INCOME TAX ACT 1961

 Extents to whole of India

 Came into force on 1st April 1962

Definition : ASSESSEE -Sec 2(7)

A person by whom any tax or other sum of money is payable under this Act
Other sum of money includes penalty or interest. And includes :
 a person on whom any proceeding under this Act is undertaken for
assessment of Income, fringe benefits, loss or refund of himself or other person
 Person who is deemed to be an assessee—eg. representative assessee –
agent of nonresident.
 Person who is deemed to be an assessee in default—eg. person collects
TDS but does not deposit it with the Income Tax Dept.

Definition : Assessment year -Sec 2(9)

 Period of twelve months commencing from 1st day of April every year and
ending on 31st March next year.
It is the year in which total income of the previous year is computed and tax payable
thereon determined. In assessment year , incomes from different heads of income are
assessed .

Definition : Assessment is the process of determining:1) income of assessee, 2)tax

liability on such income and 3) tax payable or refund due.

Definition : Business—Sec 2(13)

Includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture. Trade involves purchase of goods and sale
of it at a profit. Manufacture involves purchase of raw material , converting them into
finished goods and then selling them . Commerce includes services like transport,
banking ,insurance etc.

Definition : Sec 3-Previous year– means financial year immediately preceding the
assessment year. Usually it is a period of 12 months . But in case of newly setup
business, the previous year can be of lesser period.
In case of newly setup—business, profession or source of income newly coming into
existence in the financial year, previous year shall be the period commencing from the
date of setting up the business / profession or the date on which source of income
newly came into existence and ending with the financial year end.
Definition : Income -Sec 2(24) includes—
 Profits and Gains
 Dividend
 Voluntary contributions received by charitable or religious trust, university,
educational institution or hospital
 Salary, allowance, perquisites, profit in lieu of salary
 Profit on sale of licence under Import and Export Control Act 1947,Cash
Assistance against export , Duty Drawback
 Capital gains
 Winnings from lottery, crossword puzzle, horse races etc.
 Any sum received from assessee’s employees as contribution to Provident Fund,
Superannuation Fund
 Subsidy, Grant or Cash Incentive or concession given by Central and State
Government.
 Gift – sum of money received without consideration of value more than Rs.50000
from any person.
 Gift—immovable property -- received without consideration, of stamp duty value
more than Rs.50000 from any person. Whole of such value is income. If
consideration is less than stamp duty value by more than Rs.50000 , then
income is stamp duty value as exceeds consideration.
 Gift—movable property -- received without consideration, of Fair market value
more than 50000 from any person. Whole of such value is income. If
consideration is less than FMV by more than Rs50000 , then income is FMV
value as exceeds consideration.

Definition : Person -Sec 2(31) -- includes-

 Individual – human being. Includes minor and person of unsound mind
 Hindu Undivided Family—All persons lineally descended from a common
ancestor .Also includes wives , sons and daughters of such persons.
 Company—includes Indian and foreign companies—eg.HDFC BankLtd.
 Partnership Firm--
 Association of persons or Body of individuals—AOP means combination of
individuals, firm ,company etc.--eg.Cooperative Housing Society.
But BOI means combination of only individuals.
 Local authority—includes gram panchayat, municipality, port trust etc.
 Artificial juridical person—includes University, deity, LIC, GIC , UTI etc.

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BASIS OF CHARGE -Sec. 4
 Income Tax shall be charged for any assessment year , at rates of I Tax , on
Total Income of the previous year.
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SCOPE OF TOTAL INCOME - Sec. 5
ROR RNOR NR
Income Received in India Taxable Taxable Taxab
Income accrues/arises in India Taxable Taxable Taxab
Income deemed to be Received in India Taxable Taxable Taxab
Income deemed to accrue/arise in India Taxable Taxable Taxab

Income accrues outside India from business controlled Not

from India Taxable Taxable taxab

Not Not
Other Income accrues/ arises outside India Taxable taxable taxab

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Total Income of any previous year of a person
a) Who is a Resident includes all income from all sources which is-
 Received or deemed to be received in India
 Accrues or arises or deemed to accrue or arise to him in India
 Accrues or arises to him outside India
b) Who is a non- resident includes all income from all sources which is-
 Received or deemed to be received in India
 Accrues or arises or deemed to accrue or arises to him in India

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Definition : RESIDENCE IN INDIA Sec-6
In case of Individuals---
A) Resident in India- Individual who
 1)Stays in India for 182 days or more
OR
2)Stays in India for 365 days or more during 4 years preceding the year
AND stays in India for 60 days or more in that year.

