year in which the
amount is so shared and shall accordingly be chargeable to income-tax.

(iii) A “commodity exchange” means a “registered association” as defined in section 2(jj) of the
Forward Contracts (Regulation) Act, 1952 i.e., an association to which for the time being a
certificate of registration has been granted by the Forward Markets Commission u/s 14B.

(27) Income of Investor Protection Fund set up by depositories [Section 10(23ED)]

(i) Under section 10(23EA), any income by way of contributions from a recognised stock
exchange received by an Investor Protection Fund set up by the recognised stock exchange
is exempt from taxation.
(ii) In line with section 10(23EA), section 10(23ED) provides that any income, by way of
contribution from a depository, of such Investor Protection Fund set up by a depository in
accordance with the regulations made under the SEBI Act, 1992 and the Depositories Act,
1996, will not be included while computing the total income of such investor protection fund.
(iii) The Central Government, would, by way of notification in the Official Gazette, specify such
investor protection funds set up by depositories in accordance with the SEBI and
depositories regulations.
(iv) Where any amount standing to the credit of the fund and not charged to income-tax during
any previous year is shared wholly or partly with a depository, the amount so shared shall
be deemed to be the income of the previous year in which such amount is shared.
Accordingly, such amount would be chargeable to income-tax.

(v) “Depository” means a company formed and registered under the Companies Act, 1956 and

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which has been granted a certificate of registration under section 12(1A) of the
SEBI Act, 1992.
(28) Specified income of Core Settlement Guarantee Fund (SGF) set up by a recognized
Clearing Corporation [Section 10(23EE)]

(i) The Clearing Corporations are required, under the provisions of Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 notified by
SEBI, to establish a fund, called Core Settlement Guarantee Fund (Core SGF) for each
segment of each recognized stock exchange to guarantee the settlement of trades
executed in respective segments of the exchange.
(ii) Under sections 10(23EA), 10(23EC) and 10(23ED), any income by way of contributions
received from recognized stock exchanges or commodity exchanges and the members
thereof or depositories of Investor Protection Fund set up by such recognised stock
exchanges in India, or by commodity exchanges in India or by such depository,
respectively, as the Central Government may notify in this behalf, are exempt from taxation.
(iii) On parallel lines, section 10(23EE) exempts any specified income of such Core SGF set up
by a recognized clearing corporation in accordance with the regulations, notified by the
Central Government.
(iv) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part with the specified person, the whole of
the amount so shared shall be deemed to be the income of the previous year in which such
amount is shared, and shall accordingly be chargeable to income-tax.
(v) Meaning of certain terms:
Terms Meaning
Regulations Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 made under the SEBI Act, 1992 and
Securities Contracts (Regulation) Act, 1956 or International
Financial Services Centres Authority (Market Infrastructure
Institutions) Regulations, 2021 made under the IFSC Act, 2019.
Recognised Meaning assigned as per Regulation 2(1)(o) of the Securities
clearing Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
corporation Regulations, 2012 made under the SEBI Act, 1992 and Securities
Contracts (Regulation) Act, 1956 i.e., "Recognised clearing
corporation" means a clearing corporation which is recognised by the
SEBI under section 4 read with section 8A of the SEBI Act, 1992 or
under regulation 2(1)(n) of the International Financial Services

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.33

Centres Authority (Market Infrastructure Institutions)

Regulations, 2021 made under the IFSC Act, 2019 i.e., a clearing
corporation in an IFSC recognised by the Authority;
Specified (a) the income by way of contribution received from specified
Income persons;
(b) the income by way of penalties imposed by the recognised clearing
corporation and credited to the Core Settlement Guarantee Fund; or
(c) the income from investment made by the Fund.
Specified (a) any recognised clearing corporation which establishes and
person maintains the Core Settlement Guarantee Fund;
(b) any recognised stock exchange being shareholder in such
recognised clearing corporation or a contributor to Core
Settlement Guarantee Fund; and
(c) any clearing member contributing to the Core Settlement
Guarantee Fund.

(29) Income of trade unions [Section 10(24)]

Any income under the heads “Income from house property” and “Income from other sources” of a
registered trade union, within the meaning of the Trade Unions Act, 1926, formed primarily for the
purpose of regulating the relations between workmen and the employers or between workmen and
workmen will be exempt.
Further, this exemption is also available in respect of an association of such registered unions.

(30) Income of provident funds, superannuation funds, gratuity funds [Section 10(25)]

Any income of a recognized provident fund (RPF) and of an approved superannuation fund or
gratuity fund is exempt from tax and the trustees of these funds would not be liable to pay tax
thereon.
The exemption also applies to -
(i) the interest on securities which are held by or are the property of statutory provident fund
(SPF) governed by the Provident Funds Act, 1925;
(ii) the capital gains of the fund, if any, arising to it from the sale, exchange or transfer of such
securities;

(iii) any income received by the Board of Trustees constituted

- under Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 and
- under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952,

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on behalf of the Deposit Linked Insurance Funds established under these respective Acts.

(31) Income of Employees’ State Insurance (ESI) Fund [Section 10(25A)]

The contributions paid under ESI Act, 1948 and all other moneys received on behalf of the ESI
Corporation are paid into a Fund called the ESI Fund. This Fund is held and administered by the
ESI Corporation. The amounts lying in the Fund are to be expended for payment of cash benefits
and provision of medical treatment and attendance to insured persons and their families,
establishment and maintenance of hospitals and dispensaries, etc. Any income of the ESI Fund is
exempted from income-tax.

(32) Income of member of a scheduled tribe [Section 10(26)]

A member of a Scheduled Tribe residing in -

(i) any area specified in the Constitution i.e., The North Cachar Hills District, The Karbi
Anglong District, The Bodoland Territorial Areas District, Khasi Hills District, Jaintia Hills
District or The Garo Hills District or
(ii) in the States of Manipur, Tripura, Arunachal Pradesh, Mizoram and Nagaland, or

(iii) in Ladakh
is exempt from tax on his income arising or accruing -
(a) from any source in the areas or States aforesaid.
(b) by way of dividend or interest on securities.

(33) Specified income of a Sikkimese Individual [Section 10(26AAA)]

The following income, which accrues or arises to a Sikkimese individual, would be exempt from
income-tax –
(a) income from any source in the State of Sikkim; or
(b) income by way of dividend or interest on securities.

(34) Income of an Agricultural Produce Market Committee or Board [Section 10(26AAB)]

Any income of an Agricultural Produce Market Committee or Board constituted under any law for
the time being in force for the purpose of regulating the marketing of agricultural produce would be
exempt.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.35

(35) Income of a corporation etc. for the promotion of interests of members of Scheduled
Casts or Tribes or backward classes or any two or all of them [Section 10(26B)]

Any income of a corporation (established by a Central, State or Provincial Act) or other body,
institution or association (wholly financed by Government) formed for promotion of the interests of
the members of Scheduled Castes or Tribes or backward classes or of any two or all of them is
exempt from tax.
(36) Income of corporations established to protect interests of minority community
[Section 10(26BB)]

Any income of a corporation established by the Central Government or any State Government for
promoting the interests of the members of a minority community will be exempt from income tax.
Section 80G also provides tax relief in respect of donations made to these corporations.
(37) Income of corporation established for welfare and economic upliftment of ex-
servicemen [Section 10(26BBB)]

Any income of a corporation established by a Central, State or Provincial Act for the welfare and
economic upliftment of ex-servicemen, being citizens of India, would be exempt from income-tax.
(38) Income of a co-operative society for promoting interest of members of Scheduled
castes or Tribes or both [Section 10(27)]

Any income of a co-operative society formed for promoting the interests of the members of either
the scheduled castes or scheduled tribes or both will be exempted from being included in the total
income of the society.
Conditions:
(i) The membership of the co-operative society should consist of only other co-operative
societies formed for similar purposes, and
(ii) The finances of the society shall be provided by the Government and such other societies.

(39) Incomes of certain bodies like Coffee/Tea/Rubber Board, etc. [Section 10(29A)]
Under this clause, any income accruing or arising to the following bodies is exempt from tax:
(i) the Coffee Board constituted under section 4 of the Coffee Act, 1942,

(ii) the Rubber Board constituted under section 4(1) of the Rubber Board Act, 1947,
(iii) the Tea Board established under section 4 of the Tea Act, 1953,
(iv) the Tobacco Board constituted under the Tobacco Board Act, 1975,

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(v) the Marine Products Export Development Authority established under section 4 of the
Marine Products Export Development Authority Act, 1972,

(vi) the Agricultural and Processed Food Products Export Development Authority established
under section 4 of the Agricultural and Processed Food Products Export Development
Act, 1985,

(vii) the Spices Board constituted under section 3(1) of the Spices Board Act, 1986,
(viii) the Coir Board established under the Coir Industry Act, 1953.

(40) Tea board subsidy [Section 10(30)]

The amount of any subsidy received by any assessee engaged in the business of growing and
manufacturing tea in India through or from the Tea Board will be wholly exempt from tax.
Conditions:
(i) The subsidy should have been received under any scheme for replantation or replacement
of the bushes or for rejuvenation or consolidation of areas used for cultivation of tea, as
notified by the Central Government.
(ii) The assessee should furnish a certificate from the Tea Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.

(41) Other subsidies [Section 10(31)]

Amount of any subsidy received by an assessee engaged in the business of growing and
manufacturing rubber, coffee, cardamom or other specified commodity in India, as notified by the
Central Government, will be wholly exempt from tax.
Conditions:
(i) The subsidies should have been received from or through the Rubber Board, Coffee Board,
Spices Board or any other Board in respect of any other commodity under any scheme for
replantation or replacement of rubber, coffee, cardamom or other plants or for rejuvenation
or consolidation of areas used for cultivation of all such commodities.
(ii) The assessee should furnish a certificate from the Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.
(42) Specified income arising from any international sporting event in India [Section
10(39)]

(i) This clause exempts income of the nature and to the extent, arising from any international

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.37

sporting event in India, to the person or persons notified by the Central Government in the
Official Gazette.

(ii) Such international sporting event should -

(a) be approved by the international body regulating the international sport relating to
such event;

(b) have participation by more than two countries;

(c) be notified by the Central Government in the Official Gazette for the purposes of this
clause.
(43) Certain grants etc. received by a subsidiary from its Indian holding company engaged in
the business of generation or transmission or distribution of power [Section 10(40)]

(i) This clause exempts income of any subsidiary company by way of grant or otherwise
received from an Indian company, being its holding company engaged in the business of
generation or transmission or distribution of power.
(ii) The receipt of such income should be for settlement of dues in connection with
reconstruction or revival of an existing business of power generation.
(iii) The exemption under this clause is available if the reconstruction or revival of any existing
business of power generation is by way of transfer of such business to the Indian company
notified under section 80-IA(4)(v)(a).

(44) Specified income of certain bodies or authorities [Section 10(42)]

(i) This clause exempts income, of the nature and to the extent, arising to a body or authority,
notified by the Central Government.
(ii) Such body or authority should have been established or constituted or appointed -
(a) under a treaty or an agreement entered into by the Central Government with two or
more countries or a convention signed by the Central Government;
(b) not for the purposes of profit.

(45) Income received by any person on behalf of NPS Trust [Section 10(44)]

The NPS Trust would exempt from the applicability of –

(i) income-tax on any income received by any person for, or on behalf of, the NPS Trust
[Section 10(44)]; and

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(ii) securities transaction tax on all purchases and sales of equity and derivatives by the NPS Trust.
Further, the NPS Trust shall receive all income without any deduction of tax at source. [Section
197A(1E)].
Thus, the NPS Trust, which was set up to manage the assets and funds under the New Pension
System in the interest of the beneficiaries, would enjoy a “pass-through status”.
(46) Specified income of notified entities not engaged in commercial activity [Section 10(46)]

(i) Section 10(46) provides for exemption of income arising to a body or authority or Board or
Trust or Commission, other than those covered under section 10(46A), or a class thereof,
the nature and extent of which is to be specified by the Central Government.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or
Trust or Commission or a class thereof should be established or constituted by or under a
Central, State or Provincial Act or constituted by the Central or State Government with the
object of regulating or administering an activity for the benefit of the general public.
(iii) Further, the body or authority or Board or Trust or Commission should –

(a) not be engaged in any commercial activity; and

(b) be notified by the Central Government in this behalf.

(47) Any income of notified entities established or constituted under a Central Act or State
Act [Section 10(46A)]

(i) Section 10(46A) provides for exemption of any income arising to a body or authority or
Board or Trust or Commission, not being a company.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or
Trust or Commission, not being a company, should be established or constituted by or
under a Central Act or State Act with one or more of the following purposes -
- dealing with and satisfying the need for housing accommodation;
- planning, development or improvement of cities, towns and villages;

- regulating, or regulating and developing, any activity for the benefit of the general
public; or
- regulating any matter, for the benefit of the general public, arising out of the objects
for which it has been created.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.39

(iii) Further, the body or authority or Board or Trust or Commission, not being a company
should be notified by the Central Government in this behalf.
(48) Any income of National Credit Guarantee Trustee Company Ltd, credit guarantee fund or
credit guarantee Fund Trust [Section 10(46B)]
Section 10(46B) provides exemption of any income accruing or arising to
- National Credit Guarantee Trustee Company Ltd., being a company established and wholly
financed by the Central Government for the purpose of operating credit guarantee funds
established and wholly financed by the Central Government;
- Credit guarantee funds established and wholly financed by the Central Government and
managed by the National Credit Guarantee Trustee Company Ltd.;
- Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the
Government of India and the Small Industries Development Bank of India established under
Small Industries Development Bank of India Act, 1989.
(49) Income of notified infrastructure debt funds [Section 10(47)]

In order to give a fillip to infrastructure and encourage inflow of long-term foreign funds to this
sector, the Central Government to notify infrastructure debt funds to be set up in accordance with
the prescribed guidelines, the income of which would be exempt from tax.

(50) Certain income of Indian Strategic Petroleum Reserves Limited [Section 10(48C)]

Any income accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly
owned subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and
Natural Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility
in pursuance of directions of the Central Government would be exempt.
However, exemption would not available in respect of an arrangement, if the crude oil is not
replenished in the storage facility within three years from the end of the financial year in which the
crude oil was removed from the storage facility for the first time.
(51) Income of an institution established for financing infrastructure and development
[Section 10(48D)]

Any income accruing or arising to an institution established for financing the infrastructure and
development, set up under an Act of Parliament and notified by the Central Government, for 10
consecutive assessment years beginning from the assessment year relevant to the previous year
in which such institution is set up would be exempt.

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(52) Income of a developmental financing institution licensed by RBI [Section 10(48E)]

Any income accruing or arising to a developmental financing institution, licensed by the RBI under
an Act of Parliament referred to in section 10(48D) and notified by the Central Government, for 5
consecutive assessment years beginning from the assessment year relevant to the previous year
in which the developmental financing institution is set up would be exempt.
Further, the Central Government may, by issuing notification, extend the exemption for a further
period, not exceeding 5 more consecutive assessment year, subject to fulfillment of such
conditions as may be specified in the said notification.

Students should carefully note that all the items under section 10 listed above are either
wholly or partially exempt from taxation and the exempt portion is not even includible in the
total income of the person concerned.

2.3 RESTRICTIONS ON ALLOWABILITY OF

EXPENDITURE [SECTION 14A]
As per section 14A, notwithstanding anything to the contrary, expenditure incurred in relation to
any exempt income is not allowed as a deduction while computing income under any of the five
heads of income [Sub-section (1)].
The Assessing Officer is empowered to determine the amount of expenditure incurred in relation to
such income which does not form part of total income in accordance with such method as may be
prescribed [Sub-section (2)].

The method for determining expenditure in relation to exempt income is to be prescribed by the
CBDT for the purpose of disallowance of such expenditure under section 14A. Such method
should be adopted by the Assessing Officer in the following cases –

(i) if he is not satisfied with the correctness of the claim of the assessee, having regard to the
accounts of the assessee. [Sub-section (2)]; or
(ii) where an assessee claims that no expenditure has been incurred by him in relation to
income which does not form part of total income [Sub-section (3)].
Rule 8D lays down the method for determining the amount of expenditure in relation to income not
includible in total income.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.41

If the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not
satisfied with –

(a) the correctness of the claim of expenditure by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred
in relation to exempt income for such previous year, he shall determine the amount of expenditure
in relation to such income in the manner provided hereunder –
The expenditure in relation to income not forming part of total income shall be the aggregate of the
following:
(i) the amount of expenditure directly relating to income which does not form part of total
income;
(ii) an amount equal to 1% of the annual average of the monthly averages of the opening and
closing balances of the value of investment, income from which does not form part of total
income.
However, the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure
claimed by the assessee.
Expenditure incurred during a previous year (say, P.Y. 2024-25) in relation to exempt income
would be disallowed while computing total income of that previous year by applying the provisions
of section 14A even though such exempt income has not accrued or arisen or has not been
received during the said previous year.

Clarification regarding disallowance of expenses under section 14A in cases where

corresponding exempt income has not been earned during the financial year [Circular No.
5/2014, dated 11.2.2014]
Section 14A provides that no deduction shall be allowed in respect of expenditure incurred relating
to income which does not form part of total income. A controversy has arisen as to whether
disallowance can be made by invoking section 14A even in those cases where no income has
been earned by an assessee, which has been claimed as exempt during the financial year.
The CBDT has, through this Circular, clarified that the legislative intent is to allow only that
expenditure which is relatable to earning of income. Therefore, it follows that the expenses which
are relatable to earning of exempt income have to be considered for disallowance, irrespective of
the fact whether such income has been earned during the financial year or not.

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The above position is clarified by the usage of the term “includible” in the heading to section 14A
[Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for
determining amount of expenditure in relation to income not includible in total income], which
indicates that it is not necessary that exempt income should necessarily be included in a particular
year’s income, for triggering disallowance. Also, the terminology used in section 14A is “income
under the Act” and not “income of the year”, which again indicates that it is not material that the
assessee should have earned such income during the financial year under consideration.
In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even
where the taxpayer has not earned any exempt income in a particular year.

SIGNIFICANT SELECT CASES

Case Law

CIT v. Kribhco (2012) 349 ITR 0618 (Delhi)

Issue Analysis & Decision

Is section 14A applicable in respect of Deductions under Chapter VIA are different from the
deductions, which are permissible and exclusions/exemptions provided under Chapter III.
allowed under Chapter VI-A? Section 14A is applicable only if an income is not
included in the total income as per the provisions of
Chapter III of the Income-tax Act, 1961. Therefore, no
disallowance can be made u/s 14A in respect of
income included in total income in respect of which
deduction is allowable u/s 80C to 80U.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.43

TEST YOUR KNOWLEDGE

Questions
1. Examine with reasons, based on the provisions of the Act, as to chargeability of the following
receipts to tax in the assessment year 2025-26:

(i) Rent of ` 60,000 charged from tenants occupying houses constructed on the land
situated in India and used for agricultural purposes. The tenants, working in the
nearby industrial area, occupy these houses for their own residential purposes.
(ii) Income of ` 75,000 derived by Anand Nursery from the sale of seedlings grown
without carrying out all the basic operations on land.
(iii) Mr. Gaitonde, born and brought up in the State of Sikkim, had a net profit of
` 2,25,000 from the business located in Sikkim and interest of ` 55,000 on the
securities/ bonds issued by the Government of Rajasthan.
2. Mr. Akash, a resident Indian, earns income of ` 22 lakhs from sale of rubber manufactured
from latex obtained from rubber plants grown by him in India and ` 30 lakhs from sale of
rubber manufactured from latex obtained from rubber plants grown by him in Malaysia
during the A.Y.2025-26. What would be his business income, assuming he has no other
business?
3. Mr. Ram, a resident Indian, earns income of ` 15 lakhs from sale of coffee grown and cured
in India during the A.Y.2025-26. His friend, Mr. Shyam, a resident Indian, earns income of
` 25 lakhs from sale of coffee grown, cured, roasted and grounded by him in India during
the A.Y.2025-26. What would be the business income chargeable to tax in India of Mr. Ram
and Mr. Shyam?

Answers
1. (i) As per section 10(1), agricultural income is exempt from tax. The meaning and scope
of agricultural income is defined in section 2(1A). According to Explanation 2 to
section 2(1A), any income derived from any building from the use of such building for
any purpose (including letting for residential purposes or for the purpose of any
business or profession) other than agriculture shall not be agricultural income.
Therefore, the rent of ` 60,000 from letting out of houses constructed on agricultural
land for residential purposes of industrial workers shall not be treated as agricultural

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income by virtue of Explanation 2 to section 2(1A). Hence, such income would be

chargeable to tax.

(ii) Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income, whether or
not the basic operations were carried out on land. Accordingly, the income of
` 75,000 derived by Anand Nursery from the sale of seedlings grown without
carrying out all the basic operations on land shall be treated as agricultural income
and exempt from tax under section 10(1).

