Name of the student: - Bhavesh Madan Khillare

Roll Number: - 5619

Academic year: - 2021-2022

Class: - S. Y. B.com Accounting & Finance

Division: - [B]

Semester: - IV

Subject: - Direct Tax

For the evaluation of: - Continuous Assessment

– II

Submitted to: - Prof. Shardul Bua

1
 INTRODUCTION
Taxes in India can be categorized as direct and indirect taxes. Direct tax is a tax
you pay on your income directly to the government. Indirect tax is a tax that
somebody else collects on your behalf and pays to the government eg
restaurants, theatres and e-commerce websites recover taxes from you on goods
you purchase or a service you avail. This tax is, in turn, passed down to the
government. Direct Taxes are broadly classified as:
1. Income Tax – This is taxes an individual or a Hindu Undivided Family or
any taxpayer other than companies, pay on the income received. The law
prescribes the rate at which such income should be taxed
2. Corporate Tax – This is the tax that companies pay on the profits they
make from their businesses. Here again, a specific rate of tax for corporates has
been prescribed by the income tax laws of India.
Indirect taxes take many forms: service tax on restaurant bills and movie tickets,
value-added tax or VAT on goods such as clothes and electronics. Goods and
services tax, which has recently been introduced is a unified tax that has
replaced all the indirect taxes that business owners have to deal with.
As per the Section 14 Income Tax Act,1961, there are five main income tax
heads for an individual. The computation of income tax is an important part and
has to be calculated according to the income of a person. For a hassle-
free calculation, the income has to be classified properly so that there is no
confusion regarding the same. The government has classified the sources of
income under separate heads and then the income tax is computed accordingly.
The provisions and rules are according to the details mentioned in the Income
Tax Act.

Five main Heads of income are as follows: -

 Income from Salary
 Income from House Property
 Income from Profits and Gains of Profession or Business
 Income from Capital Gains
 Income from Other Sources

2
 GROUP 1

INCOME FROM SALARY

The first head of Income Tax heads is Income from salary. Any remuneration
paid by an employer to his employee in consideration of his service is called
Salary. It includes monetary value of those benefits and facilities provided by
the employer which are taxable. This amount qualifies to be considered for
income tax only if there is an employer-employee relationship between the
payer and the payee respectively. Section 15, 16 and 17 of the Income taxes
acts, 1961 deal with the computation of income under the head salaries. Income
from salary includes wages, pension, annuity, gratuity, fees, commission,
profits, leave encashment, annual accretion and transferred balance in
recognised Provident Fund (PF) and contribution to employees’ pension
account. The Taxation of income received from salaries is not just a concept to
learn only but practically it puts a lot of challenges in front of tax return
preparers so as to ensure that correct provisions are applied while computing the
net salary income. Income from salary seems to be a very small portion but it
contains lot of provisions, the study of which is must before practically applying
it.

3
FORMAT OF INCOME FROM SALARY: -
Particulars Amt Amt
Basic Salary xxx
xxx
Dearness Allowance
xxx
Bonus Received xxx
House Rent Allowance received xxx xxx
Less: Exemption u/s 10(13A)
xxx
Conveyance Allowance Received xxx

Children Education Allowance Received xxx xxx

Less: u/s 10(14) Exemption Deductions U/S 16 xxx

Gross salary
xxx
Deductions U/S 16
xxx
16(i) Standard Deduction
xxx xxx
16(ii) Entertainment Allowance

16(iii) Profession Tax/ Tax on Employ

Net Taxable salary / Income from salary xxx

PRACTICAL QUESTION ON INCOME FROM SALARY: -

Calculate the total Income from salary of Mr. Bhavesh for A.Y 2020-21. He is
working with Infosys Ltd. & receiving the following emoluments for the
previous year.
Particulars Amount

4
 Basic salary 25,000 per month
Dearness allowance 2,500 per month
HRA 3000 per month
Travelling allowance 1600 per month
Bonus received 20,000
Arrears of salary 15,000
Advance salary 10,000
Value of rent-free accommodation 15,000
Ex-gratia 10,000
Entertainment Allowance (Actual
expenses paid 100 per month) 800 per month
Professional Tax 2,500 per annum