But in case of Indian cityzen leaving India for employment/self employment or as crew
member of Indian ship, he should stay in India for 182 days in that year to become
Resident in India.

A1) Resident and Ordinarily a Resident

A person who is a Resident and who also fulfills BOTH the following
two conditions:
a) He is Resident in any two years out of the preceding 10 years.
AND
b) He has stayed in India for total 730 days in preceding 7 years.

A2) Resident but not Ordinarily a Resident

 A person who is a Resident but who does NOT fulfill following two
conditions:
a) He is Resident in any two years out of the preceding 10 years.
AND
b) He has stayed in India for total 730 days in preceding 7 years.

B) Non Resident
A person who is not Resident in India is called a Non-Resident.

In case of Company--- Company is said to be Resident in India if it is an Indian

Company or its control and management is wholly in India. If Company is Resident it is
automatically ROR
In case of HUF, Firm, BOI, AOP , artificial juridical person--- are said to be
Resident if any part of its control and management is in India. If Karta of HUF is ROR
the HUF is also ROR. If Firm, AOP or BOI is Resident it is automatically ROR .
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Deemed Income u/s 9

Income received or deemed to be received in India
a) Incomes received in India
 All Incomes received in India by all persons irrespective of Residential status of
the person, is taxable in India.
 Receipt means First receipt-- remittance/transmission of money after first
receipt , does not result into receipt of Income.
 If a Non Resident receives Foreign Income first time in India it is taxable in
India.
b) Incomes deemed to be received in India
 Contribution made by employer to RPF exceeding 12% of salary of employee.
 Interest credited to RPF exceeding 9.5% pa.
 Balance transferred from unrecognized PF to RPF (Recognised Providend
Fund)
 Contribution made by employer to the A/c. of an employee under notified
pension scheme u/s 80CCD.

c) Income which accrue or arise in India.

 Income is earned in India and assessee becomes entitled to receive.

d) Incomes which are deemed to accrue or arise in India.

 Income from business connection in India
 Income from property , asset or source of income situated in India
 Income from transfer of capital asset situated in India
 Income from salaries earned in India
 Salary payable to Indian citizen by Govt. for services rendered outside India.
  Interest, Royalty, Fees for technical services payable by Govt.
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Exemptions ( Non Taxable Incomes) u/s 10
Incomes which are not taxable, not to be included in Total Income

1. Agricultural Income from land in India—income derived from agricultural

operations . But income from processing of agrl. produce is taxable under
Profits and gains from business. Income from sale of trees , breeding of
livestock, fishing activities and poultry is not agrl.income and hence taxable.
2. Share of profit from HUF.
3. Share of profit from Partnership
4. Amt received under Life Ins Policy alongwith bonus.
5. Contribution by employer to Recognised Provident Fund upto 12% of salary is
exempt. Contribution above 12% is taxable as salary.
6. Interest received on PPF/PF upto 9.5%.Excess Interest received beyond 9.5%
is taxable as salary.
7. Payment received from PF/RPF/Approved Superannuation fund
8. Scholarship received to the extent used for cost of education
9. Daily allowance received by MLA/ MP
10. Constituency Allowance received by MLA
11. Awards and rewards from Govt.
12. Dividend from Indian Company/ units of Mutual Fund specified u/s10(23D)
13. Long term Capital gain from sale of equity shares / unit of equity oriented
fund
14. Travel concession from employer to him and family to proceed to any
place in India after retirement/termination of employment
15. Allowances and perquisites paid outside by govt to employee.
16. Pension/family pension received by winners / family of winners of
Gallantry awards eg. Vir chakra
17. Family pension received by family members of armed forces
18. Dividend from Indian companies upto Rs10 lakh.
19. Income of minor included in parents Income and upto 1500 is exempt for
each minor child . Income shall be clubbed in that parent's income having
higher Income and in case of divorced parents income of minor shall be clubbed
in that parent’s income who is maintaining the children. But if the minor child
earns income from manual work/personal skill/talent/knowledge his income
shall be not clubbed but separately assessed.
20. Gift – upto Rs.50000 from any person.
21. Gift of any amount- from relative/ on occasion of marriage/ under a will/ in
contemplation of death/ from local authority/ University, hospital, educational
institution is exempt.
22. Income from units of Mutual Fund, UTI.
23. POSB int—Post Office Savings Bank A/c. interest.
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Heads of Income
1. Income from Salaries
2. Income from House Property
3. Capital Gains
4. Profits and Gains from Business/Profession
5. Income from Other Sources
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Heads of Income

1) Income from Salary—(Sec.15 -17)

Sec 15—Following incomes shall be chargeable as salary:
a) Any salary due from an employer or former employer ,to an assessee in a previous year ,whether paid or
not.
b) Any salary paid or allowed by an employer or former employer ,to an assessee in a previous year ,
whether due or not.
c) Any arrears of salary paid or allowed by an employer or former employer ,to an assessee in a previous
year , if not charged to tax earlier.