(iii) Section 10(26AAA) exempts the income which accrues or arises to a Sikkimese
individual from any source in the State of Sikkim and the income by way of dividend
or interest on securities. Therefore, the income of Mr. Gaitonde from a business
located in Sikkim and interest income on the securities/bonds of Government of
Rajasthan shall not be subject to tax.
2. Since Mr. Akash is a resident, his global income would be taxable in India. Income of ` 30
lakhs from sale of rubber manufactured from latex obtained from rubber plants grown by
him in Malaysia would be his business income since it is from rubber plants grown outside
India. 35% income from sale of rubber manufactured from latex obtained from rubber plants
grown by him in India would be taxable as business income and balance 65% would be
exempt as agricultural income.
Business income = 35% of ` 22 lakhs + ` 30 lakhs = ` 37.70 lakhs
3. In case of income derived from the sale of coffee grown and cured by the seller in India,
25% income on such sale is taxable as business income. In case of income derived from
the sale of coffee grown, cured, roasted and grounded by the seller in India, 40% income on
such sale is taxable as business income.
Business income of Mr. Ram = 25% of ` 15 lakhs = ` 3.75 lakhs
Business income of Mr. Shyam = 40% of ` 25 lakhs = ` 10 lakhs

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CHAPTER 3

PROFITS AND GAINS OF

BUSINESS OR PROFESSION

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 examine whether a particular income would be chargeable to tax under the head
“Profits and gains of business or profession” by analysing the provisions of section
28;
 comprehend the “Income Computation and Disclosure Standards” (ICDSs) and
analyse and apply these standards to determine the income chargeable to tax under
this head;
 analyse and apply the provisions of sections 30 to 37 to determine whether any
particular expenditure /payment would be admissible as deduction while computing
income under this head;
 analyse and apply the conditions contained under sections 40 & 40A to determine
whether a particular expenditure/ payment would be admissible/ inadmissible as
deduction while computing income under this head;
 analyse and apply the provisions of section 43B to allow/ disallow expenditures
specified therein, in respect of which deduction is admissible only on actual
payment;
 examine when certain receipts are deemed as income chargeable to tax under this
head;

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 appreciate the provisions of section 44AA relating to maintenance of books of

account and identify the assessees, who are compulsorily required to maintain
books of account;
 appreciate the provisions of section 44AB, listing the circumstances when an
assessee is compulsorily required to get the books of account audited under
Income-tax Act, 1961;
 examine the presumptive tax provisions contained in sections 44AD, 44ADA &
44AE to determine whether an assessee engaged in a business, profession or
plying, hiring or leasing goods carriages can opt for such presumptive taxation
schemes;
 compute income under this head applying the charging and deeming provisions,
allowing the permissible deductions and disallowing the impermissible deductions.

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CHAPTER OVERVIEW

Computation of income under the head “Profits and gains of business

or profession”

Income chargeable under the head “Profits and gains of business or

profession” [Section 28] & Profits chargeable to tax [Section 41]

Less: Deductions

Inadmissible Expenses or
Admissible payments not
deductions
deductions deductible in certain
(Sections 30 (Section 40) circumstances
to 37) (Section 40A)

Other provisions [Sections 42, 43A, 43AA, 43B, 43C, 43CA, 43CB,
43D44AA, 44AB, 44AD, 44ADA, 44AE, 44DB]

3.1 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’

The income chargeable to tax under this head is in respect of the profits and gains of any
business or profession, carried on by an assessee at any time during the previous year.

Business Profession
The term “business” has been defined in The term “profession” has not been defined
section 2(13) to “include any trade, in the Act. It means an occupation requiring
commerce or manufacture or any adventure some degree of learning. The term
or concern in the nature of trade, commerce ‘profession’ includes vocation as well [Section
or manufacture”. 2(36)]
• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and
even an astrologer are persons who can be said to be carrying on a profession but not
business.

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 3.4 DIRECT TAX LAWS

• It is, however, not material whether a person is carrying on a ‘business’ or ‘profession’ or

‘vocation’ since for purposes of assessment, profits from all these sources are treated
and taxed alike (except in case of tax audit and presumptive income provisions, where
the rates and threshold limits are different for business and profession).
• Business necessarily means a continuous exercise of an activity with a profit motive;
nevertheless, profit from a single venture in the nature of trade may also be treated as
business.

Meaning of ‘Profits’
(1) Profits in cash or in kind: Profits may be realised in money or in money’s worth, i.e., in
cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of
the receipt on the date of receipt must be taken as the value of the income received in kind.
(2) Capital receipts: Capital receipts are not generally to be taken into account while
computing profits under this head.
(3) Voluntary Receipts: Payment voluntarily made by persons who were under no obligation
to pay anything at all would be income in the hands of the recipient, if they were received in
the course of a business or by the exercise of a profession or vocation. Thus, any amount
paid to a lawyer by a person who was not a client, but who has been benefited by the
lawyer’s professional service to another would be assessable as the lawyer’s income.
(4) Application of the gains of trade is immaterial: Gains made even for the benefit of the
community by a public body would be liable to tax. To attract the provisions of section 28, it
is necessary that the business, profession or vocation should be carried on at least for
some time during the accounting year but not necessarily throughout that year and not
necessarily by the assessee-owner personally, but it should be under his direction and
control.
(5) Income from distinct businesses: The profits of each distinct business must be computed
separately but the tax chargeable under this section is not on the separate income of every
distinct business but on the aggregate profits of all the business carried on by the
assessee.
(6) Computation of profits: Profits should be computed after deducting the losses and
expenses incurred for earning the income in the regular course of the business, profession,
or vocation unless the loss or expenses is expressly or by necessary implication, disallowed
by the Act. The charge is not on the gross receipts but on the profits and gains.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.5

(7) Legality of income: The illegality of a business, profession or vocation does not exempt its
profits from tax. The revenue is not concerned with the taint of illegality in the income or its
source. Thus, income tax is not restricted in its application to lawful business only.
However, expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law would not be allowable as deduction while computing profits of
such business.

3.2 INCOME CHARGEABLE UNDER THIS HEAD

[SECTION 28]
The various items of income chargeable to tax as income under the head ‘profits and gains of
business or profession’ are as under:
(1) Income from business, profession or vocation: Income arising to any person by way of
profits and gains from the business or profession carried on by him at any time during the
previous year.
However, income from letting out of a residential house or a part of the house by the
owner is chargeable to tax under the head “Income from house property” and not
under the head “Profits and gains of business or profession”.
(2) Any compensation or other payment due to or received by:
(i) Any person, by whatever name called, managing the whole or substantially the whole
of -
(a) the affairs of an Indian company or
(b) the affairs in India of any other company
at or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;

(ii) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person, at or in connection with the
termination of the agency or the modification of any of the terms and conditions
relating thereto;
(iii) any person, for or in connection with the vesting in the Government or in any
corporation owned or controlled by the Government under any law for the time being
in force, of the management of any property or business;

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(iv) any person, by whatever name called, at or in connection with the termination or
modification of the terms and conditions, of any contract relating to his business.

(3) Income from specific services performed for its members by a trade, professional or
business: Income derived by any trade, professional or similar associations from specific
services rendered by them to their members. It may be noted that this forms an exception to
the general principle of mutuality governing the assessment of income of mutual
associations such as chambers of commerce, stock brokers’ associations etc.
As a result, a trade, professional or similar association performing specific services for its
members is to be deemed as carrying on business in respect of these services and on that
assumption the income arising therefrom is to be subjected to tax. For this purpose, it is not
necessary that the income received by the association should definitely or directly be
related to these services.
(4) Incentives received or receivable by assessee carrying on export business:
(i) Profit on sale of import entitlements: Profits on sale of a licence granted under the
Imports (Control) Order, 1955 1 made under the Imports and Exports (Control) Act,
1947 2.
(ii) Cash assistance against exports under any scheme of GoI: Cash assistance (by
whatever name called) received or receivable by any person against exports under
any scheme of the Government of India.
(iii) Customs duty or excise duty re-paid or repayable as drawback: Any Customs
duty or Excise duty drawback repaid or repayable to any person against export under
the Customs and Central Excise Duties Drawback Rules, 1971 3.
(iv) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty Free
Replenishment Certificate: Any profit on the transfer of the Duty Entitlement Pass
Book Scheme 4 or Duty Free Replenishment Certificate, being Duty Remission
Scheme, under the export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) Act, 1992.

1 Now Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
2 Now Foreign Trade (Development and Regulation) Act, 1992
3 Now Customs and Central Excise Duties Drawback Rules, 2017
4 The pre‐export DEPB scheme was abolished with effect from 1 April 2000. After several extensions through the

years, the post‐export scheme was phased out on 30 September 2011 and thereafter DEPB items were incorporated
into the Duty Drawback Schedule with effect from 1 October 2011

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.7

(5) Value of any benefit or perquisite: The value of any benefit or perquisite arising from
business or the exercise of any profession, whether –

- convertible into money or not or

- in cash or in kind or partly in cash and partly in kind

Example:
If a company provides rent free residential accommodation to a lawyer in consideration of
professional services rendered by him to the company, the value of such accommodation
would be assessable in the hands of the said lawyer as his income under the head “Profits
and gains or business or profession”.

(6) Sum due to, or received by, a partner of a firm: Any interest, salary, bonus, commission
or remuneration, by whatever name called, due to or received by a partner of a firm from
such firm will be deemed to be income from business. However, where any interest, salary,
bonus, commission or remuneration by whatever name called, or any part thereof has not
been allowed to be deducted under section 40(b), in the computation of the income of the
firm the income to be taxed shall be adjusted to the extent of the amount disallowed.

Example:
Suppose a firm pays interest at 20% p.a. simple interest to a partner. The allowable rate of
interest is 12% p.a. Hence the excess 8% paid will be disallowed in the hands of the firm.
Since the excess interest has suffered tax in the hands of the firm due to disallowance, the
same will not be taxed in the hands of the partner. However the interest allowed to the
extent of 12% p.a. in the hands of firm will be taxed in the hands of partner.

Exemption of share income of a partner [Section 10(2A)]

Section 10(2A) exempts from tax a partner’s share in the total income of the firm. In other
words, the partner’s share in the total income of the firm determined in accordance with the
profit-sharing ratio will be exempt from tax.
(7) Any sum whether received or receivable, in cash or kind, under an agreement
(i) for not carrying out any activity in relation to any business or profession; or
However, the following sums received or receivable would not be chargeable to
tax under the head “profits and gains from business or profession”:
(a) any sum, whether received or receivable, in cash or kind, on account of
transfer of the right to manufacture, produce or process any article or thing or

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right to carry on any business or profession, which is chargeable under the

head “Capital gains”.
(b) any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United
Nations Environment Programme, in accordance with the terms of agreement
entered into with the Government of India.

(ii) for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or
any other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services.
Meaning of certain terms
Term Meaning
Agreement Includes any arrangement or understanding or action in concert, -
(A) whether or not such arrangement, understanding or action is
formal or in writing; or
(B) whether or not such arrangement, understanding or action is
intended to be enforceable by legal proceedings;
Service Service of any description which is made available to potential users and
includes the provision of services in connection with business of any
industrial or commercial nature such as accounting, banking,
communication, conveying of news or information, advertising,
entertainment, amusement, education, financing, insurance, chit funds,
real estate, construction, transport, storage, processing, supply of
electrical or other energy, boarding and lodging.

(8) Any sum received under a Keyman insurance policy: Any sum received by the
assessee, as an employer, under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will be taxable as income from business.
(9) Fair market value of inventory on its conversion as capital asset: Fair market value of
inventory on the date of its conversion or treatment as capital asset, determined in the
prescribed manner, would be chargeable to tax as business income 5.
(10) Sum received on account of capital asset referred under section 35AD: Any sum
received or receivable, in cash or kind, on account of any capital asset (in respect of which

5 Rule 11UAB inserted to prescribe the manner of determination of fair market value (FMV) of the inventory
on the date of conversion. For detailed reading of 11UAB of the Income-tax Rules, 1962, refer to Annexure
2 at the end of this module.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.9

whole of the expenditure on such capital asset has been allowed as a deduction under
section 35AD) being demolished, destroyed, discarded or transferred.

Note - Where a specified person, being a partner of a firm or member of other AOP/BoI, receives
during the P.Y. any stock in trade from a specified entity, being a firm or other AOP/BoI in
connection with the dissolution or reconstitution of such specified entity, then, the specified entity
would be deemed to have transferred such stock in trade to the specified person in the year in
which it is received by the specified person. Profit and gains arising from such deemed transfer
would be deemed to be the income of such specified entity in the same year of receipt by specified
person and chargeable to income-tax under the “Profit and gains of business or profession”
[Section 9B]. For detailed discussion on section 9B, refer Chapter 4 – “Capital Gains”.

3.3 SPECULATION BUSINESS

Explanation 2 to section 28 specifically provides that where an assessee carries on speculative
business, that business of the assessee must be deemed as distinct and separate from any other
business. This becomes necessary because section 73 provides that losses in speculation business
unlike other business, cannot be set-off against the profits of any business other than a speculation
business.
Likewise, a loss in speculation business carried forward to a subsequent year can be set-off only
against the profit and gains of any speculative business in the subsequent year. Profits and losses
resulting from speculative transaction must, therefore, be treated as separate and distinct from
profits and gains of business and profession from any other business.
(1) Meaning of Speculative Transaction
“Speculative transaction” means a transaction in which a contract for the purchase or sales of
any commodity including stocks and shares, is periodically or ultimately settled otherwise than by
the actual delivery or transfer of the commodity or scrips [Section 43(5)].
Where any part of the business of a company consists in the purchase and sale of the shares of
other companies, such a company shall be deemed to be carrying on speculation business to the
extent to which the business consists of the purchase and sale of such shares.

However, this deeming provision does not apply to the following companies –
(i) A company whose gross total income consists of mainly income chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income
from other sources”;

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(ii) A company, the principal business of which is –

(a) the business of trading in shares; or
(b) the business of banking; or
(c) the granting of loans and advances.
Accordingly, if these companies as mentioned above carry on the business of purchase and sale
of shares of other companies, they would not be deemed to be carrying on speculation business
[Explanation to section 73].
(2) Transaction not deemed to be speculative transaction

The following forms of transactions shall not be deemed to be speculative transaction:

(i) Hedging contract in respect of raw materials or merchandise: A contract in respect of
raw materials or merchandise entered into by a person in the course of his manufacturing or
merchandising business to guard against loss through future price fluctuations in respect of
his contracts for the actual delivery of goods manufactured by him or merchandise sold by
him; or
(ii) Hedging contract in respect of stocks and shares: A contract in respect of stocks and
shares entered into by a dealer or investor therein to guard against loss in his holdings of
stocks and shares through price fluctuation; or
(iii) Forward contract: A contract entered into by a member of a forward market or stock
exchange in the course of any transaction in the nature of jobbing or arbitrage to guard
against any loss which may arise in the ordinary course of his business as a member; or
(iv) Trading in derivatives: An eligible transaction carried out in respect of trading in
derivatives in a recognized stock exchange.
Meaning of certain terms

Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
stock broker or sub-broker or such other intermediary registered
under section 12 of the Securities and Exchange Board of India
Act, 1992 in accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956 or the Securities and Exchange
Board of India Act, 1992 or the Depositories Act, 1996 and the
rules, regulations or bye-laws made or directions issued under

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.11

those Acts or by banks or mutual funds on a recognised stock

exchange; and
(B) which is supported by a time stamped contract note issued by
such stock broker or sub-broker or such other intermediary to
every client indicating in the contract note, the unique client
identity number allotted under any Act referred to in (A) above
and permanent account number;

(v) Trading in commodity derivatives: An eligible transaction in respect of trading in

commodity derivatives carried out in a recognised stock exchange, which is chargeable to
commodities transaction tax under Chapter VII of the Finance Act, 2013.
However, the requirement of chargeability of commodities transaction tax is not applicable
in respect of trading in agricultural commodity derivatives.
Meaning of certain terms
Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
member or an intermediary registered under the bye-laws,
rules and regulations of the recognised stock exchange for
trading in commodity derivative in accordance with the
provisions of the Forward Contracts (Regulation) Act, 1952
and the rules, regulations or bye-laws made or directions
issued under that Act on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by
such member or an intermediary to every client indicating in
the contract note, the unique client identity number allotted
under the Act, rules, regulations or bye-laws referred to in (A)
above, unique trade number and permanent account number

3.4 METHOD OF ACCOUNTING

(1) Method of Accounting (Section 145)

Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section 145(1)
requires income chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” to be computed in accordance with either the cash or mercantile
system of accounting regularly employed by the assessee, subject to the provisions of section
145(2).

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However, as per section 145B, certain income would be taxable in the following manner:
(i) interest received by an assessee on compensation or on enhanced compensation, shall be
deemed to be the income of the year in which it is received. [Such income is taxable under
the head “Income from other sources”]
(ii) the claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realisation is achieved.
(iii) income referred to in section 2(24)(xviii) i.e., assistance in the form of a subsidy or grant or
cash incentive or duty drawback or waiver or concession or reimbursement, by whatever
name called, by the Central Government or a State Government or any authority or body or
agency in cash or kind to the assessee shall be deemed to be the income of the previous
year in which it is received, if not charged to income tax for any earlier previous year.
Under section 145(2), the Central Government is empowered to notify in the Official Gazette from
time to time, income computation and disclosure standards (ICDSs) to be followed by any
class of assessees or in respect of any class of income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated 29.9.2016,
notified ten ICDSs to be applicable from A.Y.2017-18.
The notified ICDSs have to be followed by all assessees (other than an individual or a Hindu
undivided family who is not required to get his accounts of the previous year audited in accordance
with the provisions of section 44AB) following the mercantile system of accounting, for the
purposes of computation of income chargeable to income-tax under the head “Profits and gains of
business or profession” or “Income from other sources”, from A.Y.2017-18.
The ten notified ICDSs are:
ICDS I : Accounting Policies
ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities
ICDS IX : Borrowing Costs
ICDS X : Provisions, Contingent Liabilities and Contingent Assets

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Cardinal features of Notified ICDSs

(1) Applicability: All the notified ICDSs are applicable for computation of income chargeable
under the head “Profits and gains of business or profession” or “Income from other sources”
and not for the purpose of maintenance of books of accounts. This is stated in the
Preamble at the beginning of each ICDS.
(2) Position in case of conflict with the Income-tax Act, 1961: In the case of conflict
between the provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions
of the Act shall prevail to that extent. This is also stated in the Preamble at the beginning of
each ICDS.
(3) Scope Paragraph: Each of the ten notified ICDSs has a scope paragraph explaining what
exactly the ICDS deals with. In some standards, the scope paragraph also specifies what
the ICDS does not deal with.
(4) Transitional Provisions: All ICDSs (except ICDS VIII on Securities) contain transitional
provisions to facilitate first time adoption and prevent any tax leakage or any double
taxation.
(5) Disclosure Requirements: All ICDSs (except ICDS VI on Effects of changes in foreign
exchange rates and ICDS VIII on Securities) contain specific disclosure requirements. The
last paragraph(s) of these ICDSs is on disclosure.
Salient Features of the notified ICDSs

ICDS I: Accounting Policies

► This ICDS deals with significant accounting policies.
► While it recognizes the fundamental accounting assumptions of going concern,
consistency and accrual, it does not recognize the concepts of “materiality” and
“prudence” in selection of accounting policies.
► Treatment and presentation of transactions have to be governed by their substance and
not merely by the legal form.
► Marked to market loss or an expected loss is not to be recognized unless recognition of
such loss is in accordance with the provisions of any other ICDS.

ICDS II: Valuation of Inventories

► “Inventories” has been defined to mean assets held for –

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o sale in the ordinary course of business;

o in the process of production for such sale;
o in the form of materials or supplies to be consumed in the production process or in
the rendering of services.
► This ICDS requires inventory to be valued at cost or net realizable value, whichever is
lower.
► This ICDS requires disclosure of the accounting policies adopted in measuring
inventories including the cost formulae used and the total carrying amount of inventories
and its classification appropriate to a person.

ICDS III: Construction Contracts

► This ICDS is required to be applied in determination of income for a construction contract
of a contractor.
► It recognizes percentage of completion method (POCM) for recognizing contract revenue
and contract costs associated with a construction contract.
► However, contract revenue and contract costs associated with the construction contract,
which commenced on or before 31.3.2016 but not completed by the said date, can be
recognised based on the method regularly followed by the person prior to the previous
year 2016-17.
► This ICDS also contains certain disclosure requirements, like the amount of contract
revenue recognized as revenue in the period, the methods used to determine the stage
of completion of contracts in progress etc.

ICDS IV: Revenue Recognition

► This ICDS deals with the bases for recognition of revenue arising in the course of the
ordinary activities of a person from –
o the sale of goods;
o the rendering of services;
o the use by others of the person’s resources yielding interest, royalties or
dividends.

► It does not, however, deal with the aspects of revenue recognition which are dealt with by
other ICDSs.
► “Revenue” is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of

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services, or from the use by others of the person’s resources yielding interest, royalties
or dividends. In an agency relationship, the revenue is the amount of commission and
not the gross inflow of cash, receivables or other consideration.
► This ICDS also contains a provision wherein the revenue from sale of goods could be
recognized when there is reasonable certainty of its ultimate collection.
► Revenue from service transactions is required to be recognized on the basis of
percentage completion method. However, revenue can be recognised on a straight line
basis over a specific period of time, when services are provided by an indeterminate
number of acts over such period.
► Revenue from service contracts with duration of not more than 90 days to be recognised
when the rendering of services under that contract is completed or substantially
completed.
► This ICDS contains certain disclosure requirements, like the amount of revenue from
service transactions recognized as revenue during the previous year, the method used to
determine the stage of completion of service transactions in progress, information
relating to service transactions in progress at the end of the previous year etc.

ICDS V: Tangible Fixed Assets

► This ICDS deals with the treatment of tangible fixed assets.
► “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held
with the intention of being used for the purpose of producing or providing goods or
services and is not held for sale in the normal course of business.
► This ICDS provides the components of actual cost of such assets and valuation of such
assets in special cases.
► The fair value of a tangible fixed asset acquired in exchange for shares or other
securities or another asset shall be its actual cost.
► The ICDS also provides that depreciation on such assets and income arising on transfer
of such assets shall be computed in accordance with the provisions of the Income-tax
Act, 1961.
► The ICDS also contains disclosure requirements in respect of such assets, like the
description of asset or block of assets, rate of depreciation, actual cost or written down
value, as the case may be, additions or deductions during the year with dates,
depreciation allowable and written down value at the end of the year.

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ICDS VI: The Effects of changes in foreign exchange rates

► This ICDS deals with treatment of transactions in foreign currencies, translating the
financial statements of foreign operations and treatment of foreign currency transactions
in the nature of forward exchange contracts.
► This ICDS requires exchange differences arising on settlement of monetary items or
conversion thereof at last day of the previous year to be recognized as income or as
expense in that previous year.
► In respect of non-monetary items, exchange differences arising on conversion thereof as
at the last day of the previous year shall not be recognized as income or as expense in
that previous year.
► At the last day of each previous year, foreign currency monetary items shall be converted
into reporting currency by applying the closing rate.
► Non-monetary items in a foreign currency shall be converted into reporting currency by
using the exchange rate at the date of the transaction.
► Non-monetary item being inventory which is carried at net realisable value denominated
in a foreign currency shall be reported using the exchange rate that existed when such
value was determined.
► The ICDS contains provisions for initial recognition, conversion at the last date of the
previous year and recognition of exchange differences. These provisions shall be subject
to the provisions of section 43A of the Income-tax Act, 1961 and Rule 115 of the Income-
tax Rules, 1962.