Solution: -
Name of assesses – Mr. Bhavesh
Legal status – Individual
A.Y – 2020-21
P.Y – 2019-20
Residential status – ROR

Particulars Amount Amount

Income from salary
Basic salary (25,000 × 12) 3,00,000
Dearness allowance (2,500 × 12) 30,000
36,000
HRA (3,000 × 12) (6,000)
Less: Exempt [Section 10 (13A)] (500 × 12) 30,000
19,200
Travelling allowance (1,600 × 12)
(9,600) 9,600
Less: Exempt [Section 10 (13A)] (800 × 12)
20,000
Bonus received 15,000
Arrears of salary 10,000
Advance salary 15,000
Value of Rent-Free Accommodation 10,000
Ex-gratia 9,600
Entertainment allowance (800 ×12)

5
 4,49,200
Gross salary

Less: Deduction U/S 16 (50,000)

Standard deduction U/S 16 (i) (2,500)
Profession Tax U/S 16 (iii)

Net Taxable salary / Income from salary 3,96,700

GROUP 2
CLUBBING & SETOFF CARRY FORWARD
The adjustment of losses against income or profit in a particular year is called
set off. Losses not set off against income can be carried forward to subsequent
years and used against income. You can set off against income in either an
intra-head or inter-head way.

LOSSES CAN BE SET OFF

 How losses can be set off

 Intra-head Set off
 Inter-head Set off

SIGNIFICANCE OF INTRA HEAD ADJUSTMENT

Any year in which the taxpayer has suffered loss from any source, under any
head Income, then he can adjust such loss against income coming from any
other source. The same head. Intra-head adjustment is the process of adjusting
loss from one source against income from another source under the same
heading. Adjustment of profit from business A to loss from business B. When
making intra-head adjustments to loss, there are some restrictions.

BEFORE MAKING ANY INTRA HEAD ADJUSTMENT, IT IS

IMPORTANT TO REMEMBER THE RESTRICTIONS

Loss: 1) Any income from speculative businesses cannot be set off by losses.
Income from speculative businesses. Non-speculative business losses can also
be possible Set off income from speculative businesses.

2) No income other than long-term capital loss can be offset by long-term

capital losses from long-term capital gains. Short-term capital loss is possible,
however. Against capital gains, long-term and short-term.

6
3) Losses from crosswords or lotteries cannot be set off by income. Puzzles,
races, including horse race, card games, and any other type of game Avoid
gambling of any kind or nature.

4) The business of racing horses can’t be lost Any income other than the income
from the business of owning or maintaining race horses.

5) The loss from business as specified in section 35AD can’t be set off against
any other

Other income, except income from a specified business (section 35AD) is

applicable Certain businesses, such as those that set up cold chain’s facilities,
may be eligible for special treatment. Setting up and managing a warehouse
facility for the storage of agricultural produce.

CARRY FORWARD OF LOSSES

Unadjusted loss can still occur after making the necessary and permissible inter-
head and intra-head adjustments. This unadjusted loss can be carried forward
into future years to adjust for income. Different income sources have different
rules regarding carry forward.

LOSSES ON HOUSE PROPERTY

You can carry the loss forward for up to 8 years after the year of the assessment.
Only income from house property can be adjusted.

LOSSES IN NON-SPECULATIVE BUSINESSES (REGULAR

BUSINESS)

 Loss You can carry the loss forward for up to 8 years after the assessment
year it was made
 Only applicable to income from a business or profession
 It is not necessary to continue the business in the future.
 If the return is not received by the due date, it cannot be carried forward.

SPECULATIVE BUSINESS LOSS

 You can carry the loss forward for up to 4 years after the assessment year
it was made
 Only applicable to income from speculative businesses
 If the return is not received by the due date, it cannot be carried forward.
 It is not necessary to continue the business in the future.

SPECIFIED BUSINESS LOSSES UNDER 35AD

7
There is no Limit to carry forward losses from the business in question under
35AD

It is not necessary to continue the business in the future.

If the return is not received by the due date, it cannot be carried forward.