Salary includes — Any payments received from employer by employee under the contract of
employment. Salary includes --Wages, annuity or pension, fees ,commission, perquisites or profits in lieu of
salary, allowances, arrears of salary , advance of salary, bonus, gratuity, leave encashment etc.
Characteristics/Essentials of Salary:
i) Relationship employer and employee ie. Master- servant relationship is necessary between giver and
receiver of salary.
ii) Salary includes wages - same treatment for income from physical and mental labour.
iii) Salary if taxed on receipt basis same shall not be again taxed on due basis.
iv) Salaries received from different employers shall be taxed under the head ‘Income from Salaries’.
v) Salary, bonus, commission received from firm in which assesse is partner & interest on capital in
partnership is not income from salary but Profit from Business . Share of profit from
partnership is exempt.

Profits in lieu of salary includes( to be included in salary income):

a) Compensation received from employer in connection with termination of employment or modifications
in terms of employment.
b) Any amount received from employer by the assessee , before joining or after cessation of his
employment.

Taxable Alowances include-- Transport Allowance ,Children education Allowance, Children hostel
Allowance , Tiffin Allowance, Entertainment Allowance.
Exempt Allowances—
1) Children education Allowance upto Rs. 100 pm. per child
2) Children hostel Allowance upto Rs. 300 pm. per child
3) Conveyance/ Transport Allowance upto Rs.1600 pm.

Taxable Perquisites--
 Value of furnished /unfurnished rent-free accommodation provided by employer to employee
 Value of concession in rental accomodation, provided by employer to employee
 Value of sweat equity shares allotted by employer,
 Contribution by employer to approved superannuation fund in excess of Rs.150000,
  Value of benefit or amenity provided free or at a concessional rate .eg.Free supply of
gas+electricity+water, Wages to domestic servants,
 Education facility to children received from employer,
 Value of use of vehicle to travel to and from placeofwork
 Any sum paid by employer which would have been payable by the employee. Eg.-- LIP premium paid,
Club fees paid ,
 Motor car for personal use.
 Contribution to approved superannuation fund by employer, to the extent it exceeds Rs.150000.

Taxfree perquisites—
 Premium of Mediclaim for employee or member of his family,
 Free or subsidised lunch/refreshments provided during office hours ,
 Medical treatment to employee + family in employer's/govt/approved hospital,
 Expenditure on medical treatment, travel and stay abroad for medical treatment of employeeor family
member with attendant. Provided Gross Total Income of the employee does not exceed Rs200,000.
 Reimbursment of medical expenses upto Rs.15000/-.
 Telephone at residence,
 Recreation facilities ,
 Goods (produced by employer) sold at concessional rates ,
 Travelling to and from office,
 Training fees.

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Heads of Income
2) INCOME FROM HOUSE PROPERTY(Sec 22 -27)
 Income from House Property means annual value of house property. House property means buildings
and lands appurtenant thereto owned by the assessee . House property includes—building,
bungalow, flat ,hut and also-- approach roads, garden, compound, garages, parking space etc. Building
should be permanent structure. Building includes residential , non residential and commercial
property.
 But this property should not be occupied by assessee for carrying on his own business /
profession. If assessee uses house property for his business --consider municipal tax, interest on
housing loan , insurance premium , house repairs as his business expense.
 Income from farm house is agricultural income (exempt income) .
 Income from subletting house is Income from other sources.

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House property can be classified into ---
a) Self occupied property (SOP)
b) Let out property (LOP)

a) Self occupied property : means house property which is owned by the assessee and is not used for any
purpose other than residence of himself and family. He should not derive any benefit from such property. The
annual value of SOP is taken as NIL. If the assessee has more than one SOP, he can call only one house
property as his SOP, and other properties can be called as DLOP i.e. deemed LOP. In case of DLOP
calculate income from house property just like LOP. Only one deduction is allowed that is interest on housing
loan. Interest on housing loan that can be claimed for SOP is limited as under :
a. If the housing loan is for repairs and renovation of that house the deduction for interest is Rs 30000 maximum
b. If the housing loan fulfills the following three conditions then maximum amount of Rs 200000 is allowed as a
deduction provided :
I. The housing loan was taken after 1st April 1999
II. The housing loan was taken for construction or purchase of the house
III. The purchase or construction of the house was completed within 5 years after the year in which the loan was
taken.