ICDS VII: Government Grants

► This ICDS deals with the treatment of government grants. It recognizes that government
grants are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks etc.
► This ICDS does not deal with Government assistance other than in the form of
Government grants and Government participation in the ownership of the enterprise.
► It requires recognition of Government Grants when there is a reasonable assurance that
the person shall comply with the conditions attached to them and the grants shall be
received. However, it also states that recognition of Government grant shall not be
postponed beyond the date of actual receipt.
► This ICDS requires Government grants relatable to depreciable fixed assets to be
reduced from actual cost/WDV. It further provides that where the Government grant is not
directly relatable to the asset acquired, then a pro-rata reduction of the amount of grant

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should be made in the same proportion as such asset bears to all assets with reference
to which the Government grant is so received.
► The standard requires grants relating to non-depreciable fixed assets to be recognized as
income over the same period over which the cost of meeting such obligations is charged
to income.
► The standard also requires Government grants receivable as compensation for expenses
or losses incurred in a previous financial year or for the purpose of giving immediate
financial support to the person with no further related costs to be recognized as income
of the period in which it is receivable.
► All other Government Grants have to be recognized as income over the periods
necessary to match them with the related costs which they are intended to compensate.
► The standard contains certain disclosure requirements, like nature and extent of
Government grants recognized during the previous year as income, nature and extent of
Government grants not recognized during the previous year as income and reasons
thereof etc.

ICDS VIII: Securities

► This ICDS deals with securities.
► There are two parts. Part A deals with securities held as stock-in-trade. Part B deals with
securities held by a scheduled bank or public financial institutions formed under a Central or a
State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013.
► It requires securities (referred to in Part A) to be recognized at actual cost on acquisition,
which shall comprise of its purchase price and include acquisition charges like
brokerage, fees, tax, duty or cess.
► The actual cost of a security (referred to in Part A) acquired in exchange for other
securities or another asset shall be the fair value of the security so acquired.
► Subsequently, at the end of any previous year, securities held as stock-in-trade have to
be valued at actual cost initially recognized or net realizable value at the end of that
previous year, whichever is lower.
► It goes on to provide that such comparison of actual cost initially recognized and net
realizable value has to be done category-wise and not for each individual security.
► Where actual cost initially recognized cannot be ascertained by reference to specific
identification, use of “First in First Out” method or “Weighted Average Cost” formula is
permitted for subsequent measurement of securities held as stock-in-trade (other than
unlisted or unquoted securities) referred to in Part A.

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► Securities referred to in Part B to be classified, recognised and measured in accordance

with the extant guidelines issued by the RBI in this regard. Any claim for deduction in
excess of the said guidelines will not be taken into account. To this extent, the provisions
of ICDS VI on the effect of changes in foreign exchange rates relating to forward
exchange contracts would not apply.

ICDS IX: Borrowing Costs

► This ICDS deals with the treatment of borrowing costs. It does not deal with the actual or
imputed cost of owners’ equity and preference share capital.
► It requires borrowing costs which are directly attributable to the acquisition, construction or
production of a qualifying asset to be capitalized as part of the cost of that asset. Other
borrowing costs have to be recognized in accordance with the provisions of the Act.
► Qualifying asset has been defined to mean –
o land, building, machinery, plant or furniture, being tangible assets;
o know‐how, patents, copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets;
o inventories that require a period of twelve months or more to bring them to a
saleable condition.
► This ICDS requires capitalization of specific borrowing costs and general borrowing
costs.
► This ICDS provides the formula for capitalization of borrowing costs when funds are
borrowed generally and used for the purpose of acquisition, construction or production of
a qualifying asset.
► For the purpose of computing the amount of borrowing costs to be capitalized, in a case
where the funds are not borrowed specifically for the purposes of acquisition,
construction or production of a qualifying asset, a qualifying asset would be such asset
that necessarily require a period of 12 months or more for its acquisition, construction or
production.
► It also provides as to when capitalization of borrowing costs would commence and cease.
► It requires disclosure of the accounting policy adopted for borrowing costs and the
amount of borrowing costs capitalized during the year.

ICDS X: Provisions, Contingent Liabilities and Contingent Assets

► This ICDS deals with Provisions, Contingent Liabilities and Contingent Assets. However,
it does not deal with provisions, contingent liabilities and contingent assets –

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o resulting from financial instruments,

o resulting from executory contracts,
o arising in insurance business from contracts with policyholders and
o covered by another ICDS.
It also does not deal with recognition of revenue dealt with by ICDS on Revenue
Recognition.
► The ICDS specifies the conditions for recognition of a provision, namely, existence of a
present obligation as a result of a past event, reasonable certainty that outflow of
resources embodying economic benefits will be required to settle the obligation and
making a reliable estimate of the amount of the obligation.
► It provides that a person shall not recognize a contingent liability or a contingent asset.
However, it requires contingent assets to be assessed continually. When it becomes
reasonably certain that inflow of economic benefit will arise, the asset and related income
have to be recognized in the previous year in which the change occurs.
► It contains provisions for measurement and review of a provision and asset and related
income.
► It also provides that a provision shall be used only for expenditures for which the
provision was originally recognized.
► The ICDS also contains specific disclosure requirements in respect of each class of
provision, asset and related income recognized.

Clarification on Income Computation and Disclosure Standards (ICDS) notified under

section 145(2) of the Income-tax Act, 1961 – [Circular No. 10/2017, dated 23-03-2017]

After notification of ICDS, it was brought to the notice of the CBDT by the stakeholders that certain
provisions of ICDS may require amendment/ clarification for proper implementation. The matter
was referred to an expert committee. The Committee after duly consulting the stakeholders in this
regard has recommended a two-fold approach for the smooth implementation of ICDS i.e.,
amendment to the provisions of ICDS in respect of certain issues and issuance of clarifications by
way of FAQs for the rest of issues.
The CBDT has, vide this circular, issued the following clarification on other issues:
Question 1: Preamble of ICDS I states that this ICDS is applicable for computation of income
chargeable under the head “Profits and gains of business or profession" or "Income from other
sources" and not for the purposes of maintenance of books of account. However, Para 1 of ICDS I

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states that it deals with significant accounting policies. Accounting policies are applied for
maintenance of books of accounts and preparing financial statements. What is the interplay
between ICDS I and maintenance of books of accounts?
Answer: As stated in the Preamble, ICDS is not meant for maintenance of books of accounts or
preparing financial statements. Persons are required to maintain books of accounts and prepare
financial statements as per accounting policies applicable to them. For example, companies are
required to maintain books of account and prepare financial statements as per requirements of
Companies Act, 2013. The accounting policies mentioned in ICDS-I being fundamental in nature
shall be applicable for computing income under the heads "Profits and gains of business or
profession" or "Income from other sources".
Question 2: Certain ICDS provisions are inconsistent with judicial precedents. Whether these
judicial precedents would prevail over ICDS?
Answer: The ICDS have been notified after due deliberation and after examining judicial views for
bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in
the absence of authoritative guidance on these issues under the Act for computing Income under
the head "Profits and gains of business or profession'' or Income from other sources. Since
certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be
applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and
subsequent assessment years.
Question 3: Does ICDS apply to non-corporate taxpayers who are not required to maintain books
of account and/or those who are covered by presumptive scheme of taxation like sections 44AD,
44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act?
Answer: ICDS is applicable to specified persons having income chargeable under the head
'Profits and gains of business or profession' or 'Income from other sources'. Therefore, the relevant
provisions of ICDS shall also apply to the persons computing income under the relevant
presumptive taxation scheme. For example, for computing presumptive income of a partnership
firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue
recognition shall apply for determining the receipts or turnover, as the case may be.
Question 4: If there is conflict between ICDS and other specific provisions of the Income-tax
Rules, 1962 governing taxation of income like rules 9A, 9B etc. of the Rules, which provisions shall
prevail?

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.21

Answer: ICDS provides general principles for computation of income. In case of conflict, if any,
between the provisions of Rules and ICDS, the provisions of Rules, which deal with specific
circumstances, shall prevail.
Question 5: ICDS is framed on the basis of accounting standards notified by Ministry of Corporate
Affairs (MCA) vide Notification No. GSR 739(E) dated 7th December, 2006 under section 211(3C)
of erstwhile Companies Act 1956. However, MCA has notified in February, 2015 a new set of
standards called 'Indian Accounting Standards' (Ind-AS). How will ICDS apply to companies which
adopted Ind-AS?
Answer: ICDS shall apply for computation of taxable income under the head "Profit and gains of
business or profession" or "Income from other sources" under the Income-tax Act. This is
irrespective of the accounting standards adopted by companies i.e. either Accounting Standards or
Ind-AS.
Question 6: Whether ICDS shall apply to computation of Minimum Alternate Tax (MAT) under
section 115JB of the Act or Alternate Minimum Tax (AMT) under section 115JC of the Act?
Answer: MAT under section 115JB of the Act is computed on 'book profit' that is net profit as
shown in the Profit and Loss Account prepared under the Companies Act subject to certain
specified adjustments. Since, the provisions of ICDS are applicable for computation of income
under the regular provisions of the Act, the provisions of ICDS shall not apply for computation of
MAT.
AMT under section 115JC of the Act is computed on adjusted total income which is derived by
making specified adjustments to total income computed as per the regular provisions of the Act.
Hence, the provisions of ICDS shall apply for computation of AMT.
Question 7: Whether the provisions of ICDS shall apply to Banks, Non-banking financial
institutions, Insurance companies, Power sector etc.?
Answer: The general provisions of ICDS shall apply to all persons unless there are sector specific
provisions contained in the ICDS or the Act. For example, ICDS VIII contains specific provisions
for banks and certain financial institutions and Schedule I of the Act contains specific provisions for
Insurance business.
Question 8: Para 4(ii) of ICDS-1 provides that Mark to Market (MTM) loss or an expected loss
shall not be recognized unless the recognition is in accordance with the provisions of any other
ICDS. Whether similar consideration applies to recognition of MTM gain or expected incomes?

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 3.22 DIRECT TAX LAWS

Answer: Same principle as contained in ICDS-I relating to MTM losses or an expected loss shall
apply mutatis mutandis to MTM gains or an expected profit.

Question 9: ICDS-1 provides that an accounting policy shall not be changed without 'reasonable
cause'. The term 'reasonable cause' is not defined. What shall constitute 'reasonable cause'?
Answer: Under the Act, 'reasonable cause' is an existing concept and has evolved well over a
period of time conferring desired flexibility to the tax payer in deserving cases.
Question 10: Which ICDS would govern derivative instruments?
Answer: ICDS -VI (subject to para 3 of ICDS-III) provides guidance on accounting for derivative
contracts such as forward contracts and other similar contracts. For derivatives, not within the
scope of ICDS-VI, provisions of ICDS-1 would apply.
Question 12: Since there is no specific scope exclusion for real estate developers and Build -
Operate-Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether
ICDS-III and ICDS-IV should be applied by real estate developers and BOT operators. Also,
whether ICDS is applicable for leases.
Answer: At present, there is no specific ICDS notified for real estate developers, BOT projects and
leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as
may be applicable.
Question 13: The condition of reasonable certainty of ultimate collection is not laid down for
taxation of interest, royalty and dividend. Whether the taxpayer is obliged to account for such
income even when the collection thereof is uncertain?
Answer: As a principle, interest accrues on time basis and royalty accrues on the basis of
contractual terms. Subsequent non-recovery in either cases can be claimed as deduction in view
of amendment to section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail
over the provisions of ICDS.
Question 14: Whether ICDS is applicable to revenues which are liable to tax on gross basis like
interest, royalty and fees for technical services for non-residents u/s. 115A of the Act.
Answer: Yes, the provisions of ICDS, also apply for computation of these incomes on gross basis
for arriving at the amount chargeable to tax.
Question 15: Para 8 of ICDS-V states expenditure incurred on commissioning of project, including
expenditure incurred on test runs and experimental production shall be capitalized. It also states
that expenditure incurred after the plant has begun commercial production i.e., production intended

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.23

for sale or captive consumption shall be treated as revenue expenditure. What shall be the
treatment of expense incurred after the conduct of test runs and experimental production but
before commencement of commercial production?
Answer: As clarified in Para 8 of lCDS-V, the expenditure incurred till the plant has begun
commercial production, that is, production intended for sale or captive consumption, shall be
treated as capital expenditure.
Question 18: If the taxpayer sells a security on 30th April 2024. The interest payment dates are
December and June. The actual date of receipt of interest is on 30th June 2024 but the interest on
accrual basis has been accounted as income on 31st March 2024. Whether the taxpayer shall be
permitted to claim deduction of such interest i.e. offered to tax but not received while computing
the capital gain?

Answer: Yes, the amount already taxed as interest income on accrual basis shall be taken into
account for computation of income arising from such sale.
Question 19: Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be
valued at actual cost initially recognised or net realisable value (NRV) at the end of that previous
year, whichever is lower. Para 10 of Part-A of ICDS-VIII requires the said exercise to be carried
out category wise. How the same shall be computed?
Answer: For subsequent measurement of securities held as stock-in-trade, the securities are first
aggregated category wise. The aggregate cost and NRV of each category of security are
compared and the lower of the two is to be taken as carrying value as per ICDS-VIII. This is
illustrated below –
Security Category Cost NRV Lower of ICDS Value
cost or NRV
A Share 100 75 75
B Share 120 150 120
C Share 140 120 120
D Share 200 190 190
Total 560 535 505 535
E Debt Security 150 160 150
F Debt Security 105 90 90
G Debt Security 125 135 125
H Debt Security 220 230 220
Total 600 615 585 600
Securities Total 1160 1150 1090 1135

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Question 20: There are specific provisions in the Act read with Rules under which a portion of
borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(i), 40(a)(ia), 40A(2)(b), etc.
of the Act. Whether borrowing costs to be capitalized under ICDS-IX should exclude portion of
borrowing costs which gets disallowed under such specific provisions?
Answer: Since specific provisions of the Act override the provisions of ICDS, it is clarified that
borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing
costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost
shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under
the Act.
Question 21: Whether bill discounting charges and other similar charges would fall under the
definition of borrowing cost?
Answer: The definition of borrowing cost is an inclusive definition. Bill discounting charges and
other similar charges are covered as borrowing cost.
Question 22: How to allocate borrowing costs relating to general borrowing as computed in
accordance with formula provided under Para 6 of ICDS-IX to different qualifying assets?
Answer: The capitalization of general borrowing cost under ICDS-IX shall be done on asset by-
asset basis.

Question 24: Expenditure on most post-retirement benefits like provident fund, gratuity, etc. are
covered by specific provisions. There are other post-retirement benefits offered by companies like
medical benefits. Such benefits are covered by AS-15 for which no parallel ICDS has been
notified. Whether provision for these liabilities are excluded from scope of ICDS X?
Answer: It is clarified that provisioning for employee benefit which are otherwise covered by AS 15
shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-X.
Question 25: ICDS-1 requires disclosure of significant accounting policies and other ICDS
requires specific disclosures. Where is the taxpayer required to make such disclosures specified in
ICDS?

Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of
income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD.
However, there shall not be any separate disclosure requirements for persons who are not liable to
tax audit.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.25

Notified ICDS and Corresponding AS and IND AS

ICDS Corresponding AS Corresponding IND AS

ICDS I - Accounting AS – 1 Disclosure of Ind AS 1 - Presentation of Financial
Policies Accounting Policies Statements
ICDS II - Valuation of AS - 2 Valuation of Ind AS – 2 Inventories
Inventories Inventories (Revised)
ICDS III - Construction AS 7 – Construction Ind AS 115 – Revenue from
Contracts Contracts contracts with customers
ICDS IV - Revenue AS 9 – Revenue Ind AS 115 - Revenue from contracts
Recognition Recognition with customers
ICDS V - Tangible Fixed AS 10 – Property, Plant and Ind AS 16 Property, Plant and
Assets Equipment (Revised) Equipment
ICDS VI - The Effects of AS 11 – The Effects of Ind AS 21 – The Effects of changes
changes in foreign changes in foreign in foreign exchange rates
exchange rates exchange rates (Revised)
ICDS VII - Government AS 12 - Accounting for Ind AS 20 – Accounting for
Grants Government Grants Government Grants and Disclosure
of Government Assistance
ICDS VIII - Securities AS 13 - Accounting for Ind AS 40 – Investment Property, Ind
Investments (Revised) AS109 – Financial Instruments, Ind
AS 105 – Non-current Assets held
for Sale and Discontinued
Operations
ICDS IX - Borrowing Costs AS 16 - Borrowing Costs Ind AS 23 - Borrowing Costs
ICDS X - Provisions, AS 29 - Provisions, Ind AS 37 - Provisions, Contingent
Contingent Liabilities and Contingent Liabilities and Liabilities and Contingent Assets
Contingent Assets Contingent Assets
(Revised)

Student may note that the text of the notified ICDSs has been given as Annexure 1 at the
end of this Module.

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 3.26 DIRECT TAX LAWS

(2) Method of Accounting in certain cases [Section 145A]

The Delhi High Court had, in the case of Chamber of Tax Consultants & Anr vs. Union of India &
Ors, held that certain provisions of ICDSs are ultra vires the Act, since they seek to overcome
binding judicial precedents and are, thus, contrary to the law settled by the Supreme Court and
various High Courts.
In order to bring certainty in the wake of such judicial pronouncements section 36(1)(xviii), section
40A(13), section 43AA, section 43CB, section 145A and section 145B have been inserted in the
Income-tax Act, 1961 with effect from A.Y.2017-18.

Section 145A provides that for the purpose of determining the income chargeable under the head
“Profits and gains of business or profession”:
(a) the valuation of inventory shall be made at lower of actual cost or net realizable value
computed in accordance with notified ICDS i.e., ICDS II “Valuation of inventories”.
(b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to
include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to
bring the goods or services to the place of its location and condition as on the date of valuation.
(c) inventory being securities not listed or listed but not quoted on a recognised stock
exchange with regularity from time to time shall be valued at actual cost initially recognised
in accordance with the notified ICDS i.e., ICDS VIII: Securities.
(d) inventory being listed and quoted securities, shall be valued at lower of actual cost or net
realisable value in accordance with notified ICDS i.e., ICDS VIII: Securities. Such
comparison of actual cost and net realisable value shall be done category-wise.
However, inventories being securities held by a scheduled bank or public financial institution shall
be valued in accordance with notified ICDS after taking into account the extant guidelines issued
by the RBI.
Note: Student may note that section 36(1)(xviii), section 40A(13), section 43AA, section 43CB,
and section 145B are discussed at respective places in this chapter.

3.5 COMPUTATION OF PROFITS AND GAINS FROM

BUSINESS OR PROFESSION [SECTION 29]
According to section 29, the profits and gains of any business or profession are to be computed in
accordance with the provisions contained in sections 30 to 43D. It must, however, be remembered

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.27

that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act
further permits allowance of items of expenses under the residuary section 37(1), which extends
the allowance to items of business expenditure not covered by sections 30 to 36, where these are
allowable according to accepted commercial practices.

Computation of income from business or profession [Section 29]

Inadmissible Other
Expenses or
Admissible Profits provisions
deductions payments not
deductions chargeable to
(Section 40) deductible in certain
(Sections 30 tax (Section 41)
circumstances
to 37)
(Section 40A)

3.6 ADMISSIBLE DEDUCTIONS

(1) Rent, rates, taxes, repairs and insurance for buildings [Section 30]
Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of buildings
used by the assessee for the purpose of his business or profession.
• Where the premises are occupied by the assessee as a tenant, the rent paid for such
premises and the amount paid on account of cost of repairs, if the assessee has undertaken
to bear such repairs to the premises.
• Occupation of premises by the assessee being the owner: Where the assessee himself
is owner of the premises and occupies them for his business purposes, no notional rent
would be allowed under this section. However, where a firm runs its business in the
premises owned by one of its partners, the rent payable to the partner will be an allowable
deduction to the extent it is reasonable and is not excessive.
• Repairs of the premises: Apart from rent, this section allows deductions in respect of
expenses incurred on account of repairs to building in case where

♦ the assessee is the owner of the building or

♦ the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.

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 3.28 DIRECT TAX LAWS

♦ Even if the assessee occupies the premises otherwise than as a tenant or owner,
i.e., as a lessee, licensee or mortgagee with possession, he is entitled to a deduction
under the section in respect of current repairs to the premises.
• Cost of repairs and current repairs of capital nature not to be allowed as deduction
[Explanation to section 30]: Amount paid on account of the cost of repairs to the premises
occupied by the assessee as a tenant and the amount paid on account of current repairs to
the premises occupied by the assessee, otherwise than as a tenant, shall not include any
capital nature expenditure. In other words, cost of repairs and current repairs other than of
capital nature is allowed as deduction while computing business income.
• Other expenses: In addition, deductions are allowed in respect of expenses by way of land
revenue, local rates, municipal taxes and insurance in respect of the premises used for the
purposes of the business or profession. Cesses, rates and taxes levied by a foreign
Government are also allowed.
• Premises used partly for business and partly for other purposes: Where the premises
are used partly for business and partly for other purposes, only a proportionate part of the
expenses attributable to that part of the premises used for purposes of business will be
allowed as a deduction [Section 38(1)].
(2) Repairs and insurance of machinery, plant and furniture [Section 31]
Section 31 allows deduction in respect of the expenses on current repairs and insurance of
machinery, plant and furniture in computing the income from business or profession.

• Usage of the asset: In order to claim this deduction, the assets must have been used for
purposes of the assessee’s own business the profits of which are being taxed i.e., the
assessee should be the beneficial owner of the asset.
The word ‘used’ has to be read in a wide sense so as to include active as well as passive
use. However, insurance and repair charges of assets which are owned by the assessee
but have not been used for the business during the previous year would not be allowed as a
deduction.
Even if an asset is used for a part of the previous year, the assessee is entitled to the
deduction of the full amount of expenses on repair and insurance charges and not merely
an amount proportionate to the period of use.