Only applicable to income from a specified business below 35AD

CAPITAL LOSSES

You can carry the loss forward for up to 8 years after the assessment year it was
made

Only long-term capital gains can be used to offset capital losses.

You can offset short-term capital losses against long-term capital gain.

CASE LAWS ON SET OFF AND CARRY FORWARD OF LOSSES

1. Jamna Dass Rameshwar Das v. CIT [1952]21ITR 109 (Punjab) – Assessee

did business of speculation in silver, gold and linseed – During relevant
assessment year, he showed a gross loss in speculative transactions – ITO
however, rejected assessee’s claim on ground that assessee had not maintained
contemporaneous record of speculative transactions since assessee failed to do
so, revenue authorities were justified in rejecting assessee’s claim.

2.CIT v. Ashok Mittal [2013]357ITR 245(Delhi)- In this Case it was held that
assessee can set off brought forward speculative business loss against the
speculative profit even before setting off the non- speculative business loss of
the year.

3. CIT v. S.C. Kothari [1971] 82 ITR794(SC) – it was held that the loss of an
illegal speculative transaction cannot be set off against the profit of another
lawful speculative transaction. If however the business was the same, then the
loss would be liable to be taken into account while computing the profit u/s
28(i)

4. CIT v. Mahalakshmi Sugar Mills Co. Ltd. [1986]160 ITR920(SC) – In this

case it was held that it is the duty of the assessing officer to apply the relevant
provision of the Act for the purpose of determining the true figure of the
assessee’s taxable income and the consequential tax liability. Only because the
assessee fails to claim the benefit of set off, it cannot relieve the Income Tax
officer of his duty to apply section 72 in an appropriate case.

8
CONCLUSION:

The concept of set-off and carry-forward helps us understand that the tax system
is flexible. There is sufficient scope of adjustment of losses under this system.
As we have seen different heads of income and their provision related to set off
and carry forward, we can say that loss should be set off on intra head Basis in
the same Assessment Year and if still there is a loss, then only inter head set off
is allowed. After completing first two steps only if any loss remains then it will
be Carry forward and will set off in next Assessment Year under the same head
of income and not different head. But there still exception to it for example
Losses in Speculation Business can only be set off against the same head for
that particular Assessment Year. The rule of set-off and carry-forward must be
followed in strict accordance with the exemptions and restrictions mentioned in
the Income Tax Act, 1961.

PRACTICAL QUESTION ON CLUBBING & SETOFF CARRY

FORWARD: -
Mr. Soham submits the following details of his income for the assessment year
2021-22:
Particulars Amt.
Income from salary 3,00,000
Loss from let out house property (40,000)
Income from sugar business 50,000
Loss from iron is business b/f (discontinued in P.Y. (1,20,000)
2015-16)
Short term capital loss (60,000)
Long term capital gain 40,000
Dividend 5,000
Income received from lottery winning (gross) 50,000
Winnings from card games(gross) 6,000
Agricultural income 20,000
Short-term capital loss under section 111A (10,000)
Bank interest on fixed deposit 5,000

Calculate gross total income and losses to be carried forward.

9
Computation of gross total income of Mr. Soham for the A.Y. 2021-22
Particulars Amt. Amt.
Salary
Income from salary 3,00,000
Less: Loss from House property (40,000) 2,60,000

Profit & Gain from business/profession

Income from sugar business 50,000
NIL
Less: Loss from Iron business b/f 1,20,000 (50,000)
(Bal. 70,000 is carry forward for the
next A.Y.)

Capital Gain 40,000 NIL

Long term capital gain (40,000)
Less: Short term capital loss 60,000
(Bal. 20,000 carry forward for the next -
A.Y.)

Short term capital loss U/S 111A 10,000 is

carried forward for the next A.Y.
5,000
Income from other sources 50,000
Dividend 6,000 66,000
Lottery (gross) 5,000
Winning from card game (gross) 3,26,000
Bank Interest

GROSS TOTAL INCOME

Note: -
Carry forward for the next A.Y.
1. Loss from Iron business – 70,000
2. Short term capital loss – 20,000
3. Short term capital loss U/S 111A – 10,000

THANK YOU

10