Income from SOP is computed by deducting interest on housing loan from annual value (nil) Hence income
from SOP will always be negative.

b)Let out Property (LOP)

If the assessee gives out his property on rental basis for being used as residence , office, factory, godown etc, it
is called as Let out Property. For computing income from LOP the following steps are followed :

Definition :ANNUAL VALUE OF HOUSE PROPERTY

I. Find gross annual value of LOP. GAV (Gross Annual Value) is higher between Municipal Ratable Value
(MRV) and fair rent but not more than standard rent. This figure is then compared with actual rent received and
the higher figure is taken as GAV.

II. From the GAV municipal tax is deducted. Municipal tax actual paid by the assessee for any year can be
deducted. Outstanding tax or tax paid by tenant should not be considered. GAV – Municipal Tax = NAV i.e. net
annual value.

III From the NAV two deductions are allowed

a. Standard deduction @30% of NAV
b. Interest on housing loan full amount without any limit
Interest paid for period prior to construction or purchase of the house ,shall be allowed asdeduction in
the year of construction or purchase of the house , and four years following it.

IV NAV less deduction equal to income from LOP

 Gross Annual value—Is the higher of the below (A) or (B) :

A) Reasonable Letting Value(RLV) –amount for which the property might reasonably be
expected to be letout from year to year. RLV is calculated as under :
i) Municipal value
ii) Fair Rent
Higher of the above two
Standard Rent
Lower of the above two
OR
B) If property or any part of it is letout , the rent received or receivable.

Income from house property equal = to income from SOP + Income from LOP

 For house property income - interest on loan taken by mortgaging the house for any other purpose
like education , marriage etc. cannot be considered for deduction as interest on housing loan.
  In case of CO-OWNERSHIP calculate total annual value of house property then divide amongst
co-owners.

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Heads of Income
C) PROFITS AND GAINS FROM BUSINESS ( Sec 28,30,31,32, 35,35 D,
36, 37,40, 40A, 43B)

Business -Sec 2(13) – includes any trade , commerce or manufacture or any adventure or concern in the
nature of trade , commerce or manufacture.
Business may be legal or illegal, it is irrelevant.

Following incomes are taxable under the head Profits and Gains:
a) Profits and Gains from business carried on by assessee during the previous year
b) Compensation or payment received by person
i) Managing whole/substantially the whole of affairs of a company , on termination or
modification of terms of management.
ii) Holding agency , on termination or modification of terms of agency
iii) On nationalization or takeover of business by government
c) Income of trade/professional association from services given toits members.
d) Profit on sale of licence under Import and Export Control Act 1947
e) Cash Assistance against export ,received by exporter
f) Duty Drawback of excise duty or customs duty ,received by exporter
g) Presents and gifts received by a professional like Lawyer, doctor etc.
h) Salary, bonus, commission & interest on capital in partnership firm.
i) Any sum including bonus received under Keyman Insurance Policy ( Keyman means main controlling
person of the business whose existence is highly essential for the business).

Business must be carried on during the year at any time during the year even for short duration, by the
assessee.
Exceptions( following should be taken as Profits from business even if the related business is no
longer carried on) —
a)Recovery against any loss , expenditure, earlier allowed as exp/deduction
b)Sale of capital asset used for scientific research
c)Recovery against bad debts.
d)Receipt of discontinued business under cash system of accounting.

There is no difference in taxability for legal and illegal business.

Method of Accounting—Sec145—1) Mercantile (accrual) system OR 2) Cash system can be followed.

But in case of a company only mercantile system is allowed.

Expenses/Amounts debited to P&L A/c. but not allowable

( ie. To be added back to Net profit as per Profit and LossA/c. to arrive at taxable profit )
1. Capital expenses
2. Personal expenses
3. Charities and donations
4. Income tax paid
5. Amounts transferred to Reserve A/c.
 6. Fine or penalty paid on contravention of law
7. Provision for gratuity payable to employees( not actually paid).But provision for contribution to
approved gratuity fund.
8. u/s40 A-Payment for expenses exceeding Rs.20,000 otherwise than Account payee cheque or Account
payee draft. Entire amount is disallowed.
9. u/s40 A-Unreasonable or excessive expenditure to specified persons—relatives/
director,partner,member/ owner of more than 20% voting power(shares)
10. u/s 37(2B) Advertisement in souvenir, pamphlet of a political party.
11. u/s 40—
a) Any interest,royalty, fees for technical services, salaries or other amount payable outside India or
payable in India to a non resident on which TDS has not been made or made but not paid to
govt.before due date of filing Income-tax Return
b) 30% of sum payable to resident on which TDS has not been made or made but not paid to govt.
before due date of filing Income-tax Return
c) Fringe benefit tax
d) Wealth Tax