• Repairs exclude replacement or reconstruction: The term ‘repairs’ will include renewal
or renovation of an asset but not its replacement or reconstruction.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.29

The deduction allowable under this section is only of current repairs but not arrears of
repairs for earlier years even though they may still rank for a deduction under section 37(1).

• Insurance premium: The deduction allowable in respect of premia paid for insuring the
machinery, plant or furniture is subject to the following conditions:

♦ The insurance must be against the risk of damage or destruction of the machinery,
plant or furniture.
♦ The assets must be used by the assessee for the purposes of his business or
profession during the accounting year.
♦ The premium should have been actually paid (or payable under the mercantile
system of accounting).
The premium may even take the form of contribution to a trade association which
undertakes to indemnify and insure its members against loss; such premium or contribution
would be deductible as an allowance under this section even if a part of it is returnable to
the insured in certain circumstances.
It does not matter if the payment of the claim will enure to the benefit of someone other than
the owner.
• Current repairs of capital nature not to be allowed [Explanation to section 31]: Amount
paid on account of current repairs of machinery, plant or furniture shall not include any
capital nature expenditure. In other words, current repairs other than of capital nature
expenditure is allowed as deduction in the computation of income under the head “profits
and gains of business or profession”.
• Machinery, plant and furniture used partly for business and partly for other purposes:
Where the machinery, plant and furniture are used partly for business and partly for other
purposes, only a proportionate part of the expenses attributable to that part of the
machinery, plant and furniture used for purposes of business will be allowed as a deduction
[Section 38(2)].
(3) Depreciation [Section 32]
(1) Charge of depreciation mandatory: Section 32 allows a deduction in respect of
depreciation resulting from the diminution or exhaustion in the value of certain capital
assets.

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The Explanation 5 to this section provides that deduction on account of depreciation shall
be made compulsorily, whether or not the assessee has claimed the deduction in computing
his total income.
(2) Conditions to be satisfied for allowance of depreciation: The allowance of depreciation
which is regulated by Rule 5 of the Income-tax Rules, 1962, is subject to the following
conditions which are cumulative in their application.
(a) The assets in respect of which depreciation is claimed must belong to either of
the following categories, namely:
(1) buildings, machinery, plant or furniture, being tangible assets;
(2) know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets
acquired on or after 1st April, 1998, not being goodwill of a business or
profession.
 The depreciation in the value of any other capital assets cannot be
claimed as a deduction from the business income.
 No depreciation is allowable on the cost of the land on which the
building is erected because the term ‘building’ refers only to
superstructure but not the land on which it has been erected.
 The term ‘plant’ as defined in section 43(3) includes ships, vehicle,
books, scientific apparatus and surgical equipments used for the
purpose of the business or profession but does not include tea bushes
or livestock or buildings or furniture and fittings.
 However, the word ‘plant’ does not include an animal, human body or
stock-in-trade. Thus, plant includes all goods and chattels, fixed or
movable, which a businessman keeps for employment in his business
with some degree of durability.
 The expression ‘plant’ includes part of a plant (e.g., the engine of a
vehicle); machinery includes part of machinery and building includes a
part of the building.
 Similarly, the term ‘buildings’ includes within its scope roads, bridges,
culverts, wells and tubewells.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.31

(b) The assets should be actually used by the assessee for purposes of his
business or profession during the previous year - The asset must be put to use
at any time during the previous year. The amount of depreciation allowance is not
proportionate to the period of use during the previous year. If the asset is acquired
during the previous year and is not put to use in the same year, then the depreciation
shall not be allowed for such asset but the cost of such asset would be added to the
block of asset.
Asset used for less than 180 days - Where any asset is acquired by the assessee
during the previous year and is put to use for the purposes of business or profession
for a period of less than 180 days, depreciation shall be allowed at 50 per cent of
the allowable depreciation according to the percentage prescribed in respect of the
block of assets comprising such asset. It is significant to note that this restriction
applies only to the year of acquisition and not for subsequent years.

If the assets are not used exclusively for the business of the assessee but
for other purposes as well, the depreciation allowable would be a proportionate
part of the depreciation allowance to which the assessee would be otherwise
entitled. This is provided in section 38.

Depreciation would be allowable to the owner even in respect of assets which are
actually worked or utilized by another person e.g., a lessee or licensee. The
deduction on account of depreciation would be allowed under this section to the
owner who has let on hire his building, machinery, plant or furniture provided that
letting out of such assets is the business of the assessee. In other cases where the
letting out of such assets does not constitute the business of the assessee, the
deduction on account of depreciation would still be allowable under section 57(ii).
Use includes passive use in certain circumstances: One of the conditions for
claim of depreciation is that the asset must be “used for the purpose of business or
profession”. Depreciation is allowed when asset is actually put to use and not ready
to use. However, in certain circumstances, Courts have held that, an asset can be
said to be in use even when it is “kept ready for use”.
For example, stand by equipment and fire extinguishers can be capitalized if they
are ‘ready for use’’.
Likewise, machinery spares which can be used only in connection with an item of
tangible fixed asset and their use is expected to be irregular, has to be capitalised.

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Hence, in such cases, the term “use” embraces both active use and passive use.
However, such passive use should also be for business purposes.

(c) The assessee must own the assets, wholly or partly – Depreciation is allowed
only to the owner of the asset. If the assessee has taken an asset on lease, he,
being the lessee, cannot avail depreciation in respect of such asset. On the other
hands, the lessor will be entitled to depreciation on such asset as he is the owner.

However, in this connection, students may note that the Explanation 1 to

section 32 provides that where the business or profession of the assessee is carried
on in a building not owned by him but in respect of which the assessee holds a lease
or other right of occupancy, and any capital expenditure is incurred by the assessee
for the purposes of the business or profession or the construction of any structure or
doing of any work by way of renovation, extension or improvement to the building,
then depreciation will be allowed as if the said structure or work is a building owned
by the assessee.

Depreciation is allowable not only in respect of assets “wholly” owned by the

assessee but also in respect of assets “partly” owned by him and used for the
purposes of his business or profession.
(3) Computation of Depreciation Allowance: Depreciation allowance will be calculated on the
following basis:
(i) Power generation undertakings: In the case of assets of an undertaking engaged
in generation or generation and distribution of power, such percentage on the actual
cost to the assessee as prescribed by Rule 5(1A).
Rule 5(1A) - As per this rule, the depreciation on the abovementioned assets shall
be calculated at the percentage of the actual cost at rates specified in Appendix IA of
these rules. However, the aggregate depreciation allowed in respect of any asset for
different assessment years shall not exceed the actual cost of the asset. It is further
provided that such an undertaking as mentioned above has the option of being
allowed depreciation on the written down value of such block of assets as are used
for its business at rates specified in Appendix I to these rules.
However, such option must be exercised before the due date for furnishing return
under section 139(1) for the assessment year relevant to the previous year in which
it begins to generate power.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.33

It is further provided that any such option once exercised shall be final and shall
apply to all subsequent assessment years.

(ii) Block of assets: In the case of any block of assets, at such percentage of the
written down value of the block, as may be prescribed by Rule 5(1).

Block of Assets: A “block of assets” is defined in section 2(11), as a group of assets

falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses,
franchises or any other business or commercial rights of similar nature, not
being goodwill of a business or profession,
in respect of which the same percentage of depreciation is prescribed.

Block of asset simply means “same class of assets with same rate of depreciation”.

Know-how - In this context, ‘know-how’ means any industrial information or

technique likely to assist in the manufacture or processing of goods or in the working
of a mine, oil-well or other sources of mineral deposits (including searching for
discovery or testing of deposits for the winning of access thereto).
(iii) Additional depreciation on Plant & Machinery [Section 32(1)(iia)]: Additional
depreciation is allowed on any new machinery or plant (other than ships and aircraft)
acquired and installed after 31.3.2005 by an assessee engaged in the business of
manufacture or production of any article or thing or in the business of generation or
transmission or distribution of power at the rate of 20% of the actual cost of such
machinery or plant.
Asset put to use for less than 180 days: As per second proviso to section
32(1)(ii), 50% of additional depreciation to be allowed, where the plant and
machinery is put to use for less than 180 days during the previous year in which
such asset is acquired.
Further, third proviso to section 32(1)(ii) also provides that the balance 50% of the
additional depreciation on new plant or machinery acquired and used for less than
180 days which has not been allowed in the year of acquisition and installation of
such plant or machinery, shall be allowed in the immediately succeeding previous
year.

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Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI
or an artificial juridical person, additional depreciation is not allowable under the
default tax regime under section 115BAC. Additional depreciation would be allowable
only if such person has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A) and pays tax as per the optional tax regime
under the regular provisions of the Act.
In case of companies and co-operative societies, additional depreciation would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, additional depreciation would be
allowable only if companies and co-operative societies pay tax under the normal
provisions of the Act.

Plant and Machinery not qualifying for additional depreciation

Such additional depreciation will not be available in respect of:
(i) any machinery or plant which, before its installation by the assessee, was
used within or outside India by any other person (second hand machinery); or
(ii) any machinery or plant installed in office premises, residential
accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise) in
computing the income chargeable under the head “Profits and Gains of
Business or Profession” of any one previous year.
Note: Additional depreciation is not allowed to power generation undertakings opting
Appendix 1A of Rule 5 i.e., depreciation calculated as a percentage on the actual cost
to the assessee.
Eligibility for grant of additional depreciation under section 32(1)(iia) in the
case of an assessee engaged in printing or printing and publishing [Circular
No. 15/2016, dated 19-5-2016]
An assessee, engaged in the business of manufacture or production of an article or
thing, is eligible to claim additional depreciation under section 32(1)(iia) in addition to
the normal depreciation under section 32(1).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.35

The CBDT has, vide this Circular, clarified that the business of printing or printing
and publishing amounts to manufacture or production of an article or thing and
is, therefore, eligible for additional depreciation under section 32(1)(iia).

(iv) Terminal depreciation: In case of a power concern as covered under clause (i)
above, if any asset is sold, discarded, demolished or otherwise destroyed in the
previous year (other than the previous year in which it is first brought into use) the
depreciation amount will be the amount by which the moneys payable in respect of
such building, machinery, plant or furniture, together with the amount of scrap value,
if any, falls short of the written down value thereof. The depreciation will be available
only if the deficiency is actually written off in the books of the assessee.
Example: Mahapower Ltd. purchased an asset on 20.7.2020. The actual cost of the
asset was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual
cost of the asset. WDV of the asset as on 1.4.2024 is ` 80 lakhs. On 15.5.2024,
Mahapower Ltd. sold the asset for ` 55 lakhs. Deduction allowed as terminal
depreciation u/s 32(1)(ii) for P.Y. 2024-25 is ` 25 lakhs (` 80 lakhs - ` 55 lakhs)
provided the deficiency of ` 25 lakhs is actually written off in the books of
Mahapower Ltd.
Meaning of certain terms
Term Meaning
Moneys In respect of any building, machinery, plant or furniture includes —
payable (a) any insurance, salvage or compensation moneys payable in
respect thereof;
(b) where the building, machinery, plant or furniture is sold, the
price for which it is sold.,
Sold Includes a transfer by way of exchange or a compulsory acquisition
under any law for the time being in force. However, it does not
include a transfer, in a scheme of amalgamation, of any asset by the
amalgamating company to the amalgamated company where the
amalgamated company is an Indian company or a transfer of any
asset by a banking company to a banking institution in a scheme of
amalgamation of such banking company with the banking institution,
sanctioned and brought into force by the Central Government.

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 3.36 DIRECT TAX LAWS

Clarification regarding treatment of expenditure incurred on purchase of participating

interest by the Oil Exploration and Production (E&P) Companies [Circular No.
20/2019, dated 19.08.2019]
Over the life cycle of an Oil & Gas block, Oil Exploration and Production (E&P) companies
generally buy ('Farm in') and sell ('Farm out') their participating interests (PI) in the
'Production Sharing Agreement' (PSC). 'Farm-in' expenditure is incurred when an entity in
this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes
part of the PSC entered into with the Central Government.
The Government of India (Gol) offers exploration and development rights through global bidding for
specified blocks in various rounds under the New Exploration and Licensing Policy (NELP),
Hydrocarbon Exploration & Licensing Policy (HELP), Open Acreage Licensing Policy (OALP) etc.
by signing the Production Sharing Contracts (PSC’s) with the Oil & Gas companies. The
successful Oil & Gas Companies are granted license to explore, develop and carry out production
operations in Oil & Gas blocks and in India under a PSC with the Gol. Typically, owing to the large
investments required and the risks involved, multiple E&P companies execute the PSC with the
Gol in which each member has its agreed and defined PI.
It is common international practice for the upstream companies to buy (farm-in) and sale
(farm-out) their PI in the PSC or similar contracts with the Government and thereby to share
risk, bring new and niche expertise and technologies. In such transactions, PI are treated as
interests in rights, licences and obligation under the PSC. Such farm-in purchase price is
accounted as an asset as per guidance note issued by the Institute of Chartered
Accountants of India. International accounting rules for Oil & Gas followed in Australia,
Indonesia, UK etc. also require that such acquisition cost to be capitalized and depreciated.
A perusal of the Model PSC’s {as per the website of the Director General of Hydrocarbon
(DGH)} indicates that participating interests are share in rights and obligation to explore,
exploit and sell petroleum under the PSC along with related licences, permits etc. A few of
the case-laws on this issue also support treatment of acquisition rights in a PSC as
Intangible asset.
In this regard, it is relevant to mention that earlier vide Notification No. G.S.R. 117(E) dated
08.03.1996, in exercise of its powers under section 293A of the Act, Central Government
had laid down that the persons with whom it enters into agreement for the association or
participation in any business consisting of the prospecting for or extraction or production of
mineral oils on or after the 1st day of April,1992 -
a) shall not be assessed on the income as association of persons or body of individuals
consisting of such persons; but
b) each of the persons referred to above be assessed in respect of his or its share of
income, as the case may be, in the same status in which the person enters into the
agreement with the Central Government.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.37

Thus, as persons participating in an E&P contract are assessed individually in respect of their
share of income, the sum expended on acquisition of whole or part of such 'Participating
Interest' in an E&P contract where such acquisition is approved by the Government of India,
represents the amount paid to acquire the underlying share (expressed as a percentage) being
interests in rights, licences and obligations under the E&P contract.
In view of the above legal position, it is hereby clarified as under:-
i. amount paid for acquiring the 'Participating Interest' shall not be treated either as
cost for acquiring the share in partnership or investment for' acquisition of a
member's interest in an association of persons or body of individuals, rather it would
be treated as an amount paid to acquire the underlying assets; and
ii. the amount paid for acquiring the 'Participating Interest', after reducing component of
cost attributable to tangible assets for purposes of section 32(1)(i), would be treated
as an 'intangible asset' (being a business or commercial right akin to a licence),
eligible for claim of depreciation for purposes of section 32(1)(ii).

(4) Rates of depreciation: All assets have been divided into four main categories and rates of
depreciation as prescribed by Rule 5(1) are given below:

PART A TANGIBLE ASSETS

I Buildings
Block 1. Buildings which are used mainly for residential purposes except 5%
hotels and boarding houses
Block 2. Buildings which are not used mainly for residential purposes and 10%
not covered by Block (1) above and (3) below
Block 3. Buildings acquired on or after 1st September, 2002 for installing 40%
machinery and plant forming part of water supply project or water
treatment system and which is put to use for the purpose of
business of providing infrastructure facilities
Block 4. Purely temporary erections such as wooden structures 40%
II Furniture and Fittings
Block 1. Furniture and fittings including electrical fittings ["Electrical fittings" 10%
include electrical wiring, switches, sockets, other fittings and fans,
etc.]
III Plant & Machinery
Block 1. Motor cars other than those used in a business of running them on 30%
hire, acquired during the period from 23.8.2019 to 31.3.2020 and
put to use on or before 31.3.2020

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 3.38 DIRECT TAX LAWS

Block 2. Motor cars other than those used in a business of running them on 15%
hire, acquired or put to use on or after 1-4-1990 [Other than motor
cars mentioned in Block 1 above]
Block 3. Motor buses, motor lorries and motor taxis used in a business of 45%
running them on hire, acquired during the period from 23.8.2019 to
31.3.2020 and put to use on or before 31.3.2020
Block 4. Motors buses, motor lorries, motor taxis used in the business of 30%
running them on hire [Other than motor cars mentioned in Block 4
above]
Block 5. Moulds used in rubber and plastic goods factories 30%
Block 6. Aeroplanes, Aeroengines 40%
Block 7. Specified air pollution control equipments, water pollution control 40%
equipments, solid waste control equipment and solid waste
recycling and resource recovery systems
Block 8. Plant & Machinery used in semi-conductor industry covering all 30%
Integrated Circuits (ICs) (other than mentioned in Block 7 Above)
Block 9. Life saving medical equipments 40%
Block 10. Machinery and plant, acquired and installed on or after the 1st day 40%
of September, 2002 in a water supply project or a water treatment
system and which is put to use for the purpose of business of
providing infrastructure facility
Block 11. Containers made of glass or plastic used as re-fills 40%
Block 12 Energy Saving Devices (as specified) 40%
Block 13. Renewable Energy Saving Devices (as specified) including the 40%
devices specified in (i) to (iii) below
(i) Electrically operated vehicles including battery powered or 40%
fuel-cell powered vehicles
(ii) Windmills and any specially designed devices which run on 40%
windmills installed on or after 1.4.2014
(iii) Any special devices including electric generators and 40%
pumps running on wind energy installed on or after 1.4.2014
Block 14. Windmills and any specially designed devices running on windmills 15%
installed on or before 31.3.2014 and any special devices including
electric generators and pumps running on wind energy installed on
or before 31.3.2014
Block 15. Computers including computer software (See Note below) 40%

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.39

Block 16. Books (annual publications or other than annual publications) 40%
owned by assessees carrying on a profession
Block 17. Books owned by assessees carrying on business in running 40%
lending libraries
Block 18. Plant & machinery (General rate) 15%
IV Ships
Block 1. Ocean-going ships 20%
Block 2. Vessels ordinarily operating on inland waters not covered by Block 20%
3 below
Block 3. Speed boats operating on inland water 20%

PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any other 25%
business or commercial rights of similar nature

Note - Mobile phones and EPABX are not considered as computers and hence, not eligible
for 40% rate of depreciation while computer accessories such as UPS, printers scanners,
etc. are eligible for 40% rate of depreciation.
Note: Students should refer to Income-tax Rules, 1962 for the detailed classification
of assets under Rule 5(1) and the rate of depreciation applicable thereto.
(5) Increased rate of depreciation for certain assets [Rule 5(2)]
Any new machinery or plant installed to manufacture or produce any article or thing by
using any technology or other know-how developed in or is an article or thing invented in a
laboratory owned or financed by the Government or a laboratory owned by a public sector
company or a University or an institution recognized by the Secretary, Department of
Scientific and Industrial Research, Government of India shall be treated as a part of the
block of assets qualifying for depreciation @40% of written down value.
Conditions to be fulfilled:
1. The right to use such technology or other know-how or to manufacture or produce
such article or thing has been acquired from the owner of such laboratory or any
person deriving title from such owner.
2. The return filed by the assessee for any previous year in which the said machinery is
acquired, should be accompanied by a certificate from the Secretary, Department of
Scientific and Industrial Research, Government of India to the effect that such article or

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 3.40 DIRECT TAX LAWS

thing is manufactured or produced by using such technology or other know-how

developed in such laboratory or such article or thing has been invented in that laboratory.

3. The machinery or plant is not used for the purpose of business of manufacture or
production of any article or thing specified in the Eleventh Schedule [The exclusion list
comprises of beer, wine and other alcoholic spirits, tobacco and tobacco preparations,
cosmetic and toilet preparations, tooth paste, dental cream, tooth powder and soap,
confectionery and chocolates, office machines and apparatus, steel furniture etc.].
The depreciation ordinarily allowable to an assessee in respect of any block of assets shall be
calculated at the above specified rates on the WDV of such block of assets as are used for the
purposes of the business or profession of the assessee at any time during the previous year.
ILLUSTRATION 1
XYZ (P) Ltd., engaged in manufacturing business, furnishes the following particulars:
Particulars `
(1) Opening WDV of plant and machinery as on 1.4.2024 (i.e., WDV as 30,00,000
on 31.3.2024 after reducing depreciation for P.Y. 2023-24)
(2) New plant and machinery purchased and put to use on 08.06.2024 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2024 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2025 3,00,000

Compute the amount of depreciation and additional depreciation as per the Income-tax Act,
1961 for the A.Y. 2025-26. Assume that all the assets were purchased by way of account
payee cheque and that the company does not opt for section 115BAA/115BAB.
SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2025-26
Plant & Computer
Particulars Machinery (40%)
(15%)
(`) (`)
Normal depreciation
• @ 15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
• @ 7.5% (50% of 15%, since put to use for less than 60,000 -
180 days) on ` 8,00,000
• @ 20% (50% of 40%, since put to use for less than - 60,000
180 days) on ` 3,00,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.41

Additional Depreciation
• @ 20% on ` 20,00,000 (new plant and machinery put 4,00,000 -
to use for more than 180 days)
• @10% (50% of 20%, since put to use for less than -
180 days) on ` 8,00,000 80,000
Total depreciation 12,90,000 60,000

Working Note:
Computation of written down value of Plant & Machinery

Particulars Plant & Computer

Machinery
(`) (`)
Written down value as on 1.4.2024 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2024 (put to 20,00,000 -
use for more than 180 days)
Add: Plant & Machinery acquired on 15.12.2024 (put to use 8,00,000 -
for less than 180 days)
Computer acquired and installed in the office premises (put - 3,00,000
to use for less than 180 days)
Written down value as on 31.03.2025 58,00,000 3,00,000

Composition of plant and machinery included in the WDV

Plant & Computer

Particulars Machinery (`)
(`)
Plant and machinery put to use for 180 days or more 50,00,000
[` 30,00,000 (WDV) + ` 20,00,000 (purchased on 8.6.2024)]
Plant and machinery put to use for less than 180 days 8,00,000 -
Computers put to use for less than 180 days - 3,00,000
58,00,000 3,00,000

Notes:
1. As per the second proviso to section 32(1)(ii), where an asset acquired during the
previous year is put to use for less than 180 days in that previous year, the amount
of deduction allowable as normal depreciation and additional depreciation would be
restricted to 50% of amount computed in accordance with the prescribed percentage.

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 3.42 DIRECT TAX LAWS

Therefore, normal depreciation on plant and machinery acquired and put to use on
15.12.2024 and computer acquired and installed on 02.01.2025, is restricted to 50%
of 15% and 40%, respectively. The additional depreciation on the said plant and
machinery is restricted to ` 80,000, being 10% (i.e., 50% of 20%) of ` 8 lakh.
2. As per third proviso to section 32(1)(ii), the balance additional depreciation of
` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2026-27 if XYZ (P) Ltd. does not opt for the provisions of
section 115BAA.

3. As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005 by an assessee engaged,
inter alia, in the business of manufacture or production of any article or thing, @20%
of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in any
guest house.
Accordingly, additional depreciation is not allowable on computer installed in the
office premises.
ILLUSTRATION 2
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired
the following assets in his office during F.Y. 2024-25 at the cost shown against each item.
Calculate the amount of depreciation that can be claimed from his professional income for
A.Y.2025-26. Assume that all the assets were purchased by way of account payee cheque.

Sl. Description Date of Date when Amount

No. acquisition put to use `
1. Computer including computer 27 Sept., 24 1 Oct., 24 35,000
software
2. Computer UPS 2 Oct., 24 8 Oct., 24 8,500
3. Computer printer 1 Oct., 24 1 Oct., 24 12,500
4. Books (of which books being annual 1 Apr., 24 1 Apr., 24 13,000
publications are of ` 12,000)
5. Office furniture 1 Apr., 24 1 Apr., 24 3,00,000
(Acquired from a practising C.A.)
6. Laptop 26 Sep., 24 8 Oct., 24 43,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.43

SOLUTION
Computation of depreciation allowable for A.Y.2025-26

Asset Rate Depreciation

Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software, 40%
computer UPS, laptop, computer printer & books) 34,500
Total depreciation allowable 64,500

Working Notes:
Computation of depreciation
Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]
Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant [Rate of depreciation - 40%]
(a) Computer including computer software (put to use for more than 180 14,000
days) [` 35,000 @ 40%]
(b) Computer UPS (put to use for less than 180 days) [` 8,500@ 20%] 1,700
[See Note below]
(c) Computer Printer (put to use for more than 180 days) [` 12,500 @ 5,000
40%]
(d) Laptop (put to use for less than 180 days) [` 43,000 @ 20%] [See 8,600
Note below]
(e) Books (being annual publications or other than annual publications) 5,200
(Put to use for more than 180 days) [` 13,000 @ 40%]
34,500

Note - Where an asset is acquired by the assessee during the previous year and is put to
use for the purposes of business or profession for a period of less than 180 days, the
deduction on account of depreciation would be restricted to 50% of the prescribed rate. In
this case, since Mr. Dhaval commenced his practice in the P.Y.2024-25 and acquired the
assets during the same year, the restriction of depreciation to 50% of the prescribed rate
would apply to those assets which have been put to use for less than 180 days in that year,
namely, laptop and computer UPS.

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 3.44 DIRECT TAX LAWS

(6) Depreciation in case of succession of firm/sole proprietary concern by a company or

business reorganization, amalgamation or demerger of companies or succession of
business otherwise than on death

As per the sixth proviso to section 32(1)(ii), depreciation allowable in the hands of

- predecessor and the successor in case of succession of firm/ sole proprietary

concern by a company fulfilling the conditions mentioned in section 47(xiii)/(xiv) or

- predecessor company and successor LLP in case of conversion of a private

company or an unlisted public company into an LLP fulfilling the conditions
mentioned in section 47(xiiib) or

- predecessor and the successor in case of succession of business otherwise than on

death

- amalgamating/ amalgamated company or demerged or resulting company in case of

amalgamation or demerger of companies

shall not exceed the amount of depreciation calculated at the prescribed rates as if the
succession, business reorganization, amalgamation or demerger had not taken place.

It is also provided that such amount of depreciation shall be apportioned between the two
entities in the ratio of the number of days for which the assets were used by them.

ILLUSTRATION 3
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose WDV as on
31.3.2024 after reducing depreciation for P.Y. 2023-24 was ` 40 lakhs. It purchased
another asset (second-hand plant and machinery) of the same block on 01.11.2024 for
` 14.40 lakhs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd.
with effect from 01.01.2025.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2025 assuming that the assets were transferred to Shirdi Ltd. at
` 60 lakhs. Also assume that the plant and machinery were purchased by way of account
payee cheque.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.45

SOLUTION
Statement showing computation of depreciation allowable
to Sai Ltd. & Shirdi Ltd. for A.Y. 2025-26
Particulars `
Opening WDV as on 1.4.2024 [i.e., WDV as on 31.3.2024 after reducing 40,00,000
depreciation for P.Y. 2023-24
Addition during the P.Y. 2024-25 (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @15% 6,00,000
Depreciation on ` 14,40,000 @7.5% 1,08,000
Total depreciation for the P.Y. 2024-25 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
` 6,00,000 × 275/365 4,52,055
` 1,08,000 × 61/151 43,629
4,95,684
(b) Amalgamated company, Shirdi Ltd.
` 6,00,000 × 90/365 1,47,945
` 1,08,000 × 90/151 64,371
2,12,316

Notes:
(i) The aggregate deduction, in respect of depreciation allowable to the amalgamating
company and amalgamated company in the case of amalgamation shall not exceed
in any case, the deduction calculated at the prescribed rates as if the amalgamation
had not taken place. Such deduction shall be apportioned between the
amalgamating company and the amalgamated company in the ratio of the number of
days for which the assets were used by them.

(ii) The price at which the assets were transferred, i.e., ` 60 lakhs, has no implication in
computing eligible depreciation.
(7) Hire purchase: In the case of assets under the hire purchase system the allowance for
depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-1943,
be granted as follows:

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 3.46 DIRECT TAX LAWS

• In every case of payment purporting to be for hire purchase, production of the agreement
under which the payment is made would be insisted upon by the department.

• Where the effect of an agreement is that the ownership of the asset is at once
transferred on the lessee, the transaction should be regarded as one of purchase by
instalments and consequently no deduction in respect of the hire amount should be
made. This principle will be applicable in a case where the lessor obtains a right to
sue for arrears of installments but has no right to recover the asset back from the
lessee. Depreciation in such cases should be allowed to the lessee on the hire
purchase price determined in accordance with the terms of hire purchase agreement.
• Where the terms of an agreement provide that the asset shall eventually become the
property of the hirer or confer on the hirer an option to purchase an asset, the
transaction should be regarded as one of hire purchase. In such case, periodical
payments made by the hirer should for all tax purposes be regarded as made up of
(i) the consideration for hirer which will be allowed as a deduction in
assessment, and
(ii) payment on account of the purchase price, to be treated as capital outlay and
depreciation being allowed to the lessee on the initial value namely, the
amount for which the hired assets would have been sold for cash at the date
of the agreement.
The allowance to be made in respect of the hire should be the amount of the
difference between the aggregate amount of the periodical payments under the
agreement and the initial value as stated above. The amount of this allowance
should be spread over the duration of the agreement evenly. If, however, agreement
is terminated either by outright purchase of the asset or by its return to the seller, the
deduction should cease as from the date of termination of agreement.
For the purpose of allowing depreciation, an assessee claiming deduction in respect
of the assets acquired on hire purchase would be required to furnish a certificate
from the seller or any other suitable documentary evidence in respect of the initial
value or the cash price of the asset.
In cases where no such certificate or other evidence is furnished the initial value of
the assets should be arrived at by computing the present value of the amount
payable under the agreement at an appropriate per centum.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.47

For the purpose of allowing depreciation the question whether in a particular case
the assessee is the owner of the hired asset or not is to be decided on a
consideration of all the facts and circumstances of each case and the terms of the
hire purchase agreement. Where the hired asset is originally purchased by the
assessee and is registered in his name, the mere fact that the payment of the price
is spread over the specified period and is made in installments to suit the needs of
the purchaser does not disentitle the assessee from claiming depreciation in respect
of the asset, since the assessee would be the real owner although the payment of
purchase price is made subsequent to the date of acquisition of the asset itself.
(8) Actual Cost [Section 43(1)]
The expression “actual cost” means the actual cost of the asset to the assessee as reduced
by that portion of the cost thereof, if any, as has been met directly or indirectly by any other
person or authority.
However, where an assessee incurs any expenditure for acquisition of any asset or part
thereof in respect of which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft
or use of electronic clearing system through a bank account or through such other
prescribed electronic mode, exceeds ` 10,000, such expenditure shall not form part of
actual cost of such asset [Second proviso to section 43(1)].
The prescribed electronic modes include credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
Actual cost in certain special situations [Explanations to section 43(1)]
Explanation Situation Actual cost of the asset to the assessee
1 Where an asset is used for Actual cost to the assessee as reduced by
the purposes of business any deduction allowed u/s 35(1)(iv).
after it ceases to be used Note - Actual cost of such asset would be
for scientific research Nil as already 100% deduction would have
related to that business been claimed u/s 35(1)(iv)
1A Where inventory is Fair market value of such inventory as on
converted or treated as a the date of its conversion into capital asset
capital asset and is used determined in the prescribed manner
for the purpose of business
or profession

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2 Where an asset is acquired Actual cost to the previous owner minus

by way of gift or inheritance depreciation allowable to the assessee as
if asset was the only asset in the relevant
block of assets.
Further, any expenditure incurred by the
assessee such as expenditure on freight,
installation etc. of such asset would also
be includible in the actual cost.
3 Where, before the date of An amount which the Assessing Officer
its acquisition by the may, with the previous approval of the
assessee, the asset was at Joint Commissioner, determine, having
any time used by any other regard to all the circumstances of the case
person for the purposes of
his business or profession,
and the Assessing Officer
is satisfied that the main
purpose of the transfer of
the asset directly or
indirectly to the assessee
was the reduction of liability
of income-tax directly or
indirectly to the assessee
(by claiming depreciation
with reference to an
enhanced cost)
4 Where any asset which had (a) the actual cost when he first acquired
once belonged to the the asset minus depreciation allowable
assessee and had been to the assessee as if asset was the
used by him for the only asset in the relevant block of
purposes of his business or assets; or
profession and thereafter (b) the actual price for which the asset is
ceased to be his property re-acquired by him
by reason of transfer or whichever is less
otherwise, is re-acquired by
him
4A Where before the date of Actual cost of the transferred assets, in the
acquisition by the case of Mr. A, shall be the same as the
assessee, say, Mr. A, the written down value of the said assets at the
assets were at any time time of transfer thereof by Mr. B.
used by any other person,
say Mr. B, for the purposes
of his business or
profession and depreciation
allowance has been

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.49

claimed in respect of such

assets in the case of Mr. B
and such person acquires
on lease, hire or otherwise,
assets from Mr. A
5 Where a building which was Actual cost of the building to the assessee,
previously the property of as reduced by an amount equal to the
the assessee is brought depreciation calculated at the rates in force
into use for the purposes of on that date that would have been
the business or profession allowable had the building been used for
the purposes of the business or profession
since the date of its acquisition by the
assessee
6 When any capital asset is The actual cost of the transferred capital
transferred by a holding asset to the transferee company shall be
company to its wholly taken to be the same as it would have
owned Indian subsidiary been if the transferor company had
company or by a subsidiary continued to hold the capital asset for the
company to its 100% purposes of its own business
holding company, being an
Indian company then, the
transaction not being
regarded as a transfer of a
capital asset
7 In a scheme of The actual cost of the transferred capital
amalgamation, if any assets to the amalgamated company will
capital asset is transferred be taken at the same amount as it would
by the amalgamating have been taken in the case of the
company to the amalgamating company had it continued to
amalgamated Indian hold it for the purposes of its own business
company
7A In the case of a demerger, The actual cost of the transferred asset to
where any capital asset is the resulting company shall be taken to be
transferred by the the same as it would have been if the
demerged company to the demerged company had continued to hold
resulting Indian company the capital asset for the purpose of its own
business.
However, the actual cost shall not exceed
the WDV of the asset in the hands of the
demerged company

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 3.50 DIRECT TAX LAWS

Explanation 4A overrides Explanation 3

Explanation 3 to section 43(1) deals with a situation where a transfer of any asset is made
with the main purpose of reduction of tax liability (by claiming depreciation on enhanced
cost), and the Assessing Officer, having satisfied himself about such purpose of transfer
with the prior approval of the joint commissioner, may determine the actual cost having
regard to all the circumstances of the case.
In the Explanation 4A, a non-obstante clause has been included to the effect that
Explanation 4A will have an overriding effect over Explanation 3. The result of this is that
there is no necessity of finding out whether the main purpose of the transaction is reduction
of tax liability. Explanation 4A is activated in every situation described above without
inquiring about the main purpose.

Example:
A person (say “B”) owns an asset and uses it for the purposes of his business or profession. B
has claimed depreciation in respect of such asset. The said asset is transferred by B to another
person (say “A”). B then acquires the same asset back from A on lease, hire or otherwise. A
being the new owner will be entitled to depreciation. In the above situation, the cost of
acquisition of the transferred assets in the hands of A shall be the same as the written down
value of the said assets at the time of transfer in the hands of B.

Actual cost in other special situations

(i) Capitalization of interest paid or payable in connection with acquisition of an
asset: Certain taxpayers have, with a view to obtain more tax benefits and reduce
the tax outflow, resorted to the method of capitalising interest paid or payable in
connection with acquisition of an asset relatable to the period after such asset is first
put to use.
This capitalisation implies inclusion of such interest in the ‘Actual Cost’ of the asset
for the purposes of claiming depreciation under the Income-tax Act, 1961. This was
never the legislative intent nor was it in accordance with recognised accounting
practices. Therefore, with a view to counter-acting tax avoidance through this
method and placing the matter beyond doubt, Explanation 8 to section 43(1)
provides that any amount paid or payable as interest in connection with the
acquisition of an asset and relatable to period after asset is first put to use shall not
be included and shall be deemed to have never been included in the actual cost of
the asset.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.51

(ii) Amount of duty of excise or additional duty leviable shall be reduced if credit
is claimed: Where an asset is or has been acquired by an assessee, the actual cost
of asset shall be reduced by the amount of duty of excise or the additional duty
leviable under section 3 of the Customs Tariff Act, 1975 in respect of which a claim
of credit has been made and allowed under the Central Excise Rules, 1944 6
[Explanation 9].
(iii) Subsidy or grant or reimbursement: Where a portion of the cost of an asset
acquired by the assessee has been met directly or indirectly by the Central
Government or a State Government or any authority established under any law or by
any other person, in the form of a subsidy or grant or reimbursement (by whatever
name called), then, so much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to the assessee.
However, where such subsidy or grant or reimbursement is of such nature that it
cannot be directly relatable to the asset acquired, so much of the amount which
bears to the total subsidy or reimbursement or grant the same proportion as such
asset bears to all the assets in respect of or with reference to which the subsidy or
grant or reimbursement is so received, shall not be included in the actual cost of the
asset to the assessee [Explanation 10].
Note: ICDS VII requires Government grants relatable to depreciable assets to be
reduced from actual cost of the asset/WDV of the block of asset. It further provides
that where the Government grant is not directly relatable to the asset acquired, then
a pro-rata reduction of the amount of grant should be made in the same proportion
as such asset bears to all assets with reference to which the Government grant is so
received.
(iv) Asset is acquired outside India by an assessee, being a non-resident and such
asset is brought by him to India: Where an asset is acquired outside India by an
assessee, being a non-resident and such asset is brought by him to India and used
for the purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost of the asset to the assessee, as reduced by an
amount equal to the amount of depreciation calculated at the rate in force that would
have been allowable had the asset been used in India for the said purposes since
the date of its acquisition by the assessee [Explanation 11].

6 Now Central Excise Rules, 2002

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 3.52 DIRECT TAX LAWS

(v) Capital asset is acquired under a scheme for corporatization: Where any capital
asset is acquired under a scheme for corporatization of a recognised stock exchange
in India approved by the SEBI, the actual cost shall be deemed to be the amount which
would have been regarded as actual cost had there been no such corporatization
[Explanation 12].
Note: Under the scheme of corporatization, recognised stock exchange gets
converted into ‘Company’ from the status of being ‘Association of persons’ or ‘Body
of Individuals’.

(vi) Capital asset on which deduction is allowable under section 35AD: Explanation
13 to section 43(1) provides that the actual cost of any capital asset, on which
deduction has been allowed or is allowable to the assessee under section 35AD,
shall be nil.
This would be applicable in the case of transfer of asset by the assessee where –
(1) the assessee himself has claimed deduction under section 35AD; or
(2) the previous owner has claimed deduction under section 35AD. This would be
applicable where the capital asset is acquired by the assessee by way of –
(a) gift, will or an irrevocable trust;
(b) any distribution on liquidation of the company;
(c) any distribution of capital assets on total or partial partition of a HUF;
(d) any transfer of a capital asset by a holding company to its 100%
subsidiary company, being an Indian company;
(e) any transfer of a capital asset by a subsidiary company to its 100%
holding company, being an Indian company;
(f) any transfer of a capital asset by the amalgamating company to an
amalgamated company in a scheme of amalgamation, if the
amalgamated company is an Indian company;

(g) any transfer of a capital asset by the demerged company to the

resulting company in a scheme of demerger, if the resulting company
is an Indian company;
(h) any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in the

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.53

business carried on by the firm, or any transfer of a capital asset to a

company in the course of demutualization or corporatisation of a
recognized stock exchange in India as a result of which an association
of persons or body of individuals is succeeded by such company
(fulfilling the conditions specified);
(i) any transfer of a capital asset or intangible asset by a sole proprietary
concern to a company, where the sole proprietary concern is
succeeded by a company (fulfilling the conditions specified).

(j) any transfer of a capital asset or intangible asset by a private company

or unlisted public company to an LLP as a result of conversion of the
company into LLP (fulfilling the conditions prescribed).
However, where an asset, in respect of which deduction is claimed and allowed
under section 35AD is deemed to be the income of the assessee in accordance with
the provisions of section 35AD(7B) (on account of being used for a purpose other
than specified business under section 35AD), the actual cost of the asset to the
assessee shall be actual cost to assessee as reduced by the amount of
depreciation allowable had the asset been used for the purpose of business,
calculated at the rate in force, since the date of its acquisition [Proviso to
Explanation 13 to section 43(1)]
(9) Written down value [Section 43(6)]

(i) Assets acquired by the assessee during the previous year: In the case of assets
acquired by the assessee during the previous year, the written down value means
the actual cost to the assessee.
(ii) Assets acquired before the previous year: In the case of assets acquired before
the previous year, the written down value would be the actual cost to the assessee
less the aggregate of all deductions actually allowed in respect of depreciation.

For this purpose, any depreciation carried forward is deemed to be depreciation

actually allowed [Section 43(6)(c)(i) read with Explanation 3].
(iii) In case of any block of assets: The written down value of any block of assets shall
be worked out as under in accordance with section 43(6)(c):
(1) W.D.V. of the block of assets in immediately preceding previous year xxx
(P.Y. 2023-24)

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 3.54 DIRECT TAX LAWS

(2) Less: Depreciation actually allowed in respect of that block of assets xxx
in said preceding previous year (i.e., in P.Y. 2023-24)
Opening balance as on 1st April of the current P.Y. (i.e., on 1.4.2024) xxx
Increased by
(3) Actual cost of assets acquired during the previous year 2024-25, not xxx
being on account of acquisition of goodwill of a business or
profession
(4) Total (1) - (2) + (3) xxx
Reduced by
(5) Money receivable in respect of any asset falling within the block xxx
which is sold, discarded, demolished or destroyed during that
previous year. However, such amount cannot exceed the amount in
(4).
(6) In case of slump sale, actual cost of the asset (-) amount of xxx
depreciation that would have been allowable to the assessee for any
assessment year as if the asset was the only asset in the block.
However, such amount of reduction cannot exceed the WDV.
(7) W.D.V at the end of the year (as on 31.3.2025, on which depreciation xxx
is allowable) [(4) – (5) – (6)]
(8) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (7) above) xxx

(iv) Succession to business or profession otherwise than on death: When in the

case of a succession to business or profession otherwise than on death, an
assessment is made on the successor under section 170(2), the written down value
of an asset or block of assets shall be the amount which would have been taken as
the written down value if the assessment had been made directly on the person
succeeded to [Explanation 1 to section 43(6)].
Example: Tapan succeeded his father’s business due to retirement of his father. The
WDV of the assets in the hands of Tapan would be the WDV of the assets in the
hands of his father.
(v) Transfer of block of assets by a holding company to a subsidiary company or
vice versa or by amalgamating company to amalgamated company: Where in
any previous year any block of assets is transferred by a holding company to its
wholly owned Indian subsidiary company or by a subsidiary company to its 100%
holding company, being an Indian company or by an amalgamating company to an

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.55

amalgamated company, the latter being an Indian company, then the actual cost of
the block of assets in the case of transferee-company or amalgamated company as
the case may be, shall be the written down value of the block of assets as in the
case of the transferor company or amalgamating company, as the case may be, for
the immediately preceding year as reduced by depreciation actually allowed in
relation to the said previous year [Explanation 2 to section 43(6)].
(vi) Block of assets is transferred by demerged company to the resulting company:
Where in any previous year any asset forming part of a block of assets is transferred
by demerged company to the resulting company, the written down value of the block
of assets of the demerged company for the immediately preceding year shall be
reduced by the written down value of the assets transferred to the resulting company
[Explanation 2A to section 43(6)].
(vii) Block of assets is transferred by a demerged company to the resulting
company: Where any asset forming part of a block of assets is transferred by a
demerged company to the resulting company, the written down value of the block of
assets in the case of resulting company shall be the written down value of the
transferred assets of the demerged company immediately before the demerger
[Explanation 2B to section 43(6)].
(viii) Block of assets in the case of the successor LLP: The actual cost of the block of
assets in the case of the successor LLP on conversion of private or unlisted
company to a LLP and the conditions of clause 47(xiiib) are satisfied, shall be the
written down value of the block of assets as in the case of the predecessor company
on the date of conversion [Explanation 2C to section 43(6)].
(ix) Block of assets transferred by a recognised stock exchange in India to a
company under a scheme for corporatization: Where any asset forming part of a
block of assets is transferred in any previous year by a recognised stock exchange in
India to a company under a scheme for corporatisation approved by SEBI, the
written down value of the block shall be the written down value of the transferred
assets immediately before the transfer [Explanation 5 to section 43(6)].
(x) Depreciation provided in the books of account deemed to be depreciation
actually allowed: Section 32(1)(ii) provides that depreciation shall be allowed at the
prescribed percentage on the written down value (WDV) of any block of assets.
Section 43(6)(b) provides that written down value in the case of assets acquired

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 3.56 DIRECT TAX LAWS

before the previous year means the actual cost to the assessee less all depreciation
actually allowed to him under the Income-tax Act, 1961.