12. u/s40b—Amounts not deductible in case of partnership firm

In case of partnership firm following are not allowed as business expenses for calculating taxable profit:
a) Payment of salary, bonus, commission or remuneration to partner who is not a working partner
b) Payment of remuneration to a working partner, or interest on capital to any partner which is not
allowed by Partnership Deed .
c) Payment of interest on capital to any partner which is allowed by Partnership Deed but exceeds
12%pa.
d) Payment of remuneration to a working partner and which is allowed by Partnership Deed but exceeds
—
i) On first 3,00,000 of book profit or in case of loss  150000 or 90% of book profit whichever is
more.
ii) If bookprofit exceeds 3,00,000 1,50,000 + 60% of exceeding bookprofit .

Income credited to P&L A/c but not included as business income

o Dividend Income
o Rental Income
o Income tax refund
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Business Loss-- Loss should be incidental (related ) to the business .

A) Losses are deductible in following cases—
 Embezzlement by employees
 Loss of stock by fire , natural calamities ,negligence of employees
 Robbery/theft in the course of business
 Fluctuations in Foreign Exchange rate
 Loss of goods in transit
 Failure of bank—loss of bank deposits
 Enemy action—war

B) Losses are not deductible in following cases—

 Pre-incorporation loss
  Closing down the business
 Damage/destruction of capital asset
 Loss on sale of securities-- because capital loss
 Violation of law
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While computing business profits--
o Family planning expenses are allowed as business expenses-- revenue expenses . Capital exp.
(Purchase of assets) 1/5 is allowed every year.
o Gift from clients is taxable as business income.
o Insurance premium paid for health insurance of employees is allowed as business exp only if
paid by cheque.
o Salary & interest received on capital -from Partnership firm is not income from salary but Profit
from Business .
o Reserves/Provisions for anticipated losses not business expense unless actually incurred/suffered
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Incomes of certain business not taxable under the head of ‘Profits and Gains of business’
 Rent from House Property—Business of letting out house property not chargeable as Business
Income but Rent from House Property
 Dividend Income—Business of dealing in shares and securities and earning dividends—not business
Income but Income from Other Sources
 Winnings from Lottery and Races etc.— Business of buying lotteries and putting money on
horses(betting)-- not Business Income but Income from Other Sources.

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Allowed Business Expenses:

Sec 30—Rent Rates , taxes, repairs and insurance for buildings—allowed as business expense.
Sec 31—Repairs and insurance of machinery, plant and furniture—allowed as business expense..
Sec 35—Expenses on Scientific Research for own business —full revenue expenses(100%) are allowed as
business expense,150% of sum paid for research purpose to scientific research association, university, college .
Sec 35D – Preliminary expenses – 1/5th of preliminary expenses shall be allowed as expense for five years
from the year the business was commenced. Preliminary expenses are expenses incurred before or at the
commencement of the business –like preparation of project report, conducting market survey, legal charges etc.
Sec 36 –Other Deductions—
i) Insurance premium for stocks
ii) Health insurance premium for employees
iii) Bonus and commission to employees
iv) Interest on loans borrowed for business
v) Contribution paid towards recognized provident Fund, and approved super annuation fund,pension
scheme , approved gratuity fund by employer for benefit of employees
vi) Bad debts written off
vii) Provision for bad debts
Sec 37—Any revenue expenses wholly and exclusively for purpose of business
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Sec32-- Depreciation—
 Asset must be owned by the assessee, and used during the year ,for the purpose of that business
/profession.
 Depreciation to be provided on WDV basis.
  Normal Depreciation for Block of Assets and Additional Depreciation in case of eligible new
machinery/plant
 If asset is used for less than 180 days during the year , only 50% of normal depreciation shall be
allowed.

Additional Depreciation—
 Rate of additional Dep—20% of cost of asset if asset used for more than 180 days. 10% if used
less than 180 days . In case the undertaking is setup in backward areas in Andhra Pradesh, Bihar ,
Telangana or West Bengal then additional depreciation shall be 35%.
 Eligible Assessee—Manufacturer of any article/thing.
 Assets for which additional Dep allowed-- any new assets purchased after—31.3.05

 Disallowed on—
o ships and aircrafts
o used /second hand asset
o machine installed in office premises/residential accommodation
o asset where whole cost is allowed as depreciation in one previous year
o office appliances
o road transport vehicles.