Persons who were exempt from tax were not required to compute their income under
the head “Profits and gains of business or profession”. However, when the
exemption is withdrawn subsequently, such persons became liable to income-tax
and hence, were required to compute their income for income-tax purposes. In this
regard, a question arises as to the basis on which depreciation is to be allowed
under the Income-tax Act, 1961 in respect of assets acquired during the years when
the person was exempt from tax.
Explanation 6 to section 43(6) provides that -
(a) the actual cost of an asset has to be adjusted by the amount attributable to
the revaluation of such asset, if any, in the books of account;
(b) the total amount of depreciation on such asset provided in the books of
account of the assessee in respect of such previous year or years preceding
the previous year relevant to the assessment year under consideration shall
be deemed to be the depreciation actually allowed under the Income-tax Act,
1961 for the purposes of section 43(6);
(c) the depreciation actually allowed as above has to be adjusted by the amount
of depreciation attributable to such revaluation.
(xi) Composite Income: Explanation 7 provides that in cases of ‘composite income’, for
the purpose of computing written down value of assets acquired before the previous
year, the total amount of depreciation shall be computed as if the entire composite
income of the assessee is chargeable under the head “Profits and Gains of business
or profession”. The depreciation so computed shall be deemed to have been
“actually allowed” to the assessee.

Rule 8 prescribes the taxability of income from the manufacture of tea. Under the
said rule, income derived from the sale of tea grown and manufactured by seller
shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax.
Example: If the turnover is, say, ` 20 lakh, the depreciation ` 1 lakh and other
expenses ` 4 lakh, then, the income would be ` 15 lakh. Business income would be
` 6 lakh (being 40% of ` 15 lakh). In this case, ` 1 lakh, being the amount of
depreciation would be deemed to have been actually allowed.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.57

The WDV is required to be computed by deducting the full depreciation attributable

to composite income i.e. ` 1 lakh. Explanation 7 clarifies this legislative intent.

(xii) Cases where the Written Down Value reduced to Nil: The written down value of
any block of assets, may be reduced to nil for any of the following reasons:

(a) The moneys receivable by the assessee in regard to the assets sold or
otherwise transferred during the previous year together with the amount of
scrap value may exceed the written down value at the beginning of the year
as increased by the actual cost of any new asset acquired, or
(b) All the assets in the relevant block may be transferred during the year.
(10) Carry forward and set off of depreciation [Section 32(2)]
Section 32(2) provides for carry forward of unabsorbed depreciation. Where, in any
previous year the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, the unabsorbed depreciation shall be added to the depreciation
allowance for the following previous year and shall be deemed to be part of that allowance.
If no depreciation allowance is available for that previous year, the unabsorbed depreciation
of the earlier previous year shall become the depreciation allowance of that year. The effect
of this provision is that the unabsorbed depreciation shall be carried forward indefinitely till
it is fully set off.
Example: Profits and gains from business or profession of Mr. X for P.Y. 2023-24, before
charging depreciation of ` 20 lakhs u/s 32, was ` 16 lakhs. In such a case, after setting off
the depreciation, the unabsorbed depreciation of P.Y. 2023-24 would be ` 4 lakhs. If profits
and gains from business or profession for P.Y. 2024-25 before depreciation is ` 11 lakhs
and depreciation allowance u/s 32 for the said previous year is ` 5 lakhs, then, the
unabsorbed depreciation of ` 4 lakhs for the P.Y. 2023-24 would be added to the
depreciation allowance of ` 5 lakhs. Consequently, ` 9 lakhs would be allowed to be set-off
against the profits of ` 11 lakhs and the taxable profits for P.Y. 2024-25 would be ` 2 lakhs.
Order of set-off
However, in the order of set-off of losses under different heads of income, effect shall first
be given to current year depreciation then brought forward business losses and only then to
unabsorbed depreciation.
The provisions in effect are as follows:

• Since the unabsorbed depreciation forms part of the current year’s depreciation, it

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 3.58 DIRECT TAX LAWS

can be set off against any other head of income except “Salaries”.
• The unabsorbed depreciation can be carried forward for indefinite number of
previous years.
• Set off will be allowed even if the same business to which it relates is no longer in
existence in the year in which the set off takes place.

Current depreciation to be deducted first - The Supreme Court, in CIT v. Mother India
Refrigeration (P.) Ltd. [1985] 23 Taxman 8, has categorically held that current depreciation
must be deducted first before deducting the unabsorbed carried forward business losses of
the earlier years in giving set off while computing the total income of any particular year.

ORDER OF SET-OFF

Current Year Brought forward Unabsorbed

Depreciation Business Loss depreciation

ILLUSTRATION 4
Lights and Power Ltd. engaged in the business of generation of power, furnishes the
following particulars pertaining to P.Y. 2024-25. Compute the depreciation allowable under
section 32 for A.Y.2025-26 and the opening balance of written down value of the block of
assets as on 01.04.2025, while computing his income under the head “Profits and gains of
business or profession”. The company has opted for the depreciation allowance on the
basis of written down value. Assume that all the assets were purchased by way of account
payee cheque and that the company has not opted for the special tax regimes under
section 115BAA or under section 115BAB.
Particulars (` )
1. Opening Written down value of Plant and Machinery (15% block) as 5,78,000
on 01.04.2024 (Purchase value ` 8,00,000) [WDV for P.Y. 2023-24
less depreciation for that year]
2. Purchase of second hand machinery (15% block) on 29.12.2024 for 2,00,000
business purpose
3. Machinery Y (15% block) purchased and installed on 12.07.2024 for 8,00,000
the purpose of power generation

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.59

4. Acquired and installed for use a new air pollution control equipment 2,50,000
on 31.7.2024
5. New air conditioner purchased and installed in office premises on 3,00,000
8.9.2024
6. New machinery Z (15% block) acquired and installed on 23.11.2024 3,25,000
for the purpose of generation of power
7. Sale value of an old machinery X, sold during the year (Purchase 3,10,000
value ` 4,80,000, WDV as on 01.04.2024 ` 3,46,800)

SOLUTION
Computation of depreciation allowance under section 32 for the A.Y. 2025-26
Plant and Plant and
Particulars Machinery Machinery
(15%) (40%)
(`) (`) (`)
Opening WDV as on 01.04.2024 5,78,000 -
Add: Plant and Machinery acquired during the
year
- Second hand machinery 2,00,000
- Machinery Y 8,00,000
- Air conditioner for office 3,00,000
- Machinery Z 3,25,000 16,25,000 -
- Air pollution control equipment - 2,50,000
22,03,000 2,50,000
Less: Asset sold during the year 3,10,000 Nil
Written down value as on 31.3.2025 before 18,93,000 2,50,000
charging depreciation
Normal depreciation
40% on air pollution control equipment (` 2,50,000 - 1,00,000
x 40%)
Depreciation on plant and machinery put to
use for less than 180 days@ 7.5% (i.e., 50% of
15%)
- Second hand machinery (` 2,00,000 × 7.5%) 15,000
- Machinery Z (` 3,25,000 × 7.5%) 24,375 39,375
15% on the balance WDV being put to use for 2,05,200
more than 180 days (` 13,68,000 × 15%)

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Additional depreciation
- Machinery Y (` 8,00,000 × 20%) 1,60,000
- Machinery Z (` 3,25,000 × 10%, being 50% of 32,500 1,92,500 -
20%)
- Air pollution control equipment (` 2,50,000× - 50,000
20%)
Total depreciation 4,37,075 1,50,000
WDV as on 1.4.2025 [WDV of P.Y. 2024-25 less 14,55,925 1,00,000
depreciation for that year]

Notes:
(i) Power generation equipments qualify for claiming additional depreciation in respect
of new plant and machinery.
(ii) Additional depreciation is not allowed in respect of second hand machinery and air
conditioner installed in office premises.

(iii) The balance 50% additional depreciation in respect of Machinery Z of ` 32,500

(10% x ` 3,25,000) can be claimed as deduction in the subsequent financial year
i.e., F.Y. 2025-26.
(11) Building, machinery, plant and furniture not exclusively used for business purpose
[Section 38(2)]
Where any building, plant and machinery, furniture is not exclusively used for the purposes
of business or profession, the deduction on account of expenses on account of current
repairs to the premises, insurance premium of the premises, current repairs and insurance
premium of machinery, plant and furniture and depreciation in respect of these assets shall
be restricted to a fair proportionate part thereof, which the Assessing Officer may determine
having regard to the user of such asset for the purposes of the business or profession.
(12) Balancing Charge

Section 41(2) provides for the manner of calculation of the amount which shall be chargeable
to income-tax as income of the business of the previous year in which the moneys payable for
the building, machinery, plant or furniture on which depreciation has been claimed under
section 32(1)(i), i.e., in the case of power undertakings, is sold, discarded, demolished or
destroyed. The balancing charge will be the amount by which the moneys payable in respect
of such building, machinery, plant or furniture, together with the amount of scrap value, if any,
exceeds the written down value. However, the amount of balancing charge should not exceed

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.61

the difference between the actual cost and the WDV. The tax shall be levied in the year in
which the moneys payable become due.

The Explanation below section 41(2) makes it clear that where the moneys payable in
respect of the building, machinery, plant or furniture referred to in section 41(2) become due
in a previous year in which the business, for the purpose of which the building, machinery,
plant or furniture was being used, is no longer in existence, these provisions will apply as if
the business is in existence in that previous year.
Example: Mahapower Ltd. purchased an asset on 20.7.2020. The actual cost of the asset
was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual cost of the
asset. WDV of the asset as on 1.4.2024 is ` 80 lakhs. On 15.5.2024, Mahapower Ltd. sold
the asset for ` 90 lakhs. The balancing charge of ` 10 lakhs (` 90 lakhs - ` 80 lakhs) would
be taxable as income u/s 41(2).
(4) Tea Development Account/ Coffee Development Account/ Rubber Development
Account [Section 33AB]
(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of growing and
manufacturing tea or coffee or rubber in India.
(ii) Quantum of deduction: It provides that where the assessee has before the expiry of six
months from the end of the previous year or before the due date of furnishing the return of
income, whichever is earlier,
(a) deposited with a National Bank any amount in a special account maintained by the
assessee with that Bank in accordance with a scheme approved by Tea Board or
Coffee Board or Rubber Board, or
(b) deposited any amount in an account to be known as Deposit Account opened by the
assessee in accordance with the scheme framed by the Tea Board or Coffee Board
or Rubber Board, as the case may be, (hereinafter referred to as the deposit
scheme) with the previous approval of the Central Government,

the assessee shall be allowed a deduction of:

(a) A sum equal to the aggregate of the deposits made or
(b) 40% of the profits of such business (as computed under the head ‘Profits and gains
of business or profession before making any deduction under this section),
whichever is less.

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The above deduction will be allowed before the setting off of brought-forward loss under
section 72.

(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where

the assessee is a firm or any association of persons or any body of individuals, the
deduction under this section shall not be allowed in the computation of the income of any
partner or member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Deposit Account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other
previous year.
(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1), and the assessee furnishes by that date the
report of such audit in the prescribed form duly signed and verified by such accountant.
Particulars Due date of filing of return Specified Date
Assessees (other 31st October of the relevant 30th September of the relevant
than a company) A.Y. A.Y.
subject to tax audit For A.Y.2025-26, on or before For A.Y.2025-26, on or before
31st October, 2025 30th September, 2025

However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount from special account or deposit account: Any
amount standing to the credit of the assessee in the special account or deposit account
cannot be withdrawn except for the purposes specified in the scheme, or, as the case may
be, in the deposit scheme.
The above amount can also be withdrawn in the following circumstances:

(a) Closure of business

(b) Death of an assessee
(c) Partition of HUF

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(d) Dissolution of a firm

(e) Liquidation of a company.
(vii) Amount withdrawn and utilised for purchase of specified assets would be chargeable
to tax as business income: Where the sum standing to the credit of the assessee in the
Special account or in the Deposit account is released by the National Bank or is withdrawn
by the assessee from the Deposit account and is utilised for the purchase of:
(a) Any machinery or plant installed in any office premises or residential accommodation
including a guest house.
(b) Any office appliances (other than computers)
(c) Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;
(d) Any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
the whole of such amount so utilised will be treated as taxable profits of that year and taxed
accordingly.
(viii) Amount withdrawn on the closure of business or dissolution of a firm: Where any
amount is withdrawn by the assessee from the special account or deposit account during
any previous year on the closure of his business or dissolution of a firm, the whole of such
withdrawal shall be deemed to be the profits and gains of business of that previous year
and shall be chargeable to tax as the income of that previous year, as if the business had
not closed or the firm had not been dissolved.
(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the deposit
account is utilised by the assessee for the purpose of any expenditure in connection with
such business in accordance with the scheme or deposit scheme, such expenditure shall
not be allowed in computing the business income.
(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the
special account which is released during any previous year by the National Bank or is
withdrawn by the assessee from the Deposit Account, for being utilised by the assessee for

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the purposes of such business and is not utilized in accordance with the scheme or deposit
scheme in that year, the unutilised amount shall be deemed to be profits and gains and
chargeable to income-tax as the income of that previous year.
However, where such amount is released during the previous year at the closing of the
account on the death of the assessee, partition of a HUF or liquidation of a company, the
above restriction will not apply.
(xi) Consequences of sale or transfer: Where an asset acquired in accordance with the
scheme or deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which it was acquired, such portion of the cost relatable to the deduction
allowed under section 33AB(1) shall be deemed to be profits and gains of business or
profession of the previous year in which the asset is sold or transferred and shall be
chargeable to income-tax as the income of that previous year.
Exceptions: Such restriction will not apply in the following cases:

(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.
(b) Where the sale or transfer is made in connection with the succession of a firm by a
company in the business or profession carried on by the firm as a result of which the
firm sells or otherwise transfers any asset to the company and the scheme or deposit
scheme continues to apply to the company in the same manner as applicable to the
firm.
Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.
(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.
(xiii) Meaning of National Bank: “National Bank” means the National Bank for Agricultural and
Rural Development (NABARD).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.65

(5) Site Restoration Fund [Section 33ABA]

(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of prospecting for, or
extraction or production, of petroleum or natural gas or both in India and in relation to which
the Central Government has entered into an agreement with such assessee for such
business.
(ii) Quantum of deduction: It provides that where the assessee has before the end of the
previous year -
(a) deposited any sum with the State Bank of India in a special account maintained by
the assessee with that bank in accordance with the scheme approved in this behalf
by the Government of India in the Ministry of Petroleum and Natural Gas, or
(b) deposited any amount in a Site Restoration Account opened by the assessee for the
purposes specified in a scheme framed by the said Ministry (hereinafter referred to
as the deposit scheme),
the assessee shall be entitled to a deduction of —
- a sum equal to the sum deposited; or
- a sum equal to 20% of its profits (as computed under the head “Profits and gains of
business or profession” before making any deduction under this section),
whichever is less.
For this purpose, it is provided that any amount credited in the special account or Site
Restoration Account by way of interest shall also be deemed to be a deposit.
The above deduction will be allowed before the setting off of brought-forward loss under
section 72.
(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where
the assessee is a firm or any association of persons or anybody of individuals the deduction
under this section shall not be allowed in the computation of the income of any partner or
member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Site Restoration Account has been
allowed in any previous year, no deduction shall be allowed in respect of such amount in
any other previous year.

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(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1) and the assessee furnishes by that date the report
of such audit in the prescribed form duly signed and verified by such accountant.
However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount - Any amount standing to the credit in the special
account or the Site Restoration Account will not be allowed to be withdrawn except for the
purposes specified in the scheme or in the deposit scheme.
(vii) No deduction: No deduction shall be allowed in respect of any amount utilised for the
purchase of the following items:

(a) any machinery or plant to be installed in any office premises or residential

accommodation, including any accommodation in the nature of a guest house;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
(viii) Withdrawal on closure of account: Where any amount standing to the credit of the
assessee in the special account or in the Site Restoration Account is withdrawn on closure
of the account during any previous year by the assessee, the amount so withdrawn from the
account as reduced by the amount, if any, payable to the Central Government by way of
profit or production share as provided in the agreement referred to in section 42, shall be
deemed to be the profits and gains of business or profession of that previous year and shall
accordingly be chargeable to income-tax as the income of that previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.67

Where any amount is withdrawn on closure of the account in a previous year in which the
business carried on by the assessee in no longer in existence, these provisions will apply
as if the business is in existence in that previous year.

(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the Site
Restoration Account is utilised by the assessee for the purpose of any expenditure in
connection with such business in accordance with the scheme or deposit scheme, such
expenditure shall not be allowed in computing the business income.

(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the

special account or Site Restoration Account is released in the previous year by the State
Bank of India or is withdrawn from the Site Restoration Account for being utilised by the
assessee for the purposes of such business and is not utilised in accordance with the
scheme or the deposit scheme in that year, the unutilised amount shall be deemed to be
profits and gains and chargeable to income-tax as the income of that previous year.

(xi) Consequences of sale or transfer - Where any asset acquired in accordance with the
scheme or the deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which such assets were acquired, such part of the cost of such asset as is
relatable to the deduction allowed under section 33ABA(1) shall be deemed to be the profits
and gains of business or profession of the previous year in which the asset is sold or
otherwise transferred and shall accordingly be chargeable to income-tax as the income of
that previous year.

Exceptions: This restriction will not apply in the following cases:

(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.

(b) Where the sale or transfer of the asset is made in connection with the succession of
a firm by a company in the business or profession carried on by the firm as a result
of which the firm sells or otherwise transfers to the company any asset and the
scheme or the deposit scheme continues to apply to the company in the manner
applicable to the firm.

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Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.

(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.

(6) Expenditure on Scientific Research [Section 35]

This section allows a deduction in respect of any expenditure on scientific research related to the
business of assessee.
Meaning of certain terms:

Term Meaning

Scientific research Activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries
[Section 43(4)(i)].

Scientific research Expenditure incurred on scientific research would include all

expenditure expenditure incurred for the prosecution or the provision of facilities for
the prosecution of scientific research but does not include any
expenditure incurred in the acquisition of rights in or arising out of
scientific research.

Scientific research Scientific research related to a business or a class of business would

related to a business include
or a class of
(i) any scientific research which may lead to or facilitate an extension
business
of that business or all the business of that class, as the case may
be;
(ii) any scientific research of a medical nature which has a special
relation to the welfare of the workers employed in that business or
all the business of that class, as the case may be.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.69

The deduction allowable under this section consists of –

by a company engaged in business of

Bio-technology or in any business of
manufacture or production of any article, 100% of expenditure incurred
not being article or thing specified in the (other than expenditure on
Expenditure on Scientific research

list of the Eleventh Schedule on an land & building)

approved in-house research and
development facility
100% of the
Revenue Expenditure expenditure
Incurred by assessee on
scientific research related to incurred
business (other than
Capital Expenditure expenditure
on land)
Approved Indian company for
scientific research
100% of
Notified approved University/ college/ sum
Research association/ other institution
for social science or statistical
paid
research
Paid to
Notified approved University/ college/
Research association/ other institution 100% of
for scientific research sum
paid
Approved National
Laboratory/university/IIT/ specified person
for scientific research undertaken under an
approved programme

(I) Incurred by assessee:

(i) Revenue Expenditure: Any revenue expenditure incurred by the assessee on
scientific research related to his business would be allowed as deduction in the
year in which it was incurred. Expenditure incurred within 3 years immediately
preceding the commencement of the business on payment of salary to research
personnel engaged in scientific research related to his business carried on by the
taxpayer or on purchase of material inputs for such scientific research will be allowed
as deduction in the year in which the business is commenced. The deduction will be
limited to the amount certified by the prescribed authority [Section 35(1)(i)]

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(ii) Capital Expenditure: Any expenditure of a capital nature on scientific research

related to the business carried on by the assessee would be deductible in full in the
previous year in which it is incurred [Section 35(1)(iv)].
(a) Capital expenditure prior to commencement of business
The Explanation 1 to section 35(2)(ia) specifically provides that where any
capital expenditure has been incurred prior to the commencement of the
business, the aggregate of the expenditure so incurred within the three years
immediately preceding the commencement of the business shall be deemed
to have been incurred in the previous year in which the business is
commenced and will rank for deduction as expenditure for scientific research
incurred during the previous year.
Expenditure on land disallowed
No deduction will be allowed in respect of capital expenditure incurred on the
acquisition of any land whether the land is acquired as such or as part of any
property.
(b) Carry forward of deficiency
Capital expenditure incurred on scientific research which cannot be absorbed
by the business profits of the relevant previous year can be carried forward to
the immediately succeeding previous year and shall be treated as the
allowance for that year. In effect, this means that there is no time bar on the
period of carry forward. It shall be accordingly allowable for that previous year
against any head of income other than salaries [Section 35(4)].
(c) No depreciation
Section 35(2)(iv) clarifies that no depreciation will be admissible on any
capital asset represented by expenditure which has been allowed as a
deduction under section 35 whether in the year in which deduction under
section 35 was allowed or in any other previous year.
(d) Sale of asset representing expenditure of capital nature on scientific
research

Section 41, inter alia, seeks to tax the profits arising on the sale of an asset
representing expenditure of a capital nature on scientific research.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.71

Where the asset representing expenditure of a capital nature on scientific

research is sold without having been used for other purposes, the provisions
of section 41(3) would be attracted. If the proceeds of sale together with the
total amount of the deductions made under section 35(1)(iv) exceed the
amount of capital expenditure, the excess or the amount of deduction so
made, whichever is less, will be charged to tax as income of the business of
the previous year in which the sale took place.
In simple words, since amount of deduction under section 35(1)(iv) is equal to
the amount of expenditure, lower of amount of sale proceeds or deduction
allowed under section 35(1)(iv) will be the charged to tax as income of the
business in the previous year in which the asset is sold.

Example - If capital expenditure incurred for scientific research in P.Y. 2023-

24 is ` 3 lakhs, then deduction u/s 35(1)(iv) would have been ` 3 lakhs in that
P.Y. If the asset is sold for ` 4 lakhs in P.Y.2024-25, ` 3 lakhs, being lower of
sale proceeds of ` 4 lakhs and deduction u/s 35(1)(iv) of ` 3 lakhs, would be
charged to tax u/s 41(3) in the P.Y. 2024-25, being the year of sale.

Note - Deduction under section 35(1)(i) and 35(1)(iv) read with section 35(2) would be
available to an assessee under the special concessional tax regimes under section
115BAA/115BAB/115BAC/115BAD/115BAE as well as the regular provisions of the Act.

(II) Amount contributed or paid to:

(i) Notified approved research association, university, college or other institution:
An amount equal to any sum paid to -
- a research association which has as its object, the undertaking of scientific
research or
- to a university, college or other institution to be used for scientific research.
provided that such university, college, institution or association is approved for this
purpose and notified by the Central Government. [Section 35(1)(ii)]
The payments so made to such institutions would be allowable irrespective of whether:
(a) the field of scientific research is related to the assessee’s business or not,
and
(b) the payment is of a revenue nature or of a capital nature.

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Note - Deduction u/s 35(1)(ii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(ii) would not be
allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(ii) would be
allowable only if they pay tax under the normal provisions of the Act.

(ii) Approved Indian company for scientific research: A sum equal to any amount
paid to a company to be used by it for scientific research [Section 35(1)(iia)]
However, such deduction would be available only if;
- the company is registered in India and
- has as its main object the scientific research and development.
Further, it should be approved by the prescribed authority and should fulfill the other
prescribed conditions.

Note - Deduction u/s 35(1)(iia) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.

In case of companies and co-operative societies, deduction u/s 35(1)(iia) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iia) would be
allowable only if they pay tax under the normal provisions of the Act.

(iii) Approved notified research association, university, college or other institution:

A sum equal to any amount paid to
- a research association which has as its object the undertaking of research in
social science or statistical research or
- a university, college or other institution to be used for research in any social
science or statistical research

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.73

provided that they are approved for this purpose and notified by the Central
Government. [Section 35(1)(iii)]

Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum to a research association or university or
college or other institution for scientific research or research in a social science or
statistical research or to a company for scientific research, shall not be denied
merely on the ground that subsequent to payment of such sum by the assessee, the
approval granted to any of the aforesaid entities is withdrawn.

Note - Deduction u/s 35(1)(iii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(iii) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iii) would be
allowable only if they pay tax under the normal provisions of the Act.

Approval -
The research association, university, college or other institution for scientific
research or research in a social science or statistical research has to make an
application in the prescribed form and manner to the Central Government for the
purpose of grant of approval, or continuance thereof.
The Central Government before granting approval, call for such documents or
information as it thinks necessary in order to satisfy itself about the genuineness of
the activities of the research association, university, college or other institution and
that Government may also make such inquiries as it may deem necessary.
Every notification in respect of research association, university, college or other
institution or Indian company for scientific research issued on or before 1.4.2021
shall be deemed to have been withdrawn unless such
association/institution/university/college/company makes an intimation to the
prescribed income-tax authority in the prescribed form. Such intimation has to be
made within 3 months from 1.4.2021. Such notification shall be valid for a period of 5

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consecutive assessment years beginning with the A.Y. 2022-23 or thereafter subject
to the intimation made by the association/institution/university/college/company.

However, where any notification is issued by the Central Government after

29.9.2020, it shall, at any time, have effect for such assessment year(s), but not
exceeding 5 assessment years as may be specified in the notification.
Requirements –
Research association, university, college or other institution or Indian company for
scientific research has to
(i) prepare prescribed statement for prescribed period and deliver or cause to be
delivered such statement to the prescribed income-tax authority or the person
authorized by such authority in such form, verified in such manner, setting
forth such particulars and within such prescribed time.
Such association/institution/university/college/company may also deliver to
the prescribed authority a correction statement for rectification of any mistake
or to add, delete or update the information furnished in the statement
delivered in the prescribed form and verified in prescribed manner.
(ii) furnish to the donor, a certificate specifying the amount of donation in the
such manner, containing such particulars and within such time from the date
of receipt of sum, as may be prescribed.
The deduction with respect to the donation given by the assessee to any research
association, university, college or other institution referred to in section 35(1)(ii)/(iii)
or the company referred to in section 35(1)(iia) would not be allowed unless such
research association, university, college or other institution or company complies
with the above requirements stipulated under section 35(1A) .
(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]: Section 35(2AA)
provides that any sum paid by an assessee to a National Laboratory or University or
Indian Institute of Technology or a specified person for carrying out programmes of
scientific research approved by the prescribed authority will be eligible for deduction
of the amount so paid.
No other deduction under the Act: No contribution which qualifies for deduction
under this clause will be entitled to deduction under any other provision of the Act.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.75

Further, it has been clarified that the deduction to which an assessee is entitled on
account of payment of any sum by him to an approved National Laboratory,
University, Indian Institute of Technology or a specified person for the approved
programme shall not be denied to the donor-assessee merely on the ground that
after payment of such sum by him, the approval granted to any of the aforesaid
donee-entities or the programme has been withdrawn.
Term Meaning
Specified person A person who is approved by the prescribed authority

Note - Deduction u/s 35(2AA) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(2AA) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(2AA) would be
allowable only if they pay tax under the normal provisions of the Act.

(III) Company engaged in Business of bio-technology or manufacturing of article or thing

etc. [Section 35(2AB)]
Where a company engaged in the business of bio-technology or in any business of
manufacture or production of any article or thing, not being an article or thing specified
in the list of the Eleventh Schedule [The exclusion list comprises of beer, wine and other
alcoholic spirits, tobacco and tobacco preparations, cosmetic and toilet preparations, tooth
paste, dental cream, tooth powder and soap, confectionery and chocolates, office machines
and apparatus, steel furniture etc] incurs any expenditure on scientific research on in-house
research and development facility as approved by the prescribed authority, a deduction of a
sum equal to the expenditure will be allowed. Such expenditure should not be in the
nature of cost of any land or building.

“Expenditure on scientific research” in relation to drugs and pharmaceuticals shall

include expenditure incurred on clinical drug trial, obtaining approval from any state
regulatory authority, and filing an application for a patent under the Patents Act, 1970.

No other deduction under the Act: No deduction will be allowed in respect of the above
expenditure under any other provision of the Income-tax Act, 1961.

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Agreement with the prescribed authority: No company will be entitled to this deduction
unless it enters into an agreement with the prescribed authority for co-operation in such
research and development facility and fulfills the prescribed conditions with regard to
maintenance and audit of accounts and also furnishes prescribed reports in the prescribed
manner.
Approval of the Authority: The prescribed authority shall submit its report in relation to
the approval of the said facility to the Principal Chief Commissioner or the Chief
Commissioner or Principal Director General Director General in such form and within such
time as may be prescribed.

Note - In case of companies, deduction u/s 35(2AB) would not be allowable if they opt for
the special provisions u/s 115BAA/115BAB. In other words, deduction u/s 35(2AB) would be
allowable only if they pay tax under the normal provisions of the Act.

ILLUSTRATION 5
A Ltd., engaged in the business of manufacturing, furnishes the following particulars for the
P.Y.2024-25. Compute the deduction allowable under section 35 for A.Y.2025-26, while computing
its income under the head “Profits and gains of business or profession”, assuming that it does not
opt for special tax regime under section 115BAA or under section 115BAB.

Particulars `
1. Amount paid to notified approved Indian Institute of Science, Bangalore, for 1,00,000
scientific research
2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
3. Amount paid to X Ltd., a company registered in India which has as its main 4,00,000
object scientific research and development, as is approved by the prescribed
authority
4. Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) 7,50,000
on scientific research

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.77

SOLUTION
Computation of deduction under section 35 for the A.Y.2025-26
Particulars ` Section % of Amount of
deduction deduction
(`)
Payment for scientific research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-house
research and development facility
Revenue expenditure 3,00,000 35(2AB)) 100% 3,00,000
Capital expenditure (excluding cost
of acquisition of land ` 5,00,000) 2,50,000 35(2AB) 100% 2,50,000
Deduction allowable under section 35 13,00,000

(7) Expenditure for obtaining right to use spectrum for telecommunication services
[Section 35ABA]
(i) Section 32 allows depreciation in respect of assets including certain intangible assets.
Section 35ABB provides for amortisation of licence fee in case of telecommunication
service.
(ii) The Government has introduced spectrum fee for auction of airwaves.
(iii) In order to resolve the uncertainty in tax treatment of payments in respect of spectrum i.e.,
whether spectrum is an intangible asset and the spectrum fees paid is eligible for
depreciation under section 32 or whether it is in the nature of a 'licence to operate
telecommunication business' and eligible for deduction under section 35ABB, section
35ABA provides for tax treatment of spectrum fee.
(iv) Tax treatment of spectrum fee:
Transaction Manner of deduction
(1) Acquisition of right to use spectrum
Any capital Appropriate fraction of the amount of such expenditure [1/
expenditure total number of relevant previous years]
incurred for

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acquisition of any Meaning of relevant previous years:

right to use
spectrum for Case Meaning
telecommunication Where the spectrum The previous years beginning with
services either fee is actually paid the P.Y. in which such business
before the before the commenced and the subsequent
commencement of commencement of P.Y. or P.Y.s during which the
the business or business to operate spectrum, for which the fee is paid,
thereafter at any telecommunication shall be in force.
time during any services
previous year and
for which payment In any other case The previous years beginning with
has actually been the P.Y. in which the spectrum fee is
made to obtain a actually paid and the subsequent
right to use P.Y. or years during which the
spectrum. spectrum, for which the fee is paid,
shall be in force.
Meaning of ‘payment has actually been made’.
Payment has actually been made means actual payment of expenditure irrespective
of the previous year in which the liability for expenditure was incurred according to
the method of accounting regularly employed by the assessee or payable in the
prescribed manner.
Rule 6A substantiates the meaning of the phrase ‘payment has actually been
made’
(a) In a case where full upfront payment of spectrum fee has been made:
Where an assessee has opted and been allowed by the Department of
Telecommunications, Government of India to make full upfront payment of
spectrum fee, the actual payment of expenditure irrespective of the previous
year in which the liability for the expenditure was incurred according to the
method of accounting regularly employed by the assessee;
(b) In a case where deferred payment is made:
Where an assessee has opted and been allowed by the Department of
Telecommunications, Government of India to make deferred payment, the
amount which would have been payable by the assessee had he opted for full
upfront payment of spectrum fee irrespective of the previous year in which the
liability for the expenditure was incurred according to the method of accounting
regularly employed by the assessee.
However, in case of deferred payment referred to in clause (b) above, where there is
failure by the assessee to comply with any of the conditions specified by the scheme
of the Department of Telecommunications, Government of India and Department of
Telecommunications terminates the allotment or assignment of spectrum, the
Assessing Officer shall, in exercise of power vested in him under section 35ABA(3),

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.79

re-compute the total income of the assessee for the previous year in which the
deduction has been claimed and granted to him by deeming that,-
(i) the total amount of spectrum fee paid up to the date of termination is the
amount of “payment actually been made”;
(ii) the spectrum was in force up to the date of its termination for the purpose of
computing “relevant previous year”.
(2) Transfer of the spectrum
Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year in
transfer of which the spectrum has been transferred.
spectrum are less Amount of deduction = Expenditure remain unallowed –
than the Sale proceeds
expenditure
incurred remaining
unallowed
Case 2: Where the The excess amount or expenditure allowed till date (i.e.,
proceeds of the difference between expenditure incurred to obtain spectrum
transfer of whole and the expenditure remain unallowed), whichever is less,
or any part of the shall be chargeable to tax as profits and gains of business in
spectrum exceed the previous year in which the spectrum has been transferred.
the amount of Taxable as profits and gains from business and
expenditure profession =
remaining
unallowed Sale proceeds – Expenditure remain unallowed
OR Whichever
is less
Expenditure allowed till date
If the spectrum is transferred in a previous year in which the
business is no longer in existence, the taxability would arise in
the above manner as though the business is in existence in
that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which spectrum is transferred or in respect of
transfer of whole any subsequent previous year or years.
or any part of the Amount of deduction = NIL
spectrum are not
less than the
amount of
expenditure
incurred remaining
unallowed.

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Case 4: Where a Unallowed expenditure would be amortised in the following

part of the manner –
spectrum is (i) subtracting the proceeds of transfer from the expenditure
transferred and remaining unallowed; and
the case is not
(ii) dividing the remainder by the number of relevant
covered under
previous years which have not expired at the beginning
Case 2 above i.e.,
of the previous year during which the spectrum is
the proceeds of
transferred.
transfer of a part
of the spectrum Unallowed expenditure − Sale proceeds
Amount of deduction =
does not exceed Unexpired number of relevant P.Y.s
the amount of
expenditure
remaining
unallowed
(3) Transfer of spectrum in a scheme of amalgamation
If the The provisions of section 35ABA will apply to amalgamated
amalgamating company as they would have applied to amalgamating
company sells or company as if the latter has not transferred the spectrum.
transfers the The tax treatment in cases 1, 2 & 3 given in (2) above will not
spectrum to the apply to the amalgamating company.
amalgamated
company, being an
Indian company
under the scheme
of amalgamation
(4) Transfer of spectrum in a scheme of demerger
If the demerged The provisions of section 35ABA will apply to resulting
company sells or company as they would have applied to demerged company
transfers the as if the latter has not transferred the spectrum.
spectrum to the The tax treatment in cases 1, 2 & 3 given in (2) above will not
resulting company, apply to the demerged company.
being an Indian
company under
the scheme of
demerger

(v) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.81

(vi) Consequences of failure to comply with the conditions after grant of deduction:
Where, in a previous year, any deduction has been claimed and granted to an assessee
and subsequently, there is failure to comply with any of the provisions of this section, then –
(1) the deduction shall be deemed to have been wrongly allowed;
(2) the Assessing Officer may recompute the total income of the assessee for the said
previous year and make the necessary rectification. This is notwithstanding anything
contained in the Income-tax Act, 1961;
(3) the provisions under section 154 for rectification of mistake apparent from the record
would apply. The period of four years would be reckoned from the end of the
previous year in which the failure to comply with the provisions of section 35ABA
takes place.
(8) Expenditure for obtaining licence to operate telecommunication services
[Section 35ABB]
(i) Tax treatment of licence fee:
Transaction Manner of deduction
(1) Acquisition of right to operate telecommunication services
Any capital Appropriate fraction of the amount of such expenditure [1/
expenditure incurred total number of relevant previous years]
for acquisition of any Meaning of relevant previous years:
right to operate
telecommunication Case Meaning
services either before Where the licence The previous years beginning with
the commencement fee is actually paid the P.Y. in which such business
of the business or before the commenced and the subsequent
thereafter at any time commencement of P.Y. or P.Y.s during which the
during any previous business to operate licence, for which the fee is paid,
year and for which telecommunication shall be in force.
payment has services
actually been made In any other case The previous years beginning with
(actual payment of the P.Y. in which the licence fee is
expenditure) to actually paid and the subsequent
obtain a licence. P.Y. or years during which the
licence, for which the fee is paid,
shall be in force.
Payment has actually been made means the actual payment of expenditure
irrespective of the previous year in which the liability for the expenditure was
incurred according to the method of accounting regularly employed by the assessee.

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(2) Transfer of the licence

Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year in
transfer of licence which the licence has been transferred.
are less than the
expenditure incurred Amount of deduction = Expenditure remain unallowed –
remaining unallowed Sale proceeds
Case 2: Where the The excess amount shall be chargeable to tax as profits
proceeds of the and gains of business in the previous year in which the
transfer of whole or licence has been transferred. However, the excess should
any part of the not exceed the difference between the expenditure incurred
licence exceed the to obtain the licence and the amount of expenditure
amount of remaining unallowed.
expenditure Taxable as profits and gains from business and
remaining unallowed profession =
Sale proceeds – Expenditure remain unallowed
Whichever is
OR
less
Expenditure allowed till date
If the licence is transferred in a previous year in which the
business is no longer in existence, the taxability would arise
in the above manner as if the business is in existence in
that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which licence is transferred or in respect of
transfer of whole or any subsequent previous year or years.
any part of the Amount of deduction = NIL
licence are not less
than the amount of
expenditure incurred
remaining unallowed.
Case 4: Where a part Unallowed expenditure would be amortised in the following
of the licence is manner –
transferred and the (i) subtracting the proceeds of transfer from the
case is not covered expenditure remaining unallowed; and
under Case 2 above (ii) dividing the remainder by the number of relevant
i.e., the proceeds of previous years which have not expired at the beginning
transfer of a part of of the previous year during which the licence is
the licence does not transferred.
exceed the amount of
expenditure Unallowed expenditure − Sale proceeds
Amount of deduction=
remaining unallowed Unexpired number of relevant P.Y.s

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.83

(3) Transfer of licence in a scheme of amalgamation

If the amalgamating The provisions of section 35ABB will apply to amalgamated
company sells or company as they would have applied to amalgamating
transfers the licence company as if the latter has not transferred the licence.
to the amalgamated
The tax treatment in cases 1, 2 & 3 given in (2) above will
company, being an
not apply to the amalgamating company.
Indian company,
under the scheme of
amalgamation
(4) Transfer of licence in a scheme of demerger
If the demerged The provisions of section 35ABB will apply to resulting
company sells or company as they would have applied to demerged company
transfers the licence as if the latter has not transferred the licence.
to the resulting
The tax treatment in cases 1, 2 & 3 given in (2) above will
company, being an
not apply to the demerged company.
Indian company,
under the scheme of
demerger

(ii) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.
ILLUSTRATION 6

X Ltd., providing telecommunication services, acquired a telecom licence at cost of ` 50 lakhs on

01.04.2022 for a period of 10 years. Assuming the telecom licence is transferred by X Ltd. in P.Y.
2024-25, say for: (a) ` 32 lakhs; (b) ` 43 lakhs or (c) ` 52 lakhs, and if:

(i) Whole of the license is transferred

(ii) Part of the license is transferred.

Explain, how the transfer shall be dealt with under the Income-tax Act, 1961 and the amount, if
any, deductible for A.Y. 2025-26.

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 3.84 DIRECT TAX LAWS

SOLUTION
(i) Whole of the license is transferred:

Particulars ` (in lakhs)

Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2022-23 5
45
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
Expenditure remaining unallowed 40
(a) If transferred for ` 32 lakhs
Proceeds from transfer 32
Deduction allowed u/s 35ABB in P.Y. 2024-25 (Expenditure remaining unallowed 8
as reduced by the proceeds of transfer)
(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession (Lesser of: ` 3 lakhs 3
i.e., Proceed from transfer - Expense remain unallowed i.e. ` 43 lakhs - ` 40
lakhs or ` 10 lakhs i.e., expense allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Taxable as profits and gains from business and profession (Lesser of: ` 12 10
lakhs i.e., Proceed from transfer - Expense remain unallowed i.e. ` 52 lakhs -
` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(ii) Part of the license is transferred:

Particulars ` (in lakhs)

Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2022-23 5
45
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
Expenditure remaining unallowed 40
(a) If transferred for ` 32 lakhs
Proceeds from transfer 32

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.85

Deduction allowed u/s 35ABB in P.Y. 2024-25 [` 40 lakhs - ` 32 lakhs)/ 8 years 1

(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession (Lesser of: ` 3 lakhs 3
i.e., Proceeds from transfer - Expense remaining unallowed i.e. ` 43 lakhs -
` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Amount taxable as profits and gains from business and profession (Lesser of: 10
` 12 lakhs i.e., Proceeds from transfer - Expense remaining unallowed i.e. ` 52
lakhs - ` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(9) “Investment-linked tax incentives” for specified businesses [Section 35AD]

(i) List of specified businesses: With the specific objective of creating rural infrastructure
and environment friendly alternate means for transportation of bulk goods, investment-
linked tax incentives have been introduced for specified businesses, namely –
• setting-up and operating ‘cold chain’ facilities for specified products;
• setting-up and operating warehousing facilities for storing agricultural produce;
• laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network;
• building and operating a hotel of two-star or above category, anywhere in India;
• building and operating a hospital, anywhere in India, with at least 100 beds for
patients;
• developing and building a housing project under a notified scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State
Government.
• developing and building a housing project under a notified scheme for affordable
housing framed by the Central Government or State Government;

• production of fertilizer in India;

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 3.86 DIRECT TAX LAWS

• setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar;
• laying and operating a slurry pipeline for the transportation of iron ore;

• setting up and operating a semiconductor wafer fabrication manufacturing unit, if

such unit is notified by the Board in accordance with the prescribed guidelines;
• developing or maintaining and operating or developing, maintaining and operating a
new infrastructure facility.
(ii) Deduction for Capital Expenditure: 100% of the capital expenditure incurred during the
previous year, wholly and exclusively for the above businesses would be allowed as
deduction from the business income to the assessee opting for deduction under section
35AD.

However, expenditure incurred on acquisition of any land, goodwill or financial

instrument would not be eligible for deduction.