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Where block of assets ceases to exist—all assets are transferred/sold-- no dep allowed
i) Sale price is more than (WDV+asset purchased during the year)--- result in short term capital gain
ii) Sale price is less than ( WDV+asset purchased during the year) --- result in short term capital loss

--Where part of block of assets is sold and sale price exceeds value of block of assets—WDV becomes
NIL Block will continue in the next year at NIL value.
--Where part of block of assets is sold and sale price is less than value of block of assets—Dep will
be allowed on WDV.

Carry forward and Setoff of unabsorbed depreciation---- Depreciation which cannot be absorbed by
current year’s profits or there is a loss in current year , shall be carry forward to succeeding years.
Setoff done as under—
a) Setoff Current year depreciation
b) Setoff brought forward business loss/speculation loss
c) Setoff brought forward unabsorbed depreciation.

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Sec 41—Profits chargeable to tax--

 Recovery in subsequent years--Where an allowance /deduction has been made in respect of any loss/
expenditure incurred in a Previous year and afterwards, in subsequent year the amount has been
received , such received amount shall be deemed to be profits and gains of business/profession of that
subsequent year and shall be taxable, even if the related business is no longer in existence.

 Amalgamation-- the successor amalgamated company(purchasing company) receives amount

previously provided as loss/expenditure , then such received amount shall be deemed to be profits and
gains of business/profession of that subsequent year and shall be taxable.
  Building, Plant, machinery or furniture is sold – Sale price less WDV shall be treated as income of
business.

 Bad debt Recovery – Bad debt allowed in previous years is recovered in subsequent years, is taxable
as business income.

 Closed Business--Business income from business no longer in existence , is taxable as business

income.
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u/s.43B -Certain deductions allowed in the Previous year, only on actual payment
Irrespective of the previous year in which the liability for payment arose. Payment should be made before
due date for filing the return of income u/s 139(1).
o Any tax , duty, cess or fee payable under any law (Sales Tax/excise duty/octroi)
o Contribution to PF, Super annuation fund, gratuity fund or other fund for welfare of employees
o Bonus , commission payable to employees..
o Interest on loan from Public financial institution, State Financial Corporation
o Interest on loan from scheduled bank
o Leave encashment to employee
o Gratuity paid to employees.

u/s 139(1) Due date for filing ITR(Income Tax Return)—

a) 31st July for assessee having income from business /profession but not subject to tax audit.
b) 30th Sept. for assessee having income from business /profession and subject to tax audit.

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Undisclosed Income and investments taxed as deemed income

a) Cash Credits(Sec 68)—Sum credited in the books of assessee , and source of amount is unexplained
or explanation is unsatisfactory in the opinion of Assessing Officer.
b) Unexplained investments(Sec 69)-- investments made not recorded in books of Accounts , and source
of investment is unexplained or explanation is unsatisfactory in the opinion of Assessing Officer.
c) Unexplained money(Sec 69A)-- money found not recorded in books of Accounts and source of
money is unexplained / explanation is unsatisfactory in the opinion of Assessing Officer.
d) Amount of investment not fully disclosed in books of Accounts (Sec 69A)—Where in Financial
year assessee is found to be owner of bullion , jewellary,or valuable articles , and IT officer finds
amount expended on such items exceeds the amount recorded in the books.
e) Unexplained expenditure (Sec 69C)-- Where in Financial year assessee has incurred expenditure
and he offers no explanation about the source of such expenditure.

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Heads of Income
D) Capital Gain( 45, 48, 49, 50, 54)
Capital gain is the gain arising from transfer of Capital Asset
Capital asset -Sec 2(14) –means
a) Property held by assessee , whether or not connected with his business / profession.
b) Any Securities held by Foreign Institutional Investor in accordance with SEBI 1992 regulations.

But excludes–
1. Stock in trade, consumable stores, raw material held for business.
2. Personal effects- movable assets( including wearing apparel, utensils, vehicles and furniture) held for
personal use by assessee or his dependent family members . But the following-- jewellery,
archaeological collections , drawings, paintings, sculpture or any work of art are capital assets and profit
on their transfer are capital gain.
Jewellery includes ornaments of gold , silver , platinum or other precious metal ,whether or not
containing precious stones. Precious or semi precious stones may be set in furniture, utensils, wearing
apparel or article.
3. Agricultural land in India situated beyond 8 Kms from jurisdiction of municipality or a cantonment
board.
4. 6 ½ % Gold bonds 1977, 7% Gold bonds 1980 or National Defence Gold bonds 1980 issued by Central
Govt.
5. Special Bearer bonds 1991 issued by Central Govt.
6. Gold Deposit bonds 1999, Deposit Certificates issued under Gold Monetisation Scheme 2015-- issued
by Central Govt.
Example of capital assets : Flat , land,building , shares, debentures, securities , goodwill. Tenancy rights,
leasehold rights, jewellery, archaeological collections , drawings, paintings, sculpture or any work of art.