Further, any expenditure in respect of which payment or aggregate of payment

made to a person of an amount exceeding ` 10,000 in a day otherwise than by an account
payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account or through such other prescribed electronic mode would not
be eligible for deduction. The prescribed electronic modes include credit card, debit card,
net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay [Notification No. 8/2020 dated 29.01.2020].

Note - In case of an individual/HUF/AoP/BoI carrying on specified business, deduction u/s

35AD would be available only if such person exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A). If such person is paying
concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35AD
would not be available.
A company/ cooperative society would not be eligible for deduction under section 35AD, if it
opts for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE,
respectively.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.87

(iii) Expenditure prior to commencement of operation: Further, the expenditure incurred,

wholly and exclusively, for the purpose of specified business prior to commencement of
operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business.
The amount incurred prior to commencement should be capitalized in the books of account
of the assessee on the date of commencement of its operations.
(iv) Conditions to be fulfilled: For claiming deduction under section 35AD, the specified
business should fulfill the following conditions –
General Conditions:
To be fulfilled by every specified business
(i) it should not be set up by splitting up, or the reconstruction, of a business already
in existence;
(ii) it should not be set up by the transfer to the specified business of machinery or
plant previously used for any purpose;
In order to satisfy this condition, the total value of the plant or machinery so
transferred should not exceed 20% of the value of the total plant or machinery
used in such specified business.
For the purpose of this condition, machinery or plant would not be regarded as
previously used if it had been used outside India by any person other than the
assessee provided the following conditions are satisfied:
(a) such plant or machinery was not used in India at any time prior to the date
of its installation by the assessee;
(b) the plant or machinery was imported into India from a foreign country;
(c) no deduction in respect of depreciation of such plant or machinery has
been allowed to any person at any time prior to the date of installation by
the assessee.
Conditions required to be fulfilled by certain specified businesses:
I. Business of laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including storage facilities being an
integral part of such network
(i) Such business should be owned by a company formed and registered in India
under the Companies Act, 1956 7 or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any Central
or State Act;

7
Now Companies Act, 2013

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 3.88 DIRECT TAX LAWS

(ii) It should have been approved by the Petroleum and Natural Gas Regulatory
Board and notified by the Central Government in the Official Gazette
(iii) It should have made not less than such proportion of its total pipeline capacity
available for use on common carrier basis by any person other than the assessee
or an associated person.
(iv) It should fulfill any other prescribed condition.
II. Business of developing or operating and maintaining or developing, operating
and maintaining a new infrastructure facility
(i) The business should be owned by a company registered in India or by a
consortium of such companies or by an authority or a board or corporation or any
other body established or constituted under any Central or State Act.
(ii) The entity should have entered into an agreement with the Central Government or
a State Government or a local authority or any other statutory body for developing
or operating and maintaining or developing, operating and maintaining, a new
infrastructure facility.

(v) No deduction under section 10AA or Chapter VI-A under the heading “C.-Deductions
in respect of certain incomes”: Where a deduction under this section is claimed and
allowed in respect of the specified business for any assessment year, no deduction under
the provisions of Chapter VI-A under the heading “C - Deductions in respect of certain
incomes” or section 10AA is permissible in relation to such specified business for the same
or any other assessment year.
Correspondingly, section 80A has been amended to provide that where a deduction under
any provision of this Chapter under the heading “C – Deductions in respect of certain
incomes” is claimed and allowed in respect of the profits of such specified business for any
assessment year, no deduction under section 35AD is permissible in relation to such
specified business for the same or any other assessment year.

In short, once the assessee has claimed the benefit of deduction under section
35AD for a particular year in respect of a specified business, he cannot claim benefit under
Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” or section
10AA, for the same or any other year and vice versa.

(vi) No deduction allowable under the Act in respect of expenditure for which deduction
allowed under this section: The assessee cannot claim deduction in respect of such
expenditure incurred for specified business under any other provision of the Income-tax Act,
1961 in the current year or under this section for any other year, if the deduction has been
claimed or opted by him and allowed to him under section 35AD.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.89

(vii) Date of Commencement of specified businesses:

S. Specified business Date of commencement
No. of operations
1. Laying and operating a cross country natural gas on or after 1st April, 2007
pipeline network for distribution, including storage
facilities being an integral part of such network
2. (a) building and operating anywhere in India, a on or after 1st April, 2010
hotel of two-star or above category as
specified by the Central Government
(b) building and operating a hospital with at least
100 beds for patients
(c) notified scheme for slum redevelopment or
rehabilitation housing projects
3. (a) notified scheme for affordable housing on or after 1st April, 2011
projects and
(b) production of fertilizer in a new plant or in a
newly installed capacity in an existing plant
4. (a) setting up and operating an inland container on or after 1st April, 2012
depot or a container freight station notified or
approved under the Customs Act, 1962,
(b) bee-keeping and production of honey and
beeswax and
(c) setting up and operating a warehousing
facility for storage of sugar
5. (a) laying and operating a slurry pipeline for the on or after 1st April, 2014
transportation of iron ore or
(b) setting up and operating a semi-conductor
wafer fabrication manufacturing unit
6. developing or operating and maintaining or on or after 1st April, 2017
developing, operating and maintaining, any
infrastructure facility
7. In any other case, namely, setting and operating - on or after 1st April, 2009
(a) “cold-chain” facilities for specified products or
(b) warehousing facilities for storing agricultural
produce

(viii) Meaning of certain terms

Term Meaning
Cold chain A chain of facilities for storage or transportation of agricultural and
facility forest produce, meat and meat products, poultry, marine and dairy
products, products of horticulture, floriculture and apiculture and

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processed food items under scientifically controlled conditions including

refrigeration and other facilities necessary for the preservation of such
produce.
Associated In relation to the assessee means a person—
person (i) who participates directly or indirectly or through one or more
intermediaries in the management or control or capital of the
assessee;
(ii) who holds, directly or indirectly, shares carrying not less than
26% of the voting power in the capital of the assessee;
(iii) who appoints more than half of the Board of directors or
members of the governing board, or one or more executive
directors or executive members of the governing board of the
assessee; or
(iv) who guarantees not less than 10% of the total borrowings of the
assessee.
Infrastructure (i) A road including toll road, a bridge or a rail system.
facility (ii) A highway project including housing or other activities being an
integral part of the highway project.
(iii) A water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management
system.
(iv) A port, airport, inland waterway, inland port or navigational
channel in the sea.
(ix) Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction under section 35AD in respect of a specified
business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD.
Such loss can, however, be carried forward indefinitely for set-off against profits of the
same or any other specified business but the assessee has to file return of income on or
before the due date of filling return of income under section 139 for carry forward of losses
from specified business.
Example:
A assessee can therefore, set-off the losses of a hospital or hotel which begins to operate
after 1st April, 2010 and which is eligible for deduction section 35AD, against the profits of
the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel
(of two-star or above category) started before 1st April, 2010, even if the latter is not eligible
for deduction under section 35AD.

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ILLUSTRATION 7
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of
food grains, sugar and edible oil on 1.4.2024. He incurred capital expenditure of ` 80 lakh, ` 60
lakh and ` 50 lakh, respectively, on purchase of land and building during the period January, 2024
to March, 2024 exclusively for the above businesses, and capitalized the same in its books of
account as on 1st April, 2024. The cost of land included in the above figures is ` 50 lakh, ` 40 lakh
and ` 30 lakh, respectively. During the P.Y. 2024-25, he incurred capital expenditure of ` 20 lakh,
` 15 lakh & ` 10 lakh, respectively, for extension/ reconstruction of the building purchased and
used exclusively for the above businesses.
The profits from the business of setting up a warehousing facility for storage of food grains, sugar
and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2025-26
is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs, respectively. Assume in respect of expenditure incurred,
the payments are made by account payee cheque or use of ECS through bank account.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26 and the loss to be carried forward, assuming that Mr. A is exercising the option of
shifting out of the default tax regime provided under section 115BAC(1A) and has fulfilled all the
conditions specified for claim of deduction under section 35AD and wants to claim deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. –
Deductions in respect of certain incomes”.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2025-26
Particulars ` (in lakhs)
Profit from business of setting up of warehouse for storage of edible oil (before 31
providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or profession” 28

Computation of income/loss from specified business under section 35AD

Particulars Food Sugar Total
Grains
` (in lakhs)
(A) Profits from the specified business of setting up a 16 14 30
warehousing facility (before providing deduction under
section 35AD)

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Less: Deduction under section 35AD

(B) Capital expenditure incurred prior to 1.4.2024 (i.e., prior to
commencement of business) and capitalized in the books
of account as on 1.4.2024 (excluding the expenditure
incurred on acquisition of land) = ` 30 lakh (` 80 lakh –
30 20 50
` 50 lakh) and ` 20 lakh (` 60 lakh – ` 40 lakh)
(C) Capital expenditure incurred during the P.Y.2024-25 20 15 35
(D) Total capital expenditure (B + C) 50 35 85
(E) Deduction under section 35AD
100% of capital expenditure (food grains/sugar) 50 35 85
Total deduction u/s 35AD for A.Y.2025-26 50 35 85
(F) Loss from the specified business of setting up and
operating a warehousing facility (after providing for
deduction under section 35AD) to be carried forward as (34) (21) (55)
per section 73A (A-E)
Notes:
(i) Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2025-26
in respect of specified business of setting up and operating a warehousing facility for storage
of sugar and setting up and operating a warehousing facility for storage of agricultural
produce where operations are commenced on or after 01.04.2012 or on or after 01.04.2009,
respectively.
(ii) However, since setting up and operating a warehousing facility for storage of edible oils is not
a specified business, Mr. A is not eligible for deduction under section 35AD in respect of
capital expenditure incurred in respect of such business.
(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use for more
than 180 days during the P.Y. 2024-25.
(iv) Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ` 55 lakh from the specified businesses of setting up and
operating a warehousing facility for storage of food grains and sugar cannot be set-off against
the profits of ` 28 lakh from the business of setting and operating a warehousing facility for
storage of edible oils, since the same is not a specified business. Such loss can, however, be
carried forward indefinitely for set-off against profits of the same or any other specified
business provided Mr. A file his return of income on or before the due date as specified
u/s 139.

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ILLUSTRATION 8
XYZ Ltd. commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu
on 1.4.2024. The company incurred capital expenditure of ` 50 lakh during the period January,
2024 to March, 2024 exclusively for the above business, and capitalized the same in his books of
account as on 1st April, 2024. Further, during the P.Y. 2024-25, it incurred capital expenditure of
` 2 crore (out of which ` 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim of deduction
under section 35AD and opted for claiming deduction under section 35AD; and has not claimed
any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain
incomes”. The company is not opting for the concessional tax regime under section 115BAA.

The profits from the business of running this hotel (before claiming deduction under section 35AD) for
the A.Y.2025-26 is ` 25 lakhs. Assume that the company also has another existing business of
running a four-star hotel in Coimbatore, which commenced operations fifteen years back, the profits
from which are ` 120 lakhs for the A.Y.2025-26. Also, assume that expenditure incurred during the
previous year 2024-25 were paid by account payee cheque or use of ECS through bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2025-26

Particulars ` (in lakhs)

Profits from the specified business of new hotel in Madurai (before providing 25
deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2024-25 (excluding the
expenditure incurred on acquisition of land) = ` 200 lakhs – ` 150 lakhs 50 lakh
Capital expenditure incurred prior to 1.4.2024 (i.e., prior to
commencement of business) and capitalized in the books of account 50 lakh
as on 1.4.2024
Total deduction under section 35AD for A.Y.2025-26 100
Loss from the specified business of new hotel in Madurai (75)
Profit from the existing business of running a hotel in Coimbatore 120
Net profit from business after set-off of loss of specified business against profits 45
of another specified business under section 73A

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(x) Transfer of hotel built by the assessee: Where the assessee builds a hotel of two-star or
above category as classified by the Central Government and subsequently, while continuing
to own the hotel, transfers the operation of the said hotel to another person, the assessee
shall be deemed to be carrying on the specified business of building and operating a hotel.
Therefore, he would be eligible to claim investment-linked tax deduction under section
35AD.

Therefore, in effect, the assessee shall be deemed to be carrying on the

specified business of building and operating hotel if –
(i) The assessee builds a hotel of two-star or above category;
(ii) Thereafter, he transfers the operation of the hotel to another person;
(iii) He, however, should continue to own the hotel.

(xi) Other conditions contained under section 35AD

S. Particulars Condition
No.
1. Transfer of goods Where any goods or services held for the purposes of the
and services specified business are transferred to any other business
carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the
market value of the goods or services then the profits and
gains of the specified business shall be computed as if the
transfer was made at market value.
Market value means the price such goods or services would
ordinarily fetch in the open market, subject to statutory or
regulatory restrictions, if any.
2. Close connection Where due to the close connection between the assessee
between assessee and the other person or for any other reason, it appears to
and any other the Assessing Officer that the profits of specified business is
person increased to more than the ordinary profits, the Assessing
Officer shall compute the amount of profits of such eligible
business on a reasonable basis for allowing the deduction.
2. Audit of accounts The deduction shall be allowed to the assessee only if the
accounts of the assessee for the relevant previous year
have been audited by a chartered accountant and the
assessee furnishes the audit report in the prescribed form,
duly signed and verified by such accountant along with his
return of income.

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3. Asset to be used Section 35AD(7A) provides that any asset in respect of

for specified which a deduction is claimed and allowed under section
business for eight 35AD shall be used only for the specified business for a
years period of eight years beginning with the previous year in
which such asset is acquired or constructed.
4. Asset demolished, destroyed, discarded or transferred for which a deduction
has been allowed
If any asset on which a deduction under section 35AD has been claimed and
allowed, is demolished, destroyed, discarded or transferred, the sum received or
receivable for the same is chargeable to tax under clause (vii) of section 28.
This does not take into account a case where asset on which deduction under
section 35AD has been claimed is used for any purpose other than the specified
business by way of a mode other than that specified above.
5. Asset used for any other business other than specified business during 8
years [Section 35AD(7B)]
If asset is used for any purpose other than the specified business during 8
years beginning with the previous year in which such asset is acquired, the total
amount of deduction so claimed and allowed in any previous year(s) in respect of
such asset, as reduced by the amount of depreciation allowable in accordance with
the provisions of section 32 as if no deduction had been allowed under section
35AD, shall be deemed to be income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset
is so used.
In such a case, as per the proviso to Explanation 13 to Section 43(1), the actual
cost of such asset for the assesse shall be the actual cost as reduced by amount of
depreciation would have been allowable had the asset been used for the purpose
of business since the date of its acquisition.
However, the deeming provision under sub-section (7B) shall not be applicable to a
company which has become a sick industrial company under section 17(1) of the
Sick Industrial Companies (Special Provisions) Act, 1985, during the intervening
period of eight years specified in sub-section (7A).

ILLUSTRATION 9
ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2023 and it claimed deduction of ` 100 lakhs incurred on
purchase of two buildings for ` 50 lakhs each (for operating a warehousing facility for storage of
sugar) under section 35AD for A.Y. 2024-25. However, in February, 2025, Unit A transferred one
of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of ABC Ltd.

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SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lakhs was claimed under section
35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-
specified business in the P.Y.2024-25, the deeming provision under section 35AD(7B) is attracted
during the A.Y. 2025-26.
Particulars `
Deduction allowed under section 35AD for A.Y.2024-25 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ` 50 lakhs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

ABC Ltd., however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation
under section 32 on the building in Unit B for A.Y. 2025-26. For the purpose of claiming
depreciation on building in Unit B, the actual cost of the building would be:
Particulars `
Actual cost to the assesse 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ` 50 lakhs] 5,00,000
Actual cost in the hands of ABC Ltd. in respect of building in Unit B 45,00,000

(10) Contributions for Rural Development [Section 35CCA]

This section allows a deduction of the following payment or contribution made by the assessee
during the previous year to:
(1) Notified rural development fund - Payment to a rural development fund set up and
notified by the Central Government.
(2) Notified National Urban Poverty Eradication Fund - Payments made to “National Urban
Poverty Eradication Fund” (NUPEF) set up and notified by the Central Government.
No other deduction - It has been specifically provided that in every case where any deduction
under this section is claimed by the assessee and allowed to him for any assessment year in
respect of any expenditure incurred by way of payment of contribution to such notified fund, no
deduction in respect of the same expenditure can again be claimed by the assessee under any
other relevant provision for the same or any other assessment year.
(11) Deduction in respect of expenditure incurred on notified agricultural extension
project [Section 35CCC]
(i) Eligible project and Quantum of Deduction: In order to incentivize the business entities
to provide better and effective agriculture extensive services, section 35CCC provides a

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deduction of a sum equal to expenditure incurred by an assessee on agricultural extension

project in accordance with the prescribed guidelines.

(ii) No other deduction: In case deduction in respect of such expenditure is allowed under this
section then, no deduction in respect of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.

(iii) Project must be notified: The agricultural extension project eligible for this deduction shall
be notified by the CBDT.
The agricultural extension project shall be considered for notification if it fulfils all of the
following conditions, namely:—
(a) the project shall be undertaken by an assessee for training, education and guidance
of farmers;
(b) the project shall have prior approval of the Ministry of Agriculture, Government of India;
and
(c) an expenditure (not being expenditure in the nature of cost of any land or building)
exceeding the amount of ` 25 lakhs is expected to be incurred for the project.

Components of expenditure: All expenses (not being expenditure in the nature of cost
of any land or building), as reduced by the amount received from beneficiary, if any,
incurred wholly and exclusively for undertaking an eligible agricultural extension project
shall be eligible for deduction under section 35CCC.
However, expenditure incurred on the agricultural extension project which is
reimbursed or reimbursable to the assessee by any person, whether directly or
indirectly, shall not be eligible for deduction under section 35CCC.

(iv) Conditions for claiming deduction: Deduction in respect of expenditure incurred for
notified agricultural extension project would be available, if

♦ assessee maintain separate books of account of such agricultural extension project

and get such books of account audited by an Accountant and
♦ furnish the following on or before the due date of furnishing the return of income to
the Commissioner of Income-tax or Director of Income-tax, as the case may be :-
 the audited statement of accounts of the agricultural extension project along
with the audited report and amount of deduction claimed under this section,

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 a note on agricultural project undertaken and programme of agricultural

extension project to be undertaken during the current year and financial
allocation for such programme and
 a certificate from Ministry of Agriculture, Government of India, regarding the
genuineness of such project.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction u/s 35CCC would be available only if such person exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A). If such person is
paying concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35CCC
would not be available.
A company/ cooperative society would not be eligible for deduction under section 35CCC, if it opts
for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE, respectively.
(12) Deduction in respect of expenditure incurred by companies on notified skill
development project [Section 35CCD]
(i) Quantum of Deduction: In order to encourage companies to invest on skill development
projects in the manufacturing sector, section 35CCD provides for a deduction of a sum
equal to the expenditure (not being expenditure in the nature of cost of any land or building)
on skill development project incurred by the company in accordance with the prescribed
guidelines. However, expenditure incurred on the notified skill development project which is
reimbursed or reimbursable to the company by any person, whether directly or indirectly,
shall not be eligible for deduction under section 35CCD.
(ii) No other deduction allowed: In case deduction in respect of such expenditure is allowed
under this section then, no deduction of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.
(iii) Only notified projects are eligible: The skill development project eligible for this
deduction shall be notified by the CBDT.
A skill development project would be considered for notification if it is undertaken by an
eligible company (a company engaged in the business of manufacture or production of any
article or thing, not being beer, wine and other alcoholic spirits and tobacco and tobacco
preparations or engaged in providing specified services) and the project is undertaken in
separate facilities in a training institute.

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Skill development project in respect of existing employees of the company, however, would
not be eligible for notification, where the training of such employees commences after six
months of their recruitment.
Further, the deduction would be available, if the company undertaking such project
- maintain separate books of account of the skill development project and get such
books of account audited by an accountant.
- furnish the audited statement of accounts of the skill development project along with
the audited report and amount of deduction claimed under this section, to the
Commissioner of Income-tax or Director of Income-tax, as the case may be.

Note - A company would not be eligible for deduction under section 35CCD, if it opts for the
special provisions of section 115BAA/115BAB.

(13) Amortisation of Preliminary Expenses [Section 35D]

(i) Nature of expenditure: Section 35D provides for the amortisation of preliminary expenses
incurred by Indian companies and other resident non-corporate taxpayers for the
establishment of business concerns or the expansion of the business of existing concerns.
(ii) Applicable: This section applies
(a) only to Indian companies and resident non-corporate assessees;

(b) in the case of new companies to expenses incurred before the commencement of the
business;
(c) in the case of extension of an existing undertaking to expenses incurred till the
extension is completed, i.e., in the case of the setting up of a new unit - expenses
incurred till the new unit commences production or operation.
(iii) Amount eligible for deduction: Such preliminary expenditure incurred shall be amortised
over a period of 5 years. In other words, 1/5th of such expenditure is allowable as a
deduction for each of the five successive previous years beginning with the previous year in
which the business commences or, the previous year in which the extension of the
undertaking is completed or the new unit commences production or operation, as the case
may be.
(iv) Eligible expenses - The following expenditure are eligible for amortisation:
(I) Expenditure in connection with –

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(a) the preparation of feasibility report

(b) the preparation of project report;
(c) conducting market survey or any other survey necessary for the business of
the assessee;
(d) engineering services relating to the assessee’s business;
The assessee has to furnish a statement containing the particulars of above
expenditure within one month prior to the due date for furnishing the return of income
as specified under section 139(1) to the Principal Director General of Income-tax
(Systems) or the Director General of Income-tax (Systems), as the case may be, or
any person authorised by the Principal Director General of Income-tax (Systems) or
Director General of Income-tax (Systems) in the Form No. 3AF in prescribed manner
for each previous year [Rule 6ABBB].
(II) legal charges for drafting any agreement between the assessee and any other
person for any purpose relating to the setting up to conduct the business of
assessee.
(III) Where the assessee is a company, in addition to the above, expenditure incurred –
(f) by way of legal charges for drafting the Memorandum and Articles of
Association of the company;
(g) on printing the Memorandum and Articles of Association;
(h) by way of fees for registering the company under the Companies Act; 1956 8,
(i) in connection with the issue, for public subscription, of the shares in or
debentures of the company, being underwriting