Definition : Transfer of Capital Assets—Capital gain arises only when capital asset is transferred.
Transfer can be voluntary from one person to other, or compulsory under a law ie compulsory acquisition of
property. Transfer of capital assets includes the following—
1. Sale or exchange of capital asset
2. Compulsory acquisition of capital asset under the law—example land taken for construction of road/
dam.
3. Conversion of capital asset into stock in trade
4. Maturity or redemption of bonds / zero coupon bond.
5. Redemption of preference shares.

Exceptions to transfer--Transfers not regarded as transfer for calculating capital gains—

1. Distribution of capital assets on partition of HUF.
2. Transfer of capital asset under gift or will or irrevocable trust
3. Transfer of capital asset by holding company to wholly owned Indian subsidiary company.
4. Transfer of capital asset by wholly owned Indian subsidiary company to holding company.
5. Transfer of capital asset by amalgamating company to amalgamated company.
6. Transfer of capital asset by demerged company to resulting company.
7. Transfer of capital asset by conversion of bonds and debentures into shares of company.
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Short term Capital Asset—
a) If any capital asset is held for 36 months or for less than 36 months , before transfer of asset,
such asset is called Short term Capital Asset.

b) In case of the following capital assets held for held for 12 months or for less than 12 months
shall be called as short term capital assets:
i) Equity shares, preference shares listed on recognized stock exchange.
ii) Securities like Debentures , government securities and others listed on recognized stock exchange.
iii) Units of Unit Trust of India and Mutual fund units specified/s10(23D)
 iv) Zero coupon bonds

c) In case of the following capital assets held for held for 24 months or for less than 24 months
shall be called as short term capital assets:
i) Equity shares, preference shares listed on recognized stock exchange.
ii) Immovable property ie. Land, flat , building.

Short Term Capital Gain-- Gain from transfer of Short Term Capital Asset is called as Short Term
Capital Gain. It is included under the head Capital Gains in the total income of the assessee and taxed
according to the tax rates applicable to the Total Income . Indexation is not allowed while calculating STCG.
Short Term Capital Gain = Full value of Consideration - Transfer cost - Cost of Acquisition -
Cost of Improvement.

Long Term Capital Asset— Capital Asset which is not a Short Term Capital Asset.
Long Term Capital Gain-- Gain from transferring Long Term Capital Asset is called as Long Term
Capital Gain. It is included under the head Capital Gains in the total income of the assessee , but it is taxed at a
concessional rate of 20%.(10% tax rate in some cases)

Indexation--
 For finding Long term capital gain indexation of Cost of Acquisition and indexation of Cost of
Improvement is done using Cost Inflation Index. (CII). CII means index calculated at 75% of
average rise in Consumer price index of preceding previous year to previous year, for urban non
manual employees, CII is notified in the Official Gazette.
 Now CII is available from the pear 2001-02 .CII for 2001-02 is100 and for the year 2017-18 is 272.
 No indexation in case of --a) STCG, b) transfer of debentures and bonds c) depreciable assets in
business, d)transfer of shares and debentures by Non Resident assessee .
 If acquired from previous owner u/s 49(1) ie. free under gift/will etc.-- take year of transfer as year
of acquisition for indexation purpose.

Indexed Cost of Acquisition =

= Cost of Acquisition x CII of year of transfer
CII of year of acquisition

Indexed Cost of Improvement =

= Cost of Improvement x CII of year of transfer
CII of year of Improvement

Long Term Capital Gain = Full value of Consideration - Transfer cost - Indexed Cost of
Acquisition - Indexed Cost of Improvement. As shown above.
LTCG taxed at 20%.

Full Value of consideration -- means what the transferor receives for transferring the capital asset . The
consideration can be money or in kind ie. other than cash. Fair market value (FMV) of the article given as
consideration shall be included in the Value of consideration. Full Value of consideration shall be computed
differently for peculiar/ specific situations—

a) Damage/ Destruction of Capital Asset—Money or FMV of asset received from Insurance company.
b) Conversion of asset into stock in trade—FMV of of Capital Asset converted into stock in trade.
c) Transfer of asset by partner to firm / Body of Individuals(BOI)/Association of Persons (AOP) —
Value at which the transferred asset is recorded in the books of accounts of the firm / Body of
 Individuals(BOI)/Association of Persons (AOP).
d) Distribution of assets on dissolution of the firm-- FMV of Capital Asset on the date of such
distribution of assets.
e) Compulsory Acquisition u/s 45(5)— Amt. of compensation received as determined by Central
Govt.
f) Repurchase of Mutual Fund Units—Difference between repurchase price and cost of the MF units.

Cost of Transfer—Includes commission, brokerage, stamp duty, registration charges, amount paid to tenants
for vacating and handing over possession of property , legal expenses for preparing conveyance deed, travel
expenses in connection with transfer of assets.
Cost of Acquisition -- cost incurred for acquiring the asset and acquiring title to the asset.
Cost of Improvement-- cost of additions and alterations of capital asset after purchasing it.
Example –In case of jewellery- remaking charges
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Where capital asset was acquired by assessee before 1 April 2001:

a) Cost of Acquisition shall be taken as higher of Actual cost or FMV on 1.4.2001 .
b) Where capital asset was acquired by assessee before 1 April 2001--- Cost of improvement done by
assesse or previous owner , incurred before 1.4.2001 shall be ignored.
c) For indexation index for year of acquisition shall be taken 2001-02 as 100.
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Sec 49(1)-- When property is obtained by assessee by following methods:
 Under gift or will( ie. Without consideration)
 Succession or inheritance
 Transfer of HUF property to members OR member’s property to HUF
 Dissolution of partnership firm
 Liquidation of company
 Transfer of property to Trust
 Transfer of property by Holding company to subsidiary or subsidiary to holding company
 Transfer of property of amalgamating companies to amalgamated company.
Then---
a) Holding period of assessee plus Holding period of previous owner should be considered for determining
whether STCA or LTCA.
b) Cost of acquisition to previous owner to be taken as COA to Assessee (Present Owner)
c) For indexation purpose -- index of year of purchase by previous owner should be considered.
d) If asset is purchased by previous owner before 1.4.2001 , index of purchase year shall be taken as 100.

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Special Cases—
 Sec 50 -Depreciable assets—If sale price of capital asset exceeds total of Opening WDV of the block
of assets and price of assets purchased, such excess shall be called as Short Term Capital Gain. SP –
(WDV +Purch)= STCG.(Short term capital gain )

Capital Gains – Exemptions

Capital gains are taxable .To decrease the capital gains following investments made can be deducted from
capital gains , and net balance to be shown as taxable capital gains.

Sec 54—Capital gain invested in house property—

  The LTCG (long term capital gain) from transfer of house property used for residential purpose , can
be invested within one year before or two years after date of transfer for purchase of a
residential house , or within three years after transfer for construction of a residential house.
Cost of Plot purchased for construction of house can also be considered as investment .
 The LTCG can be deposited in bank A/c under Capital Gain Scheme Account before due date for
filing Income Tax Return. The Return should be accompanied by proof of such deposit.
 If it is done , LTCG will not be taxable. But if LTCG exceeds cost of new house , excess LTCG shall
be taxable.

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Gross Total Income means Total Income computed in accordance with the
provisions of this Act before making deductions under Chapter VI A.
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Head of Income
5) Income from Other Sources(56, 57,58,59)
Sec-56--Residuary head of Income . Covers all incomes which are not covered under earlier 4 heads of
income.
Example :
1) Dividends from cooperative banks , interest on securities , interest on deposits in savings bank account,
fixed deposits – deduction allowed is commission /remuneration , collecting charges paid for realizing
such dividend or interest, interest on loan taken to invest in shares/securities.
2) Winnings from lotteries, crossword puzzles, races , card games, gambling ,betting-- no deduction
allowed for related expenses,
3) Rent from machinery/ furniture let out ( provided letting out is not his business) –deduction allowed is
rent, rates, taxes repairs, insurance , depreciation
4) Gift in money not exceeding Rs.50000
Exempt --- Gift of any amount- from relative/ on occasion of marriage/ under a will/ in contemplation
of death/ from local authority/ University, hospital, educational institution is exempt.
5) Family pension –deduction allowed is 1/3 of family pension or Rs.15000 whichever is less,
6) Rent from subletting-- deduction allowed for rent paid to landlord(original owner of house)
7) Ground rent , lease rent, examiner ship fees ,director’s fees, honorarium etc.
8) Winnings from Horse Races deduction is allowed for expenses incurred for maintaining horses.

Sec 57 provides for deductions not allowed from Income from other sources:
1) Personal expenses of assessee.
2) Interest , salary payable outside India Any interest,royalty, fees for technical services, salaries or other
amount payable outside India on which TDS has not been made or made but not paid to govt.before due
date of filing Income-tax Return .
3) In case of Winnings from lotteries, crossword puzzles, races , card games, gambling ,betting-- no
deduction allowed for related expenses,
4) But in case of winnings from Horse Races deduction is allowed for expenses incurred for maintaining
horses.
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